                FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

In the Matter of: SUNNYSLOPE          No. 12-17241
HOUSING LIMITED PARTNERSHIP,
                            Debtor,      D.C. No.
                                      2:11-cv-02579-
                                           HRH
FIRST SOUTHERN NATIONAL BANK,
               Plaintiff-Appellant,

                v.

SUNNYSLOPE HOUSING LIMITED
PARTNERSHIP,
             Defendant-Appellee.



In the Matter of: SUNNYSLOPE          No. 12-17327
HOUSING LIMITED PARTNERSHIP,
                            Debtor,      D.C. No.
                                      2:11-cv-02579-
                                           HRH
SUNNYSLOPE HOUSING LIMITED
PARTNERSHIP,
              Plaintiff-Appellant,

                v.

FIRST SOUTHERN NATIONAL BANK,
              Defendant-Appellee.
2       IN THE MATTER OF SUNNYSLOPE HOUSING

In the Matter of: SUNNYSLOPE               No. 13-16164
HOUSING LIMITED PARTNERSHIP,
                            Debtor,          D.C. No.
                                          2:12-cv-02700-
                                               HRH
FIRST SOUTHERN NATIONAL BANK,
               Plaintiff-Appellant,

                  v.

SUNNYSLOPE HOUSING LP,
             Defendant-Appellee.



In the Matter of: SUNNYSLOPE               No. 13-16180
HOUSING LIMITED PARTNERSHIP,
                            Debtor,          D.C. No.
                                          2:12-cv-02700-
                                               HRH
SUNNYSLOPE HOUSING LP,
              Plaintiff-Appellant,
                                             OPINION
                  v.

FIRST SOUTHERN NATIONAL BANK,
              Defendant-Appellee.


       Appeal from the United States District Court
                for the District of Arizona
    H. Russel Holland, Senior District Judge, Presiding
          IN THE MATTER OF SUNNYSLOPE HOUSING                         3

                   Argued and Submitted
          May 12, 2015—San Francisco, California

                        Filed April 8, 2016

           Before: Alex Kozinski, Richard A. Paez,
            and Richard R. Clifton, Circuit Judges.

                    Opinion by Judge Clifton;
                     Dissent by Judge Paez


                           SUMMARY*


                            Bankruptcy

    Reversing the district court’s judgment affirming the
bankruptcy court’s confirmation of a chapter 11 plan of
reorganization, the panel held that the plan was based on an
improper valuation of a creditor’s secured interest in real
property.

    The debtor developed and operated an apartment complex
intended to provide affordable housing. When the debtor
defaulted on the senior loan for the project, the Department
of Housing and Urban Development honored its guarantee,
acquired the senior loan from the original private lender, and
resold it to First Southern National Bank. First Southern
started the foreclosure process, which would have wiped out
affordable housing restrictive covenants related to additional

  *
    This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
4        IN THE MATTER OF SUNNYSLOPE HOUSING

financing. The debtor then was put into bankruptcy, and it
exercised the cram down option of 11 U.S.C. § 1325(a)(5)(B)
and elected to retain the property in exchange for a new
payment plan that would require it to pay First Southern an
amount equal to the present value of the secured claim at the
time of bankruptcy.

   The panel held that the parties’ appeals were not equitably
moot even though funding for the reorganization plan had
been provided by the investment of new equity by
Cornerstone at Camelback, LLC, which had taken over
ownership of the debtor, and the plan had been substantially
consummated.

    The panel held that the value of First Southern’s secured
interest under 11 U.S.C. § 506(a) should not be reduced by
the impact of the affordable housing restrictions because First
Southern was released from HUD’s requirements, and its
claim was superior to the rights of other secured creditors.
All of the restrictive covenants that the debtor sought to
invoke were derived from positions that were junior and
expressly subordinated to First Southern’s interest.
Distinguishing Assocs. Commercial Corp. v. Rash, 520 U.S.
953 (1997), the panel held that the plan of reorganization
confirmed by the bankruptcy court must be set aside because
valuing First Southern’s secured interest as if the affordable
housing restrictions related to subordinated positions still
applied was not appropriate under § 506(a). The panel
reversed the district court’s judgment and remanded the case
for additional proceedings.

