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Commentary Authored by Thompson & Knight Attorney Bruce Zabarauskas and Published by Law360
Sunnyslope Bankruptcy Case: Bad News For Secured Lenders
October 9, 2012 11:56 pm


By Bruce J. Zabarauskas, Thompson & Knight LLP.
Bruce Zabarauskas is counsel in the Los Angeles office of Thompson & Knight.

Law360, New York (October 09, 2012, 5:14 PM ET) -- During the past two years there has been an increase in bankruptcy cases within the Ninth Circuit Court of Appeals cramming down plans of reorganization on secured lenders. In one of these cases, In re Sunnyslope Housing Limited Partnership, Case No. 2:11-cv-02579 (D. Az. Sept. 18, 2012), the bankruptcy court confirmed a plan that provided for the payment of the lender's secured claim over a 40-year period with a substantial balloon payment and a 4.4-percent interest rate.

While this decision was reversed, in part, by the United States District Court for the District of Arizona, the ruling provides little solace for secured lenders because the court held that valuation of collateral under the Bankruptcy Code does not need to be based on the property's highest and best use.

The debtor in Sunnyslope was the owner of real property, which it operated as an affordable housing community. First Southern National Bank held an approximately $8.9 million claim, which was secured by a first deed of trust on the property.

Commentary authored by Thompson & Knight attorney Bruce Zabarauskas and published by Law360


According to the district court, this would result in a sufficient loan-to-value ratio that would support a lower interest rate. In other words, the lower, nonefficient use of the property would only be relied on to determine the value of the collateral for purposes of determining the amount of the creditor's secured claim, but not with respect to the interest rate to be used under the plan.

Finally, there may be instances in which a highest-and-best-use valuation would establish that the secured lender is over-secured and therefore entitled to post-petition interest during the bankruptcy case. Conversely, valuation based on the debtor's actual use of the property may result in a determination that the lender is under-secured and therefore not entitled to post-petition interest.

The court's decision in Sunnyslope will likely to lead to additional litigation in the bankruptcy area concerning the appropriate premises and methodologies for valuing collateral in Chapter 11 cases.

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