In Re Sunnyslope Housing Limited Partnership

Sunnyslope Housing Limited Partnership (Sunnyslope) (debtor) owned an apartment complex financed by three loans conditioned on using the complex for affordable, low-income housing. To obtain financing and tax benefits, Sunnyslope entered regulatory agreements as well as covenants and restrictions that would bind future owners and terminate only on foreclosure. Sunnyslope defaulted in 2009. As guarantor, the United States Department of Housing and Urban Development took over the loan and sold it to First Southern National Bank (First Southern) for $5.05 million. First Southern initiated foreclosure proceedings, and a state court appointed a receiver who agreed to sell the property to a third party for $7.65 million. Before the sale closed, Sunnyslope filed for Chapter 11 reorganization seeking to keep the complex under the “cram-down” option in the Bankruptcy Code that allows a reorganized debtor to keep the creditor’s collateral provided the debt is treated as secured to the extent of the value of the creditor’s interest in the collateral. The central issue was the value of the apartment complex. Sunnyslope argued the complex had to be valued as low-income housing, which its expert said resulted in a value of $2.6 million. First Southern argued the complex had to be valued without the housing restrictions. Its expert said that value was $7.74 million. The bankruptcy court valued the complex as low-income housing at $2.6 million. First Southern appealed to the district court, then the Ninth Circuit.