First Southern National Bank v. Sunnyslope Housing Lp

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

IN RE SUNNYSLOPE HOUSING No. 12-17241
LIMITED PARTNERSHIP,
Debtor. D.C. No.
2:11-cv-02579-HRH

FIRST SOUTHERN NATIONAL
BANK,
Plaintiff-Appellant,

v.

SUNNYSLOPE HOUSING LIMITED
PARTNERSHIP,
Defendant-Appellee.
2 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP

IN RE SUNNYSLOPE HOUSING No. 12-17327
LIMITED PARTNERSHIP,
Debtor. D.C. No.
2:11-cv-02579-HRH

SUNNYSLOPE HOUSING LIMITED
PARTNERSHIP,
Plaintiff-Appellant,

v.

FIRST SOUTHERN NATIONAL
BANK,
Defendant-Appellee.

IN RE SUNNYSLOPE HOUSING No. 13-16164
LIMITED PARTNERSHIP,
Debtor. D.C. No.
2:12-cv-02700-HRH

FIRST SOUTHERN NATIONAL
BANK,
Plaintiff-Appellant,

v.

SUNNYSLOPE HOUSING LP,
Defendant-Appellee.
 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP 3

IN RE SUNNYSLOPE HOUSING No. 13-16180
LIMITED PARTNERSHIP,
Debtor. D.C. No.
2:12-cv-02700-HRH

SUNNYSLOPE HOUSING LP,
Plaintiff-Appellant, ORDER AND
AMENDED
v. OPINION

FIRST SOUTHERN NATIONAL
BANK,
Defendant-Appellee.

Appeals from the United States District Court
for the District of Arizona
H. Russel Holland, District Judge, Presiding

Argued and Submitted En Banc January 17, 2017
San Francisco, California

Filed May 26, 2017
Amended June 23, 2017

Before: Sidney R. Thomas, Chief Judge, and Alex
Kozinski, Diarmuid F. O’Scannlain, Susan P. Graber,
Ronald M. Gould, Richard C. Tallman, Carlos T. Bea,
Jacqueline H. Nguyen, Andrew D. Hurwitz, John B.
Owens, and Michelle T. Friedland, Circuit Judges.

Order;
Opinion by Judge Hurwitz;
Dissent by Judge Kozinski
4 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP

SUMMARY *

Bankruptcy

The en banc court affirmed the district court’s judgment,
which affirmed the bankruptcy court’s affirmance of a
Chapter 11 plan of reorganization, as modified on remand
from the district court.

The debtor sought, over a secured creditor’s objection,
to retain and use the creditor’s collateral in the Chapter 11
plan through a “cram down.” Pursuant to 11 U.S.C.
§ 506(a)(1), the creditor’s claim was treated as secured “to
the extent of the value of such creditor’s interest.” That
value was “determined in light of the purpose of the
valuation and of the proposed disposition or use of such
property.” Under Associates Commercial Corp. v. Rash, 520
U.S. 953 (1997), a “replacement-value standard,” rather than
a “foreclosure-value standard,” applies to cram-down
valuations.

Here, unlike in a typical case, foreclosure value exceeded
replacement value because foreclosure would vitiate
covenants requiring that the secured property, an apartment
complex, be used for low-income housing. The en banc
court nonetheless held that, under Rash, § 506(a)(1) required
the use of replacement value rather than a hypothetical value
derived from the very foreclosure that the reorganization was
designed to avoid. Thus, the bankruptcy court did not err in
approving the debtor’s plan of reorganization and valuing

*
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP 5

the collateral assuming its continued use after reorganization
as low-income housing.

The en banc court held that the plan of reorganization
was fair and equitable, as required by 11 U.S.C. § 1129(b),
because the creditor retained its lien and received the present
value of its allowed claim over the term of the plan. The
secured claim was not undervalued, and the plan provided
for payments equal to the present value of the secured claim.

The en banc court held that the bankruptcy court did not
abuse its discretion in finding the plan of reorganization
feasible.

Finally, the en banc court held that the bankruptcy court
did not err in failing to allow the creditor, on remand, to
make a second election to have its claim treated as either
fully or partially secured under 11 U.S.C. § 1111(b).

Dissenting, Judge Kozinski, joined by Judges
O’Scannlain and Friedland, wrote that the majority
misinterpreted Rash, and the appropriate value of the
secured property was the market price of the building
without restrictive covenants.