    Dissenting, Judge Paez wrote that under Rash, First
Southern’s collateral, the apartment complex, must be valued
in light of the debtor’s proposed use of the property as
        IN THE MATTER OF SUNNYSLOPE HOUSING               5

affordable housing. Accordingly, Judge Paez did not agree
with the majority that the bankruptcy court erred in its
valuation of First Southern’s collateral under § 506(a).


                       COUNSEL

Brian Sirower (argued) and Walter J. Ashbrook, Quarles &
Brady LLP, Phoenix, Arizona; E. King Poor, Quarles &
Brady LLP, Chicago, Illinois, for Plaintiff-Appellant/Cross-
Appellee First Southern National Bank.

David William Engelman, Scott B. Cohen, and Bradley D.
Pack, Engelman Berger, P.C., Phoenix, Arizona; Susan M.
Freeman (argued), Henk Taylor, and Justin Henderson, Lewis
Roca Rothgerber Christie LLP, Phoenix, Arizona for Debtor
Defendant-Appellee/Cross-Appellant Sunnyslope Housing
Limited Partnership.
6        IN THE MATTER OF SUNNYSLOPE HOUSING

                          OPINION

CLIFTON, Circuit Judge:

    This case concerns the valuation of the secured interest in
real property under section 506(a) of the Bankruptcy Code
when a bankrupt debtor has exercised the “cram down”
option provided under section 1325(a)(5)(B) of the Code.

    Debtor Sunnyslope Housing Limited Partnership
(“Sunnyslope”) developed and operated an apartment
complex in Phoenix intended to provide affordable housing.
The project was largely financed by government agencies,
and restrictions were imposed to require that the apartments
would be used for affordable housing. The senior loan was
provided by a private entity but was guaranteed by the
Department of Housing and Urban Development (“HUD”).
Other loans were provided by the City of Phoenix and the
State of Arizona, and additional financial support was
available through federal tax credits. Restrictions imposed in
connection with the additional loans and tax credits provided
that the additional financing and the related restrictions were
subordinate to the HUD guaranteed loan. Sunnyslope
defaulted. HUD honored its guarantee, acquired the senior
loan from the original private lender, and resold it to First
Southern National Bank (“First Southern”). First Southern
started the foreclosure process, which would have the effect
of wiping out all the affordable housing restrictions related to
the additional financing. Before foreclosure was
accomplished, however, Sunnyslope was put into bankruptcy.

    As the debtor, Sunnyslope exercised the cram down
option and elected to retain the property. It argued that the
value of First Southern’s secured interest should be calculated
         IN THE MATTER OF SUNNYSLOPE HOUSING                 7

with the affordable housing restrictions remaining in place.
The bankruptcy court and the district court both agreed, and
a plan of reorganization was confirmed and implemented.
The plan valued First Southern’s secured interest at $3.9
million, substantially less than what it would cost to replace
the property or the amount that First Southern could have
obtained if it had been permitted to foreclose on the property.

    First Southern appeals. The primary question is whether
the value of First Southern’s secured interest should be
reduced by the impact of the affordable housing restrictions.
We conclude that it should not be reduced in that manner. We
reverse the judgment of the district court and remand for
further proceedings.

I. Background

    Sunnyslope is an Arizona limited partnership. The project
it developed and operated consisted of 150 apartments.
Financing came from several sources.

    The primary financing was provided by an $8.5 million
loan from Capstone Advisors, LLC (the “Capstone Loan”).
The federal government, through HUD, guaranteed the
Capstone Loan. The terms of the loan provided for
repayment over 40 years with an interest rate of 5.35% per
annum. The loan was secured by a first-position deed of trust
on the property. To obtain the HUD guaranteed loan,
Sunnyslope had to enter into and record a Regulatory
Agreement that required that the project be operated as
affordable housing and that limited rents that tenants could be
charged to amounts within levels set by HUD.
8        IN THE MATTER OF SUNNYSLOPE HOUSING

    The Capstone Loan was funded by the sale of municipal
bonds issued by the Phoenix Industrial Development
Authority (“IDA”). The Phoenix IDA required the recording
of another agreement that compelled the owner of the
apartment project to operate it in accordance with the
affordable housing requirements of 26 U.S.C. § 142(d). The
IDA Regulatory Agreement provided that the covenants
“shall run with the land and shall bind the Owner, and its
successors and assigns and all subsequent owners or operators
of the Project.” It further provided that “[t]his Agreement,
and each and all of the terms hereof, shall terminate and be of
no further force and effect in the event of a foreclosure of the
lien of the Mortgage or delivery of a deed in lieu of
foreclosure[.]”

