The odds have risen that the Supreme Court will grant certiorari to review the en banc opinion by the Ninth Circuit in First Southern National Bank v. Sunnyslope Housing LP (In re Sunnyslope Housing LP), 859 F.3d 637 (9th Cir. May 26, 2017).
In Sunnyslope, the justices could decide whether a secured creditor in chapter 11 is always entitled to recover at least the foreclosure value of its collateral. The justices will consider the certiorari petition at a conference on Jan. 5, meaning there could be an order on Jan. 8 announcing whether or not the high court will hear an appeal.
The debtor in Sunnyslope contended there was no circuit split to underpin certiorari. Of significance, a group of nine professors and former bankruptcy judges filed an amicus brief urging the Court to hear the case. The amici said that the Ninth and Seventh Circuits split, with the Third Circuit taking “an intermediate position.”
The judges and professors said that the “valuation standard” for cramdown in chapter 11 has been the subject of “long-simmering” confusion that intensified after Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), where the Supreme Court laid down the valuation standard for chapter 13. Ever since, there has been disagreement about the applicability of Rash to chapter 11.
Although the amici unanimously urge the Court to grant certiorari, their brief says they “fundamentally disagree about the merits.” The amici include Prof. Juliet M. Moringiello from the Widener University Commonwealth Law School, Prof. Ronald Mann from the Columbia Law School, and former judges Judith K. Fitzgerald, Louis H. Kornreich, and Judith H. Wizmur.
In its reply brief in support of the petition, the bank that lost in the Ninth Circuit naturally argued there “is a clear split of authority,” despite the debtor’s contention to the contrary. Much of the bank’s reply brief is devoted to laying out the circuit split.
For both the bank and the amici, the question is whether a secured creditor in chapter 11 can be forced to accept less than the foreclosure value of its collateral. The bank argues that the Bankruptcy Code “has always guaranteed secured creditors at least what they would receive outside bankruptcy.”
The amici described the policy question as “whether the federal interest of restructuring the debtor-creditor relationships in a manner that does not return full value to a secured creditor predominates over the state-law rights of a secured creditor and permits reduction of its claim below what the creditor would receive through foreclosure under state law.”
However, the case may not present such an apocalyptic question because the lender in Sunnyslope had not taken the so-called 1111(b) election, where the bank would have emerged from chapter 11 with the full amount of its lien intact under Section 1111(b). By not taking the election, the bank subjected itself to the vagaries of a bankruptcy court valuation in confirming a cramdown plan under Section 1129(b)(2)(A).
Although three circuits may have split on the question of whether a secured creditor can recover foreclosure value when foreclosure will bring a higher price than the debtor’s continuing use of the property, the justices might believe the split is not yet broad enough to warrant review. A split may be slow to broaden because questions arising from confirmation valuations seldom reach even the courts of appeals because consummation of chapter 11 plans often renders the appeals moot.
If the Court rules one way or another on the petition on Jan. 8, the justices will likely deny certiorari. In recent years, the Court has often held two or more conferences on a petition before granting certiorari. Another possibility is a so-called CVSG, where the Court seeks the views of the U.S. Solicitor General on whether to grant review.
A CVSG is possible because the outcome of Sunnyslope could determine whether the country stands to lose low-income housing units if affordable housing projects are unable to reorganize.
To read ABI’s discussion of the debtor’s opposition to certiorari, click here. For a story on the Ninth Circuit’s en banc opinion, click here.