COUNSEL

Edward K. Poor (argued), Quarles & Brady LLP, Chicago,
Illinois; Brian Sirower and Walter J. Ashbrook, Quarles &
Brady LLP, Phoenix, Arizona; for Plaintiff-Appellant
Plaintiff-Appellant.

Susan M. Freeman (argued), Henk Taylor, and Justin
Henderson, Lewis and Roca LLP, Phoenix, Arizona;
6 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP

Bradley D. Pack, Scott B. Cohen, and David Wm.
Engelman, Engelman Berger P.C., Phoenix, Arizona; for
Defendant-Appellee Defendant-Appellee.

Donald L. Gaffney and Jasmin Yang, Snell & Wilmer LLP,
Phoenix, Arizona, for Amici Curiae Arizona Bankers
Association, California Bankers Association, Hawaii
Bankers Association, Idaho Banks Association, Montana
Bankers Association, and Washington Bankers Association.

ORDER

The opinion filed May 26, 2017, is amended as follows:

1. At page 9 of the slip opinion, delete “11 U.S.C.
§ 1325(a)(5)(B)” and replace it with “11 U.S.C.
§ 1129(b)(2)(A).”

2. At page 11 of the slip opinion, delete “Cornerstone at
Camelback LLC invested $1.2 million in the complex.” and
in the next sentence, the word “then.” The amended opinion
should state: “After confirmation, First Southern obtained a
stay of the plan of reorganization from the district court
pending appeal.”

3. At page 11 of the slip opinion, delete the sentence
following “First Southern again appealed.” and replace it
with “The district court denied First Southern’s request for a
stay. Cornerstone at Camelback LLC invested $1.2 million
in the complex, and the plan was funded. The district court
affirmed the reorganization plan as modified.”
 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP 7

OPINION

HURWITZ, Circuit Judge:

When a debtor, over a secured creditor’s objection, seeks
to retain and use the creditor’s collateral in a Chapter 11 plan
of reorganization through a “cram down,” the Bankruptcy
Code treats the creditor’s claim as secured “to the extent of
the value of such creditor’s interest.” 11 U.S.C § 506(a)(1).
That value is to “be determined in light of the purpose of the
valuation and of the proposed disposition or use of such
property.” Id.

In Associates Commercial Corp. v. Rash, the Supreme
Court adopted a “replacement-value standard” for
§ 506(a)(1) cram-down valuations. 520 U.S. 953, 956
(1997). The Court held that replacement value, “rather than
a foreclosure sale that will not take place, is the proper guide
under a prescription hinged to the property’s ‘disposition or
use.’” Id. at 963 (quoting In re Winthrop Old Farm
Nurseries, Inc., 50 F.3d 72, 75 (1st Cir. 1995)).

In rejecting a “foreclosure-value standard,” the Court
also noted that foreclosure value was “typically lower” than
replacement value. Id. at 960. Today, however, we confront
the atypical case. Because foreclosure would vitiate
covenants requiring that the secured property—an apartment
complex—be used for low-income housing, foreclosure
value in this case exceeds replacement value, which is tied
to the debtor’s “actual use” of the property in the proposed
reorganization. Id. at 963. But we take the Supreme Court
at its word and hold, as Rash teaches, that § 506(a)(1)
requires the use of replacement value rather than a
hypothetical value derived from the very foreclosure that the
reorganization is designed to avoid. Thus, the bankruptcy
court did not err in this case in approving Sunnyslope’s plan
8 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP

of reorganization and valuing the collateral assuming its
continued use after reorganization as low-income housing.

BACKGROUND

The Sunnyslope Project

Sunnyslope Housing Limited Partnership
(“Sunnyslope”) owns an apartment complex in Phoenix,
Arizona. Construction funding came from three loans.
Capstone Realty Advisors, LLC, provided the bulk of the
funding through an $8.5 million loan with an interest rate of
5.35%, secured by a first-priority deed of trust. The
Capstone loan was guaranteed by the United States
Department of Housing and Urban Development (“HUD”),
and funded through bonds issued by the Phoenix Industrial
Development Authority. The City of Phoenix and the State
of Arizona provided the balance of the funding. The City
loan was secured by a second-position deed of trust, and the
State loan by a third-position deed of trust.

A. The Covenants

To secure financing and tax benefits, Sunnyslope entered
into five agreements:

1. To obtain the HUD guarantee, Sunnyslope signed a
Regulatory Agreement requiring that the apartment complex
be used for affordable housing.