    Additional funding for the project came from a $3 million
loan from the City of Phoenix, secured by a second-position
deed of trust. To obtain that loan, Sunnyslope had to enter
into recorded covenants that required the debtor to set aside
twenty-three units of the project as affordable housing. The
covenants provided that they were binding on successor
owners but also that “the provisions hereof are expressly
subordinate to the HUD insured mortgage or Deed of Trust,
to the HUD Regulatory Agreement, and subordinate to all
applicable HUD mortgage insurance . . . regulations and
related administrative requirements.” They further provided
that “[i]n the event of foreclosure or transfer of title by deed
in lieu of foreclosure, any and all land use covenants
contained herein shall automatically terminate.”

    Another $500,000 in public funding came from the State
of Arizona, secured by a third-position deed of trust. It was
conditioned on the recording of covenants that set aside an
additional five units for low-income renters. Like the City’s
         IN THE MATTER OF SUNNYSLOPE HOUSING                   9

provisions, the State covenants were binding upon the owner
and any successors to the property, but they similarly
provided that “[t]he provisions of this Agreement are
expressly subordinate to the Senior Loan, to the HUD
Regulatory Agreement, and subordinate to all applicable
HUD mortgage insurance . . . regulations and related
administrative requirements.” They also provided that “[i]n
the event of foreclosure or transfer by title of deed in lieu of
foreclosure, any and all land use covenants contained in this
agreement shall automatically terminate.”

    Once the apartment project was completed in 2008,
Sunnyslope and its equity owners qualified for federal tax
credits under the Low Income Housing Tax Credit
(“LIHTC”) program. The LIHTC program gives investors a
monetary incentive to invest in low income housing by
providing tax credits rather than traditional cash returns.
Those tax credits are made available for the first ten years a
project operates as affordable housing. The Sunnyslope
apartment project was placed in service in 2008, so there
were seven years of tax credits remaining at the time of the
bankruptcy proceedings described below, estimated to be
worth $539,973 per year. To receive the tax credits,
Sunnyslope entered into still another agreement, requiring
that all 150 units in the project meet the definition of “low
income units” in 26 U.S.C. § 42(i)(3)(A). Like the financing
agreements described above, this agreement was binding on
future owners but the provisions of the agreement “are
expressly subordinate to the HUD insured mortgage or Deed
of Trust, to the HUD Regulatory Agreement, and subordinate
to all applicable HUD mortgage insurance . . . regulations and
related administrative requirements.” The agreement further
provided that “[i]n the event of foreclosure or transfer of title
10         IN THE MATTER OF SUNNYSLOPE HOUSING

by deed in lieu of foreclosure, any and all land use covenants
contained herein shall automatically terminate.”

     Unfortunately, the project was not blessed with good
timing. It was completed in 2008, the same year that the
nation suffered a financial crisis, driven in large part by the
bursting of a housing bubble. Housing prices in much of the
nation declined substantially, and Phoenix was one of the
cities hit hardest. Whether or not that was the cause of
distress for this project,1 by the summer of 2009 Sunnyslope
defaulted on the Capstone Loan. HUD took the loan over
from Capstone.

    In September 2010, HUD sold a package of loans to First
Southern. The Capstone Loan was part of the package, and it
was sold to First Southern for $5,050,186.24. The loan sale
agreement provided that the deed of trust was a valid and
enforceable lien on the property, subject to “any applicable
bankruptcy, insolvency, reorganization and other laws
affecting creditors’ rights generally” and except for
“covenants, conditions and restrictions, rights of way,
easements and other matters of public record[.]” As part of
the sale, HUD released the HUD Regulatory Agreement.

