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In Chapter 11 bankruptcy cases, the court can “cram down” a reorganization plan over a secured creditor’s objections. David Kupetz authored the Daily Journal article “9th Circuit Decision Addresses Cramdown Valuation,” discussing the case of Sunnyslope Housing Limited Partnership, in which the court addressed a cramdown plan where the central issue was the valuation of the secured creditor’s collateral, an apartment complex.
The Code’s cramdown option displaces a secured creditor’s state-law right to obtain immediate foreclosure upon a debtor’s default. In a cramdown where the debtor will retain and use the collateral, the secured creditor generally must retain its lien and receive payments over time equaling the present value of the secured claim.
“Sunnyslope is an atypical case where foreclosure value is greater than replacement value,” Kupetz wrote. This was because the property was encumbered by low income housing restrictions that would be eliminated in foreclosure, but would otherwise depress the value of the property.
In Sunnyslope, the 9th Circuit explained that a creditor’s claim is secured to the extent of the value of its collateral and the collateral is to be valued “in light of the purpose of the valuation and of the proposed disposition or use of such property.” The 9th Circuit stressed that the actual plan must be the focus, and that the U.S. Supreme Court has “emphasized that, in a reorganization involving a cram down, the debtor will continue to use the collateral and the valuation must therefore occur “in light of the proposed payment plan reality: no foreclosure sale.” The valuation must reflect the property’s actual use under the plan and not a hypothetical foreclosure.