2. Sunnyslope also entered into a Regulatory Agreement
with the Phoenix Industrial Development Authority,
requiring Sunnyslope to “preserve the tax-exempt status” of
the project, and use 40% of the units for low-income
housing. The agreement provided that its covenants “shall
run with the land and shall bind the Owner, and its
 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP 9

successors and assigns and all subsequent owners or
operators of the Project or any interest therein.” The
restrictions, however, terminated on “foreclosure of the lien
of the Mortgage or delivery of a deed in lieu of foreclosure.”

3. The City of Phoenix required Sunnyslope to sign a
Declaration of Affirmative Land Use Restrictive Covenants,
mandating that 23 units be set aside for low-income families.
The restriction ran with the land and bound “all future
owners and operators” but, similarly, would be vitiated by
foreclosure.

4. The Arizona Department of Housing required
Sunnyslope to enter into a Declaration of Covenants,
Conditions, and Restrictions. That 40-year agreement set
aside five units for low-income residents. The agreement ran
with the land and bound future owners, terminated upon
foreclosure, and was expressly subordinate to the HUD
Regulatory Agreement.

5. Finally, in order to receive federal tax credits,
Sunnyslope agreed with the Arizona Department of Housing
to use the entire complex as low-income housing. The tax
credits, and restriction on use, would terminate on
foreclosure.

B. The Default and its Aftermath

In 2009, Sunnyslope defaulted on the Capstone loan. As
guarantor, HUD took over the loan and sold it to First
Southern National Bank (“First Southern”) for $5.05
million. In connection with the sale, HUD released its
Regulatory Agreement. The Loan Sale Agreement
confirmed, however, that the property remained subject to
the other “covenants, conditions and restrictions.”
10 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP

First Southern began foreclosure proceedings, and an
Arizona state court appointed a receiver. In December 2010,
the receiver agreed to sell the complex to a third party for
$7.65 million.

The Bankruptcy Proceedings

Before the sale could close, Sunnyslope filed a Chapter
11 petition. Over First Southern’s objection, Sunnyslope
sought to retain the complex in its proposed plan of
reorganization, exercising the “cram-down” option in
11 U.S.C. § 1129(b)(2)(A). A successful cram down allows
the reorganized debtor to retain collateral over a secured
creditor’s objection, subject to the requirement in
§ 506(a)(1) that the debt be treated as secured “to the extent
of the value of such creditor’s interest” in the collateral.

The central issue in the reorganization proceedings was
the valuation of First Southern’s collateral, the apartment
complex. Sunnyslope asserted that the complex should be
valued as low-income housing, while First Southern
contended that the complex should instead be valued without
regard to Sunnyslope’s contractual obligations to use it as
low-income housing, which would terminate upon
foreclosure.

In that regard, First Southern’s expert valued the
complex at $7.74 million, making the “extraordinary
assumption” that a foreclosure would remove any low-
income housing requirements. First Southern’s expert also
opined, however, that the value of the property was only
$4,885,000 if those requirements remained in place.
Sunnyslope’s expert valued the property at $2.6 million with
the low-income housing restrictions in place, and at $7
million without.
 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP 11

During its original proceeding, the bankruptcy court held
that, under § 506(a)(1), the value of the property was $2.6
million because Sunnyslope’s plan of reorganization called
for continued use of the complex as low-income housing.
The court also declined to include in the valuation of the
complex the tax credits available to Sunnyslope. First
Southern then elected to treat its claim as fully secured under
11 U.S.C. § 1111(b).

The bankruptcy court subsequently confirmed the plan
of reorganization, which provided for payment in full of the
First Southern claim over 40 years, at an interest rate of
4.4%, with a balloon payment at the end without interest.
The reorganization plan required the City and State to
relinquish their liens, but provided for payment of their
unsecured claims in full, albeit without interest, at the end of
the 40 years.

The bankruptcy court found the plan fair and equitable
under 11 U.S.C. § 1129(b)(1) because First Southern
retained its lien, would receive an interest rate equivalent to
the prevailing market rate, and could foreclose (and,
therefore, obtain the property without the restrictive
covenants) should Sunnyslope default. The court also found
the plan feasible under 11 U.S.C. § 1129(a)(11), citing
Sunnyslope’s financial projections, and noting that “the
Creditor has come in with no evidence of a lack of
feasibility.” The court concluded that it was more likely than
not that Sunnyslope could make plan payments based on the
history of comparable properties. The court also noted that,
when the balloon payment came due, the property would be
free of the low-income housing restrictions, making the
collateral an even more valuable asset.