    First Southern, in October 2010, filed a foreclosure
complaint against Sunnyslope in state court and moved for
the appointment of a receiver. A trustee’s sale of the project
was noticed. The receiver negotiated an agreement to sell the
property, post-foreclosure, for $7,650,000. Before any sale
could be completed, however, Sunnyslope’s general partner
filed a petition for involuntary bankruptcy on January 31,

 1
   In its brief, Sunnyslope points to “a substantial increase in construction
costs and other challenges.”
         IN THE MATTER OF SUNNYSLOPE HOUSING                11

2011. The bankruptcy court later entered an order converting
the involuntary bankruptcy to a voluntary Chapter 11
bankruptcy.

    Through the bankruptcy proceedings, Sunnyslope sought
to retain ownership and control of the property by exercising
the so-called “cram down” power under 11 U.S.C.
§ 1325(a)(5)(B). That power allowed the debtor, Sunnyslope,
to keep the property over the objection of the secured
creditor, First Southern, in exchange for a new payment plan
that would require Sunnyslope to pay First Southern an
amount equal to the present value of the secured claim at the
time of bankruptcy. The value of the allowed secured claim
is governed by 11 U.S.C. § 506(a). See Associates
Commercial Corp. v. Rash, 520 U.S. 953, 957 (1997). The
determination of that value is the primary subject of this
appeal.

    In its proposed plan of reorganization, Sunnyslope
originally asserted that First Southern’s secured claim should
be valued at $2.5 million. First Southern filed a motion under
section 506(a) to determine the amount of its secured claim.
First Southern’s experts valued the property at about $7.7
million. That value was premised on the release of the
affordable housing covenants, because foreclosure would
extinguish them. In response, Sunnyslope’s expert valued the
property without the affordable housing restrictions at $7
million but valued it at $2.6 million if the restrictions still
applied. The valuation by Sunnyslope’s expert did not include
anything for the value of the tax credits. In reply, First
Southern offered an additional report from one of its experts
opining that with the rent restrictions the property was worth
$4.885 million and that the tax credits that could be available
12       IN THE MATTER OF SUNNYSLOPE HOUSING

if the project were maintained as affordable housing added an
additional $2.91 million for a total value of $7.795 million.

     The primary difference in the valuations turned on
whether the affordable housing covenants remained in effect
to limit the rent that could be collected from the apartments.
Sunnyslope argued that they still applied and, as a result, the
limit on the amount of rental income that could be realized
from the apartments substantially reduced the value of the
project. First Southern contended that the restrictions should
no longer apply and that the project should be valued
accordingly.

    The bankruptcy court agreed with Sunnyslope. It
concluded that the secured value of the property was $2.6
million, based on continuing application of the covenants, and
further concluded that the creditor had no right to the value of
the tax credits. The bankruptcy court subsequently confirmed
Sunnyslope’s plan of reorganization and denied First
Southern’s motion for a stay of the plan.

    That reorganization plan proposed to pay $2.6 million for
First Southern’s secured claim over 40 years at an interest
rate of 4.4 % per annum. The balance of First Southern’s
claim would be paid as a balloon payment at the end of the
40-year term. Funding for the plan was to be provided by the
investment of $1.2 million of new equity by Cornerstone at
Camelback, LLC (“Cornerstone”), which would take over
ownership of Sunnyslope, and from revenues generated by
continued operation of the apartment complex as affordable
housing.

   First Southern appealed to the district court, challenging
both the valuation order and the confirmation order. The
         IN THE MATTER OF SUNNYSLOPE HOUSING                13

district court ultimately held, in an order entered September
18, 2012, that the valuation was properly limited by the
affordable housing restrictions, but that the valuation should
have included the value of the tax credits. The matter was
remanded to the bankruptcy court for further proceedings.
The district court also concluded that the bankruptcy court
did not err in denying First Southern’s motion for a stay.

    First Southern filed a notice of appeal to this court on
October 9, 2012, primarily contesting the section 506(a)
valuation. Sunnyslope responded by filing a notice of cross-
appeal, contesting the inclusion of the tax credits in the
section 506(a) valuation. The clerk of this court issued an
order requiring the parties to brief whether this court had
jurisdiction over the appeal and cross-appeal, as there was no
final order from the district court.

