A case from the Ninth Circuit is a “clumsy vehicle” for the Supreme Court to decide whether a secured creditor in a cramdown is entitled to the higher of foreclosure or replacement value, according to the debtor in First Southern National Bank v. Sunnyslope Housing LP, 17-455 (Sup. Ct.).
Reversing a three-judge panel, the Ninth Circuit sat en banc and held in May that a secured creditor in a cramdown is only entitled to the replacement value of collateral used as the debtor intends, not the price that would be realized after foreclosure in those rare cases where foreclosure value is higher than replacement value. First Southern National Bank v. Sunnyslope Housing LP (In re Sunnyslope Housing LP), 859 F.3d 637 (9th Cir. May 26, 2017).
The Supreme Court is unlikely to grant certiorari in Sunnyslope, but if it does, watch out!
The Court is more conservative than it was in 1997 when the justices decided Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), the Supreme Court authority that the Ninth Circuit was interpreting to decide Sunnyslope. Taking on Sunnyslope might signal that some justices are rethinking Rash and may be inclined to rule that secured lenders are entitled to receive the highest realistically plausible value for their collateral. Moving in that direction might also initiate a rethinking of what’s adequate protection.
The ‘Cert’ Petition
The secured lender in Sunnyslope filed a petition for certiorari, urging the Supreme Court to resolve an alleged split between the Ninth Circuit and the Seventh Circuit’s opinion in United Air Lines Inc. v. Regional Airports Improvement Corp., 564 F.3d 873 (7th Cir. 2009).
The Sunnyslope debtor responded to the certiorari petition on Nov. 27, arguing that the case is not worthy of Supreme Court review for several reasons. Primarily, the debtor says there is no split, when the Seventh Circuit opinion is properly understood. According to the debtor, all circuits have the same understanding of Rash, where the Supreme Court interpreted Section 506(a) to require using the ordinarily higher “replacement value standard” rather than the typically lower value from a foreclosure sale that will not take place. In other words, Rash established a valuation standard that ordinarily favors secured lenders.
Sunnyslope was unusual because the debtor owned and operated an affordable housing project. The debtor or anyone who bought the property from the debtor would be required to continue the property as affordable housing. If the property were foreclosed, the affordable housing restrictions would terminate, making the property worth approximately twice as much for the lender. Thus, Sunnyslope was the unusual case where foreclosure would produce a higher valuation. The Ninth Circuit nonetheless said that replacement value as affordable housing was the proper Rash standard in deciding what the lender should receive in a chapter 11 cramdown plan.
The lender in Sunnyslope believes the Ninth Circuit committed error by refusing to use foreclosure value in those instances where foreclosure will fetch a higher price than the market value stemming from the debtor’s continued use of the property. The debtor opposes granting certiorari, contending that Rash calls for using replacement value even when foreclosure prices are higher. There is no difference between Rash and Sunnyslope, the debtor said, aside from the fact that Sunnyslope is the rare case where foreclosure value would be higher.
Reasons to Deny ‘Cert’
Because Sunnyslope represents a fact pattern that rarely occurs, the debtor contends that the case is a poor candidate for Supreme Court review. The case is also atypical, the debtor says, because the lender made the Section 1111(b) election and therefore waived the confirmation requirement that the chapter 11 plan must produce as much value as foreclosure in chapter 7.
The debtor also warned the Supreme Court to stay away, because revisiting confirmation would compel the justices to confront the doctrine of equitable mootness, since the plan had been implemented and distributions were made.
Setting aside the bankruptcy court’s valuation would double payments to the secured lender, representing the largest payment obligation under the plan. Given how the Supreme Court has denied certiorari numerous times to avoid confronting equitable mootness, the debtor recommends denying the Sunnyslope petition.
Equitable mootness aside, the decision to grant review or not may turn on whether the justices believe there is a circuit split. Even if the Ninth and Seventh Circuits are not on the same page, the split may not be deep enough for the justices to take on a case with significant ramifications.
When Might the Justices Grant or Deny ‘Cert’?
The justices have not yet scheduled a conference to consider granting or denying the Sunnyslope petition. Theoretically, they could grant the petition and hear argument late this winter, with a decision handed down before the end of the term in June.
If the justices believe there is not a deepening circuit split, the Court could simply deny the petition in the next few weeks.
However, the case involves affordable housing, a program with significant involvement by the federal government. If the Court does not deny certiorari out of hand, the justices may ask for the opinion of the U.S. Solicitor General, a procedure known as CVSG, or “consider the views of the Solicitor General.” If there is a CVSG, the case will not be heard this term because the government will need several months to file a brief with a recommendation for or against a further appeal.
On a CVSG, the Solicitor General can also give the government’s view about the proper outcome. If the Supreme Court were to reverse and rule that the lender was entitled to twice the value of an affordable housing project, the result could mean that no affordable housing project anywhere could reorganize successfully in chapter 11 while maintaining the units as affordable housing. Thus, reversal in the Supreme Court could presage the loss of affordable housing units across the country.
If the Court does grant certiorari, the bankruptcy bench and bar should pay close attention, because the justices will have an opening to lay down rules favoring secured lenders in chapter 11s. The case might also force the Court to tackle equitable mootness, an issue they have avoided for years.
To read ABI’s discussion of the Ninth Circuit’s en banc opinion in Sunnyslope, click here.