After confirmation, First Southern obtained a stay of the
plan of reorganization from the district court pending appeal.
12 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP

The district court affirmed the bankruptcy court’s valuation
of the complex with the low-income housing restrictions in
place, but held that the tax credits should also have been
considered. Both parties appealed.

After First Southern unsuccessfully sought a writ from
this court prohibiting the bankruptcy court from considering
the district court’s remand pending resolution of the appeals,
the bankruptcy court valued the tax credits at $1.3 million,
added that amount to its previous valuation, and re-
confirmed the plan of reorganization. First Southern
attempted to withdraw its § 1111(b) election, but the
bankruptcy court denied the request.

First Southern again appealed. The district court denied
First Southern’s request for a stay. Cornerstone at
Camelback LLC invested $1.2 million in the complex, and
the plan was funded. The district court affirmed the
reorganization plan as modified. First Southern timely
appealed to this court, and Sunnyslope cross-appealed.

Panel Opinion

After the various appeals were consolidated, a divided
panel of this court reversed the bankruptcy court’s order
approving the plan of reorganization, holding that the court
should have valued the apartment complex without regard to
the affordable housing requirements. In re Sunnyslope
Hous. Ltd. P’ship, 818 F.3d 937, 940 (9th Cir. 2016). The
majority held that, under § 506(a)(1), replacement cost “is a
measure of what it would cost to produce or acquire an
equivalent piece of property” and that “the replacement
value of a 150-unit apartment complex does not take into
account the fact that there is a restriction on the use of the
complex.” Id. at 948 n.5. The dissenting opinion, in
contrast, argued that “a straightforward application” of Rash
 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP 13

“compels valuing First Southern’s collateral . . . in light of
Sunnyslope’s proposed use of the property in its plan of
reorganization as affordable housing.” Id. at 950 (Paez, J.,
dissenting). 1

A majority of the active judges of this court voted to
grant Sunnyslope’s petition for rehearing en banc, and the
panel opinion was vacated. In re Sunnyslope Hous. Ltd.
P’ship, 838 F.3d 975 (9th Cir. 2016); see Fed. R. App. P. 35.

DISCUSSION

The critical issue for decision is whether the bankruptcy
court erred by valuing the apartment complex assuming its
continued use after reorganization as low-income housing.
In addition, First Southern contends that the plan of
reorganization is neither fair and equitable nor feasible, and
that the district court erred in not allowing it to withdraw its
§ 1111(b) election.

Valuation

When a Chapter 11 debtor opts for a cram down, a
creditor’s claim is secured “to the extent of the value of such
creditor’s interest in the estate’s interest in [the secured]
property.” 11 U.S.C. § 506(a)(1). The value of that claim is
“determined in light of the purpose of the valuation and of
the proposed disposition or use of such property.” Id. We
established long ago that, “[w]hen a Chapter 11 debtor or a

1
The panel unanimously rejected Sunnyslope’s contention that the
appeal was equitably moot because the plan of reorganization had gone
into effect during the appeal. Sunnyslope, 818 F.3d at 945 (majority); id.
at 950 n.1 (dissent). And, because the panel reversed the order approving
the reorganization plan on the valuation issue, it pretermitted the other
issues raised by the parties. See id. at 949 n.6 (majority).
14 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP

Chapter 13 debtor intends to retain property subject to a lien,
the purpose of a valuation under section 506(a) is not to
determine the amount the creditor would receive if it
hypothetically had to foreclose and sell the collateral.” In re
Taffi, 96 F.3d 1190, 1192 (9th Cir. 1996) (en banc). The
debtor is “in, not outside of, bankruptcy,” so “[t]he
foreclosure value is not relevant” because the creditor “is not
foreclosing.” Id.

In Taffi, we noted that our decision was consistent with
the approach of all but one circuit—the Fifth—which had
adopted a foreclosure-value standard in In re Rash, 90 F.3d
1036 (5th Cir. 1996) (en banc). See 96 F.3d at 1193. There,
the Rashes owed $41,171 on a freight-hauler truck loan
when they filed a Chapter 13 petition. Rash, 520 U.S. at 956.
They sought to retain the truck through a cram down,
proposing a reorganization plan paying the creditor for the
foreclosure value of the truck, which they contended was
$28,500. Id. at 957. In contrast, the creditor argued the truck
should be valued at “the price the Rashes would have to pay
to purchase a like vehicle,” estimated at $41,000. Id. But
the Fifth Circuit disagreed and held that § 506(a)(1) required
the use of foreclosure value. Rash, 90 F.3d at 1060–61.