    After additional proceedings, the bankruptcy court
entered a memorandum decision on December 12, 2012,
determining that the value of the tax credits was $1.3 million,
bringing the secured value of First Southern’s lien to $3.9
million. The bankruptcy court subsequently confirmed a
modified plan of reorganization based on that valuation. First
Southern appealed to the district court and sought a stay. The
district court affirmed the bankruptcy court’s determinations
and declined to grant First Southern a stay. The
reorganization plan was thereafter put into effect;
Cornerstone provided its new equity funding and took control
of Sunnyslope.

   First Southern filed a second notice of appeal to this court
on June 6, 2013. Sunnyslope again cross-appealed.
Sunnyslope moved to dismiss both appeals on the ground of
equitable mootness.
14         IN THE MATTER OF SUNNYSLOPE HOUSING

II. Jurisdiction

    Although there may have been some question as to this
court’s jurisdiction following the filing of the first notice of
appeal,2 the district court’s later entry of final judgment has
eliminated that question. “[T]he rule in this circuit [is] that
once a final judgment is entered, an appeal from an order that
otherwise would have been interlocutory is then appealable.”
In re Rains, 428 F.3d 893, 901 (9th Cir. 2005) (quoting In re
Eastport Assocs., 935 F.2d 1071, 1075 (9th Cir. 1991)).
“Whatever prematurity existed in [an appeal from an
interlocutory order] was cured by the subsequent entry of a
final judgment.” Id. Thus, we have jurisdiction over the issues
in both appeals, and we now consider both appeals together.

III.     Equitable Mootness

    Sunnyslope has moved to dismiss these appeals as
equitably moot. “An appeal is equitably moot if the case
presents ‘transactions that are so complex or difficult to
unwind’ that ‘debtors, creditors, and third parties are entitled
to rely on [the] final bankruptcy court order.’” In re
Mortgages Ltd., 771 F.3d 1211, 1215 (9th Cir. 2014) (quoting
In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir.



  2
    “Under 28 U.S.C. § 158(a), we have jurisdiction to hear appeals from
final judgments, order[s] and decrees entered by a district court on appeal
from a bankruptcy court.” In re Fowler, 394 F.3d 1208, 1211 (9th Cir.
2005) (internal quotation marks omitted). This court may also hear
interlocutory appeals based on the flexible finality rule, a judicially
created rule unique to bankruptcy. See id. (discussing the flexible finality
rule). The parties have disagreed about the applicability of that flexible
finality rule in these circumstances, but it is no longer necessary for us to
resolve that issue.
          IN THE MATTER OF SUNNYSLOPE HOUSING                         15

2012)); see also In re Transwest Resort Properties, Inc.,
801 F.3d 1161, 1168–73 (9th Cir. 2015).3

    Sunnyslope primarily points to the new equity invested by
Cornerstone as the reason to dismiss the appeals as moot.
Because the investment was made as part of a 26 U.S.C.
§ 1033 exchange, it contends that Cornerstone and its
principals would be subject to tax liabilities of more than $1.5
million including penalties and interest if the plan
confirmation order were reversed. It also argues that
Cornerstone would be unable to recover a substantial part of
the $1.2 million that it invested in Sunnyslope if the plan
were unwound.

   This court has identified four factors to help determine
whether a case should be deemed equitably moot:

         (1) “whether a stay was sought, for absent that
         a party has not fully pursued its rights”; (2) “if
         a stay was sought and not gained, [the court]
         then will look to whether substantial
         consummation of the plan has occurred”;
         (3) “[the court] will look to the effect that a
         remedy may have on third parties not before
         the court”; (4) “[f]inally, we will look at
         whether the bankruptcy court can fashion

 3
   The doctrine of equitable mootness differs from Article III mootness.
The latter deals with whether there is an actual, live case or controversy
for a court to decide. If there is not, then we lack authority under the
Constitution to proceed. In contrast, “equitable mootness” is “a judge-
made abstention doctrine” that is based on an unwillingness to alter the
outcome of a plan of reorganization in circumstances where it would not
be equitable to do so. In re Mortgages, 771 F.3d at 1214–15. As it is a
prudential doctrine, it does not present a challenge to our jurisdiction.
16       IN THE MATTER OF SUNNYSLOPE HOUSING

        effective and equitable relief without
        completely knocking the props out from under
        the plan and thereby creating an
        uncontrollable situation before the bankruptcy
        court.”

