## Facts

- Sunnyslope Housing Limited Partnership owned a 150-unit Phoenix apartment complex operated as low-income housing.
- The project was financed through a senior HUD-insured loan (later acquired by First Southern National Bank) and junior public loans, alongside low-income housing covenants tied to tax credits.
- The covenants restricted rents and occupancy and would terminate upon foreclosure.
- Sunnyslope defaulted on the senior loan; First Southern initiated foreclosure and obtained a state-court receiver.
- The receiver arranged a sale priced on the assumption that foreclosure would eliminate the low-income restrictions.
- Before the sale closed, Sunnyslope filed Chapter 11 and proposed a cramdown plan to retain the property and continue restricted low-income operations.
- The parties’ valuation evidence diverged: about $2.6 million under continued restrictions versus about $7.7 million assuming foreclosure and removal of restrictions.
- The bankruptcy court valued the collateral at the restricted-use figure and confirmed the plan; the district court affirmed.

## Issues

1. Under 11 U.S.C. § 506(a)(1), when a Chapter 11 debtor retains and uses collateral under a cramdown plan, must the secured claim be valued by replacement value based on the plan’s proposed use, rather than by hypothetical foreclosure value?
2. In that valuation, may a court disregard recorded low-income use covenants on the theory that foreclosure would eliminate them, even though the plan avoids foreclosure?

## Decision

- The Ninth Circuit (en banc) affirmed the district court and upheld plan confirmation.
- The court held that § 506(a)(1), as applied through Associates Commercial Corp. v. Rash, requires replacement (reorganization) value when the debtor retains and uses the property.
- Because the estate’s interest in the property remained subject to the low-income covenants absent foreclosure, valuation had to reflect the restricted-use condition contemplated by the plan.
- The bankruptcy court did not err by adopting the $2.6 million restricted-use valuation, with any excess debt treated as unsecured.

## Legal Principles

- Under 11 U.S.C. § 506(a)(1), collateral value is determined in light of the valuation’s purpose and the proposed disposition or use of the property under the plan.
- When a debtor retains and uses collateral under a reorganization plan, Rash requires a replacement-value standard, not a foreclosure/liquidation value standard.
- The “estate’s interest” in collateral defines the baseline for valuation; when that interest is encumbered by enforceable use restrictions that remain in place under the plan, the secured claim is valued subject to those restrictions.
- A secured creditor may not require valuation based on a foreclosure scenario that the confirmed plan is structured to prevent.

## Conclusion

The en banc Ninth Circuit held that, in a Chapter 11 cramdown where the debtor keeps the collateral for continued restricted low-income use, § 506(a)(1) requires valuation at replacement value reflecting those restrictions, not a higher hypothetical foreclosure value that assumes the restrictions’ termination.


In re Sunnyslope Hous. Ltd. P’ship, 859 F.3d 637 (9th Cir. 2017) (en banc)