One year after we decided Taffi, the Supreme Court
reversed the Fifth Circuit. The Court held, consistent with
Taffi, that Ҥ 506(a) directs application of the replacement-
value standard,” rather than foreclosure value. Rash,
520 U.S. at 956. 2 The Court stated that the value of
collateral under § 506(a)(1) is “the cost the debtor would

2
Rash used the term “replacement” value, but noted that the term is
consistent with the “fair-market” valuation nomenclature that we used in
Taffi. Rash, 520 U.S. at 959 n.2.
 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP 15

incur to obtain a like asset for the same ‘proposed . . . use.’”
Id. at 965 (alteration in original).

Rash stressed the instruction in § 506(a)(1) to value the
collateral based on its “proposed disposition or use” in the
plan of reorganization. Id. at 962. The Court emphasized
that, in a reorganization involving a cram down, the debtor
will continue to use the collateral, and valuation must
therefore occur “in light of the proposed repayment plan
reality: no foreclosure sale.” Id. at 963 (alteration omitted)
(quoting Winthrop Old Farm Nurseries, 50 F.3d at 75). The
“actual use,” the Court held, “is the proper guide,” id., and
replacement value is therefore “the price a willing buyer in
the debtor’s trade, business, or situation would pay to obtain
like property from a willing seller,” id. at 960.

Rash also teaches that the determination of replacement
value by the bankruptcy court is a factual finding. Id. at 965
n.6. We therefore review the valuation determination in this
case for clear error. In re JTS Corp., 617 F.3d 1102, 1109
(9th Cir. 2010). We find none.

The essential inquiry under Rash is to determine the
price that a debtor in Sunnyslope’s position would pay to
obtain an asset like the collateral for the particular use
proposed in the plan of reorganization. 520 U.S. at 965.
First Southern does not dispute that there was substantial
evidence before the bankruptcy court that it would cost
Sunnyslope $3.9 million to acquire a property like the
apartment complex (including the tax-credits) with similar
restrictive covenants requiring that it be devoted to low-
income housing.

Despite this, First Southern argues that the property
should instead be valued at its “highest and best use”—
housing without any low-income restrictions. But
16 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP

§ 506(a)(1) speaks expressly of the reorganization plan’s
“proposed disposition or use.” Absent foreclosure, the very
event that the Chapter 11 plan sought to avoid, Sunnyslope
cannot use the property except as affordable housing, nor
could anyone else. Rash expressly instructs that a
§ 506(a)(1) valuation cannot consider what would happen
after a hypothetical foreclosure—the valuation must instead
reflect the property’s “actual use.” 520 U.S. at 963.

First Southern attempts to distinguish Rash by noting
that foreclosure value is greater than replacement value in
this case. But Rash implicitly acknowledged that this
outcome might occasionally be the case, and nonetheless
adopted a replacement-value standard. See 520 U.S. at 960.
We cannot depart from that standard without doing precisely
what Rash instructed bankruptcy courts to avoid—assuming
a foreclosure that the Chapter 11 petition prevented. See id.
at 963.

To be sure, a creditor is better off whenever the highest
possible value for its collateral is chosen, and Rash did in
fact recognize that when “a debtor keeps the property and
continues to use it, the creditor obtains at once neither the
property nor its value and is exposed to double risks: The
debtor may again default and the property may deteriorate
from extended use.” Id. at 962. But Rash did not adopt a
rule requiring that the bankruptcy court value the collateral
at the higher of its foreclosure value or replacement value.
Rather, it expressly rejected the use of foreclosure value, and
instead stressed the requirement in § 506(a)(1) that the
property be valued in light of its “proposed disposition or
use.” 520 U.S. at 960, 962. Here, the proposed disposition
and use is for low-income housing; indeed, no other use is
possible without foreclosure. First Southern may be exposed
 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP 17

to an increased risk under the cram down, but that does not
allow us to ignore the command of Rash.

First Southern also argues that the low-income housing
requirements do not apply to its security because HUD
released its Regulatory Agreement, and all other covenants
are junior to its lien. Although the State and City liens may
be subordinate to First Southern’s, it is undisputed the
restrictions they impose continue to run with the land absent
foreclosure. Thus, they were properly considered in
determining the value of the collateral.