Id. at 1217 (quoting In re Thorpe Insulation, 677 F.3d at
881).

    Generally, in determining equitable mootness, and in
particular with regard to the fourth factor in the analysis, the
power to grant equitable relief, we have noted that “[t]he
party asserting mootness has a heavy burden to establish that
there is no effective relief remaining for a court to provide.”
In re Focus Media, Inc., 378 F.3d 916, 923 (9th Cir. 2004)
(quoting In re Pintlar Corp., 124 F.3d 1310, 1312 (9th Cir.
1997)). We conclude that Sunnyslope has not carried that
burden.

    First Southern applied for a stay in the bankruptcy court
and then again in the district court. Those applications were
denied. First Southern did not appeal the denial of the stay to
this court, asserting that it was misled by Sunnyslope as to the
need to do so, but it did file two separate notices of appeal.
These made plain its intent to pursue the matter on appeal.
We conclude that the failure to seek a stay from this court is
not fatal to the current appeal and that First Southern’s efforts
to obtain a stay from the bankruptcy court and the district
court were sufficient to satisfy the first factor. We have
previously declined to dismiss appeals based on equitable
mootness when, as here, the aggrieved party applied for a stay
to the bankruptcy court and appealed to the district court but
did not further pursue a stay motion to this court. See In re
Focus Media, 378 F.3d at 924; In re Mortgages, 771 F.3d at
           IN THE MATTER OF SUNNYSLOPE HOUSING                             17

1216; In re Transwest, 801 F.3d at 1168. The reality is that
this court does not often grant stays in circumstances like
these. A secured creditor might be wise to err on the side of
caution and seek a stay from this court, but the failure to do
so in this case should not, we conclude, mean that these
appeals should be dismissed as moot.4

    As for the second factor, the plan as approved by the
bankruptcy court was substantially consummated, as all
parties acknowledge. Cornerstone invested the new equity
funding and took over Sunnyslope.

    The question posed by the third factor is “whether
modification of the plan of reorganization would bear unduly
on the innocent.” In re Thorpe Insulation, 677 F.3d at 882;
see In re Transwest, 801 F.3d at 1169. In our view, the
unraveling of the plan would not have a negative effect on
parties intended to be protected by the doctrine of equitable
mootness, namely innocent third parties not before the court.

    The key third party who would be affected by the
unraveling of the plan is the new equity investor under the
plan, Cornerstone. While not a party before the court in its
own name, it is here in the guise of Sunnyslope. Sunnyslope
concedes that Cornerstone is now the equity owner of
Sunnyslope. More broadly, Cornerstone is not the kind of

  4
    Sunnyslope contends that the aggrieved party is required to appeal a
denial of a stay to this court and thereafter to the Circuit Justice, citing In
re Roberts Farms, 652 F.2d 793, 798 (9th Cir. 1981). But our later
decision in Focus Media looked only to see if the party sought a stay from
the bankruptcy court and the district court. In Roberts Farms, the party did
not even seek a stay from the bankruptcy court, so the question of what
further steps beyond that had to be taken was not before the court.
652 F.2d at 798.
18       IN THE MATTER OF SUNNYSLOPE HOUSING

innocent third party the doctrine of equitable mootness is
intended to protect. Cornerstone’s principals are sophisticated
investors. They decided on their own to obtain funds for this
investment via an exchange transaction that posed potential
tax risks if something went wrong. Cornerstone was
intimately involved in the development of the plan under
which they took over Sunnyslope. It knew that the valuation
upon which the plan was based was vigorously disputed by
First Southern. Cornerstone’s primary principal, Mr.
Aronson, served as one of Sunnyslope’s main witnesses.
Cornerstone knew that First Southern had filed notices of
appeal. The failure of First Southern to seek a stay from this
court could not have given Cornerstone reasonable cause to
conclude that First Southern had abandoned its challenge.
Cornerstone made a conscious decision to proceed
nonetheless. The attempt to characterize Cornerstone as an
innocent third party to invoke dismissal of the appeal on the
ground of equitable mootness is unconvincing.

