A divided panel of the U.S. Court of Appeals for the Ninth Circuit recently issued an opinion that effectively unraveled a debtor’s confirmed Chapter 11 plan due to an improper method used for valuing a lender’s secured claim. The decision in In re Sunnyslope Housing Limited Partnership1 has broad implications within the Ninth Circuit for debtors seeking to retain and continue using collateral through a reorganization in bankruptcy and lenders in underwriting loans where there are subordinate restrictions in place on the use of such collateral.
‘Sunnyslope’ Background
The debtor, Sunnyslope developed and operated a 150-apartment complex in Phoenix, AZ that was intended to provide affordable housing. The primary financing for the project came from an $8.5 million senior loan that was guaranteed by the federal government through the Department of Housing and Urban Development (HUD) and secured by a first priority deed of trust on the property. To obtain the HUD guaranteed loan, Sunnyslope was required to enter into a regulatory agreement requiring the complex to be operated as affordable housing and limiting the rents that could be charged to amounts within HUD-approved levels. Additional junior funding was provided by the City of Phoenix Housing Department and the State of Arizona Department of Housing, and the apartment project qualified for federal tax credits under the Low Income Housing Tax Credit (LIHTC) program.
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