Finally, First Southern’s amici argue that valuing the
collateral with the low-income restrictions in place would
discourage future lending on like projects. We disagree.
“[W]hile the protection of creditors’ interests is an important
purpose under Chapter 11, the Supreme Court has made
clear that successful debtor reorganization and maximization
of the value of the estate are the primary purposes.” In re
Bonner Mall P’ship, 2 F.3d 899, 916 (9th Cir. 1993)
(footnote omitted), abrogated on other grounds by Bullard
v. Blue Hills Bank, 135 S. Ct. 1686 (2015). Allowing the
debtor to “rehabilitate the business” generally maximizes the
value of the estate. Id. And, in this case, First Southern
bought the Sunnyslope loan at a substantial discount,
knowing of the risk that the property would remain subject
to the low-income housing requirements. Valuing First
Southern’s collateral with those restrictions in mind subjects
the lender to no more risk than it consciously undertook. See
Rash, 520 U.S. at 962–63.

Accordingly, we hold that the bankruptcy court did not
err in valuing First Southern’s collateral in the plan of
18 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP

reorganization assuming its continued use as affordable
housing. 3

Plan Fairness

The cram-down provision in 11 U.S.C. § 1129(b)
requires that the reorganization plan be “fair and equitable.”
The secured creditor must retain its lien,
§ 1129(b)(2)(A)(i)(I), and receive payments over time
equaling the present value of the secured claim,
§ 1129(b)(2)(A)(i)(II). Whether a plan is fair and equitable
is a factual determination reviewed for clear error. In re
Acequia, Inc., 787 F.2d 1352, 1358 (9th Cir. 1986).

The bankruptcy court found the Sunnyslope plan fair and
equitable because First Southern retained its lien and
received the present value of its allowed claim over the term
of the plan. There is no dispute that First Southern retained
its lien, and our discussion above disposes of any contention
that its secured claim was undervalued. Thus, the only
remaining question is whether the bankruptcy court erred in
concluding that the plan provides for payments equal to the
present value of the secured claim.

3
The dissent correctly notes the statement in Rash that “[w]hether
replacement value is the equivalent of retail value, wholesale value, or
some other value will depend on the type of debtor and the nature of the
property.” 520 U.S. at 965 n.6. But the very footnote in which that
language appears stresses “that the replacement-value standard, not the
foreclosure-value standard, governs in cram down cases.” Id. Given the
Court’s plain injunction that “actual use, not a foreclosure sale that will
not take place, is the proper guide” to determining replacement value, id.
at 963, a bankruptcy court surely cannot premise a § 506(a) valuation on
a hypothetical foreclosure. And, First Southern had no ability to sell the
property free and clear of the low-income restrictions absent such a
foreclosure.
 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP 19

The interest rate chosen must ensure that the creditor
receives the present value of its secured claim through the
payments contemplated by the plan of reorganization. Till
v. SCS Credit Corp., 541 U.S. 465, 469 (2004). In Till, a
plurality endorsed the “formula approach” for calculating
the appropriate interest rate, which begins with the national
prime rate and adjusts up or down according to the risk of
the plan’s success. Id. at 478–79. The creditor bears the
burden of showing that the prime rate does not adequately
account for the riskiness of the debtor. Id.

First Southern argues that it is not receiving the present
value of its secured claim because the interest rate adopted
in the plan, 4.4%, is lower than the original rate on its loan.
But we find no clear error in the bankruptcy court’s
determination. The bankruptcy court conducted a hearing at
which it heard expert testimony, applied the Till test, and
found that the 4.4% interest rate on the plan payments would
result in First Southern’s receiving the present value of its
$3.9 million security over the term of the reorganization
plan. The relevant national prime rate was 3.25%, and the
bankruptcy court adjusted that rate upward to account for the
risk of non-payment. The court also heard testimony that the
market loan rate for similar properties was 4.18%. In setting
the 4.4% rate, the bankruptcy court carefully explained its
reasoning, noting that interest rates had decreased
significantly since the Capstone loan was made. The
bankruptcy court also noted that the risk to the lender had
similarly decreased since then because, when the loan was
made, the apartment complex had not yet been built. 4

4
First Southern contends that the bankruptcy court erred by
considering the chance of a second default as a credit enhancement. But
if Sunnyslope defaults a second time, First Southern can foreclose and
20 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP

The bankruptcy court did not clearly err, and we affirm
its determination.