    Sunnyslope argues that the City of Phoenix and the State
of Arizona were also innocent third parties that would be
harmed by the unraveling of the plan. But no additional
investment was made under the plan by either the City or the
State. Nor, as junior secured creditors, are they third parties
absent from the proceedings, unable to protect themselves.
They have legitimate interests as creditors and as sponsors of
affordable housing, but those interests do not support
dismissal of the appeal on the ground of equitable mootness.

    The fourth factor, whether the bankruptcy court can
fashion effective and equitable relief, is generally the most
important of the four factors. In re Thorpe Insulation, 677
F.3d at 883. But Sunnyslope’s objection here is not really that
the transactions cannot practically be unwound. The
         IN THE MATTER OF SUNNYSLOPE HOUSING                19

transactions were not that complex. The argument, rather, is
that the unwinding would have a substantial negative impact
on Cornerstone. That may be true, but as discussed above,
Cornerstone is not the kind of innocent third party the
doctrine of equitable mootness is designed to protect.

   We deny Sunnyslope’s motion to dismiss the appeals as
equitably moot.

IV.    Section 506(a) Valuation

    This court reviews de novo a district court’s decision on
an appeal from a bankruptcy court and thus applies the same
standard of review applied by the district court. In re AFI
Holding, Inc., 525 F.3d 700, 702 (9th Cir. 2008). No
deference is owed to the district court’s decision. Id. “The
bankruptcy court’s findings of fact are reviewed for clear
error, while its conclusions of law are reviewed de novo.” In
re JTS Corp., 617 F.3d 1102, 1109 (9th Cir. 2010) (internal
quotation marks omitted). This court will “accept the
bankruptcy court’s findings of fact, unless the court is left
with the definite and firm conviction that a mistake has been
committed.” Id. (citation and quotation marks omitted).

    The primary question posed here is whether the affordable
housing restrictive covenants should affect the valuation of
First Southern’s secured claim under section 506(a). The facts
related to that issue are not seriously in dispute. As noted
above, Sunnyslope’s own expert, while valuing the secured
claim as worth $2.6 million if the covenants still applied,
conceded that the value was $7 million if they did not. We
conclude, as a matter of law, that the restrictive provisions
should not apply to limit the value of First Southern’s secured
claim.
20       IN THE MATTER OF SUNNYSLOPE HOUSING

    The starting point is that First Southern as a secured
creditor stands in the first position. It obtained the rights of
the senior lender from HUD. HUD acquired the Capstone
Loan after it fell into default, sold it to First Southern, and
released First Southern from the requirements of the HUD
Regulatory Agreement. First Southern’s secured claim is
superior to the rights of other secured creditors.

    All of the restrictive covenants and other provisions that
Sunnyslope seeks to invoke to limit the project to affordable
housing and to the reduced rental income that would be
collected as a result are derived from positions that were
junior and expressly subordinated to the Capstone Loan. The
agreement related to the City of Phoenix loan, for instance,
states that “the provisions hereof are expressly subordinate to
the HUD insured mortgage or Deed of Trust, to the HUD
Regulatory Agreement, and subordinate to all applicable
HUD mortgage insurance . . . regulations and related
administrative requirements.” They further provided that “[i]n
the event of foreclosure or transfer of title by deed in lieu of
foreclosure, any and all land use covenants contained herein
shall automatically terminate.” If there were a foreclosure
sale, there is no doubt that the restrictive provisions would be
swept away, giving First Southern’s interest a value of at least
$7 million.

    Due to the bankruptcy proceedings, there has not been a
foreclosure sale. But that does not mean that the secured
value of First Southern’s secured claim may be suppressed by
conditions subordinated to its position and attached to loans
made by junior creditors.