Plan Feasibility

Plan confirmation also requires a finding that the debtor
will not require further reorganization. 11 U.S.C.
§ 1129(a)(11). It therefore requires the debtor to
demonstrate that the plan “has a reasonable probability of
success.” Acequia, 787 F.2d at 1364. A bankruptcy court’s
finding of feasibility is reviewed for abuse of discretion. Id.
at 1365.

The bankruptcy court did not abuse its discretion in
finding the Sunnyslope plan feasible. A projection showed
that Sunnyslope would be able to make plan payments, and
expert testimony confirmed that the collateral would remain
useful for 40 years (the term of the plan). The court also
found the balloon payment feasible because it was secured
by property whose value exceeded the value of the
remaining First Southern claim. And the court noted that
First Southern had “come in with no evidence of a lack of
feasibility.” It was therefore well within the bankruptcy
court’s discretion to find that the plan of reorganization was
feasible.

The § 1111(b) Election

Finally, § 1111(b) of the Bankruptcy Code allows a
secured creditor to elect to have its claim treated as either
fully or partially secured. An election affects the treatment
of the unsecured portion of the claim under the plan and the

obtain a property worth more than the court’s § 506(a)(1) valuation. See
Till, 541 U.S. at 479 (noting that risk can be evaluated in light of “the
nature of the security”).
 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP 21

procedural protections afforded to the creditor. See, e.g.,
11 U.S.C. § 1129(a)(7)(B). In the absence of a contrary
order by the bankruptcy court, the creditor must make this
election before the end of the disclosure statement hearing.
Fed. R. Bankr. P. 3014.

In this case, the bankruptcy court ordered that First
Southern make its § 1111(b) election “7 calendar days after
the court issues a ruling on valuation.” First Southern timely
did so, choosing to treat its entire claim as secured.

First Southern now argues that the bankruptcy court
erred in not allowing it to make a second election after the
district court remanded and required the tax credits be added
to the valuation. In effect, First Southern contends that the
bankruptcy court erred by not amending its scheduling order
to allow the creditor a second bite at the apple. A bankruptcy
court may modify a scheduling order “for cause,” Fed. R.
Bankr. P. 9006(b)(1), and we review its decision whether to
do so for abuse of discretion, see In re Zilog, Inc., 450 F.3d
996, 1006–07 (9th Cir. 2006). We assume without deciding
that a court should modify a scheduling order to allow a
creditor to change its § 1111(b) election after a material
alteration to the original plan. See In re Scarsdale Realty
Partners, L.P., 232 B.R. 300, 300 (Bankr. S.D.N.Y. 1999);
see also In re Keller, 47 B.R. 725, 730 (Bankr. N.D. Iowa
1985). But, in this case, we agree with the district court that
the only alteration in the plan—the increased valuation of the
collateral—was not material to the election decision.

When First Southern made its election, the plan provided
for 40 years of payments of principal and interest providing
the creditor with the present value of its $2.6 million secured
claim, with a final balloon payment covering the remainder
of the debt. After remand, as the district court noted, “First
Southern’s treatment under the plan as modified remains the
22 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP

same; the only difference is that its annual payments will be
more and the balloon payment at the end of the 40 years will
be less.”

Significantly, the amended plan of reorganization did not
alter the treatment of unsecured claims, which are to be paid
without interest in 40 years, or immediately at five cents on
the dollar. Thus, First Southern knew at the time of the
initial election “the prospects of its treatment under the
plan,” Keller, 47 B.R. at 729 (quoting Fed. R. Bankr. P. 3014
advisory committee note), yet it opted to treat its entire claim
as secured.

Allowing a second election would give First Southern a
second chance to object to the plan, this time both as a
secured and unsecured creditor and, given the potential size
of the unsecured claim, the ability to prevent approval of the
reorganization plan. See 11 U.S.C. § 1129(a)(7)(A)(ii). But
this is precisely the option First Southern had at the time of
its first election, when it chose to forgo having any portion
of its claim treated as unsecured, instead seeking to increase
the valuation of its secured claim through appeal. That
gambit failed, and the bankruptcy court did not err when it
rejected First Southern’s attempt to turn back the clock and
torpedo the plan of reorganization.

CONCLUSION

We AFFIRM the judgment of the district court. 5

5
Sunnyslope’s cross-appeal argues that the tax credits should not
have been included in the valuation of the security. At oral argument,
 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP 23

KOZINSKI, Circuit Judge, with whom Circuit Judges
O’SCANNLAIN and FRIEDLAND join, dissenting:

Today’s opinion claims to “take the Supreme Court at its
word,” but it fetishizes a selection of the Court’s words at
the expense of its logic. This cramped formalism produces
a strange result: Even though the Court has told us that
cramdown valuations are supposed to limit a secured
creditor’s risk, we’ve adopted a new valuation standard that
turns entirely on the debtor’s desires—creditors be damned.
Instead of holding the valuation hostage to the debtor’s
“particular use,” I would hold that the appropriate value is
the market price of the building without restrictive
covenants. 1

The majority purports to rely on Associates Commercial
Corp. v. Rash, 520 U.S. 953 (1997), but Rash never adopted
today’s strict “particular use” interpretation of replacement
value. The Court was more flexible: “Whether replacement
value is the equivalent of retail value, wholesale value, or
some other value will depend on the type of debtor and the

counsel for Sunnyslope stated that this argument would be withdrawn if
the bankruptcy court’s valuation were otherwise affirmed. Given our
conclusions above, we do not address the tax credit issue. In the exercise
of our discretion, we also decline to address Sunnyslope’s argument that
the appeal is equitably moot. See In re Transwest Resort Props., Inc.,
801 F.3d 1161, 1167 (9th Cir. 2015) (noting that “[e]quitable mootness
is a prudential doctrine”).

1
In this case, the price a buyer would have to pay on the market for
like property may be closely approximated by “foreclosure value.” That
coincidence drives the majority’s analysis, but it does nothing to answer
the real question presented by this case: Whether the market valuation
commanded by Rash turns on a debtor’s idiosyncratic use of the
particular property. It does not.
24 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP

nature of the property.” Id. at 965 n.6. After all, the bare
notion of “replacement value” isn’t self-interpreting. A
conservation-minded owner may prefer to see his lands stay
wild. He may adopt an easement to keep them that way, and
may not care that this drastically reduces the commercial
value of the property. But the owner’s preferences don’t
shape the market value of an undeveloped acre—which is
what the owner who actually did buy new replacement
property would have to pay.

What interpretation of “replacement value” should we
use? Unhelpfully, Rash offers few specifics on how the
nature of the property and the debtor should affect
valuation. 2 But Rash expressly notes that replacement value
shouldn’t include certain warranties and modifications that
drive a wedge between private value and market value. See
id. And Rash was unambiguously motivated by a desire to
reduce what it saw as the “double risks” that cramdowns
pose for creditors: “The debtor may again default and the
property may deteriorate from extended use.” Id. at 962.
With these risks in mind, the Rash Court adopted a broad
standard—the typically higher replacement value over the
typically lower foreclosure value—that would give secured
creditors their due protection. See also Till v. SCS Credit
Corp., 541 U.S. 465, 489 (2004) (Thomas, J., concurring)
(noting that creditors are “compensated in part for the risk of

2
The fact that Rash does not adopt a strict definition of “replacement
value” and offers little guidance on how to apply it has been widely
appreciated by other courts and commentators. See, e.g., Charles Jordan
Tabb, Law of Bankruptcy 741 (4th ed. 2016) (describing footnote 6 of
Rash as a “substantial opening” that has allowed a wide variety of
valuation standards to flourish). I make no effort to defend Rash, which
has been subject to abundant criticism along these lines. But I also see
no reason to step beyond it, as today’s majority does.
 IN RE SUNNYSLOPE HOUSING LTD. PARTNERSHIP 25

nonpayment through the valuation of the secured claim”
because Rash used a “secured-creditor-friendly
replacement-value standard rather than the lower
foreclosure-value standard”). A moment’s reflection reveals
why today’s holding is at odds with these motivations: The
majority’s valuation falls well below what the secured
creditor would obtain from an immediate sale. 3

In short, the majority has adopted a test that is not
dictated by the letter of Rash and is contradicted by its
reasoning. For these reasons, and those offered by Judge
Clifton in his panel opinion, In re Sunnyslope Hous. Ltd.
P’ship, 818 F.3d 937 (9th Cir. 2016), I dissent.

3
In my view, much of this risk will be passed on to borrowers in the
form of higher interest rates—in which case, the joke’s on future
Sunnyslopes. Regardless, the Supreme Court expressly held that
“[a]djustments in the interest rate and secured creditor demands for more
‘adequate protection’ do not fully offset” the risks of cramdowns.
520 U.S. at 962–63 (quoting 11 U.S.C. § 361). Of course, one reason
for ex-post credit risk might be Rash itself: It’s hard for parties to bargain
in the shadow of an unclear rule.