    Section 506 of the Bankruptcy Code provides for the
recognition in bankruptcy of the claim of a secured creditor:
         IN THE MATTER OF SUNNYSLOPE HOUSING                 21

       An allowed claim of a creditor secured by a
       lien on property in which the estate has an
       interest . . . is a secured claim to the extent of
       the value of such creditor’s interest in the
       estate’s interest in such property, . . . and is an
       unsecured claim to the extent that the value of
       such creditor’s interest . . . is less than the
       amount of such allowed claim. Such value
       shall be determined in light of the purpose of
       the valuation and of the proposed disposition
       or use of such property, and in conjunction
       with any hearing on such disposition or use or
       on a plan affecting such creditor’s interest.

11 U.S.C. § 506(a)(1).

    In Associates Commercial Corp. v. Rash, 520 U.S. 953
(1997), the Supreme Court applied this section in the context
of a bankruptcy cram down. Rash purchased a tractor truck
for use in his freight hauling business. He made a down
payment, agreed to pay the remaining amount in 60 monthly
installments, and pledged the truck as collateral. The seller
assigned the loan and the truck lien to a third party, ACC.
Rash and his wife later filed for bankruptcy. At that time the
balance owed to ACC on the truck loan was $41,171. Id. at
956. The debtor exercised the cram down power under
section 1325(a)(5)(B), which allows a debtor to retain the
property over the objection of a secured creditor. Id. at 957.

    The dispute there, as here, concerned the valuation of the
creditor’s secured claim. The creditor argued that the proper
valuation was “the price the Rashes would have to pay to
purchase a like vehicle,” id., estimated to be $41,000. The
debtor, in contrast, argued that the proper valuation was “the
22       IN THE MATTER OF SUNNYSLOPE HOUSING

net amount ACC would realize upon foreclosure and sale of
the collateral,” id., estimated to be $31,875. The bankruptcy
court and the district court agreed with the debtor, and so did
the Fifth Circuit sitting en banc, but the Supreme Court did
not. The Court held that replacement value was the proper
measure in that case.

    The Court highlighted a portion of the second sentence of
section 506(a) in determining the value of the secured portion
of the claim: “Such value shall be determined in light of the
purpose of the valuation and of the proposed disposition or
use of such property.” Id. at 961. It treated the phrase
“proposed disposition or use” of the collateral as identifying
two alternatives: “in one case the collateral will be
surrendered to the creditor, and in the other, the collateral will
be retained and used by the debtor.” Id. at 962. The Court
concluded that a “replacement-value” standard “distinguishes
retention from surrender and renders meaningful the key
words ‘disposition or use.’” Id.

    In the Rash case, as here, the debtor elected to retain the
property and use it in his business, over the objection of the
secured creditor. Sunnyslope thus argues that Rash requires
the rejection of the “foreclosure value” and the application of
“replacement value” here, which it defines as the value of the
property when used for affordable housing. That inference
goes astray in two separate ways.

    For one, it takes the reference to “use” in Rash and in
section 506(a) as meaning the particular use to which the
debtor elects to devote the property, in Sunnyslope’s case as
affordable housing. But Rash interpreted “use” simply to
mean the alternative to “surrender.” Rash decided to retain
the truck rather than give it up. Nothing in the Court’s
         IN THE MATTER OF SUNNYSLOPE HOUSING                 23

decision supports the proposition that the “replacement
value” of the property should be measured by the income that
can be generated when used in the specific way that the
debtor elects to use it. There was no discussion in Rash of the
income stream that Rash might realize from using the truck
in his freight hauling business. Instead, replacement value
was variously described as “what the debtor would have to
pay for comparable property,” id. at 955, or “the price the
Rashes would have to pay to purchase a like vehicle,” id. at
957, or “the price a willing buyer in the debtor’s trade,
business, or situation would pay to obtain like property from
a willing seller,” id. at 960. The cost to build or buy an
apartment complex like Sunnyslope would be much more
than the valuation of First Southern’s secured claim asserted
by Sunnyslope and allowed by the district court.

    For another, Sunnyslope fails to appreciate how the facts
of this case diverge from the facts in Rash. In that case, the
“replacement value” was higher than the “foreclosure value.”
That is usually the case. As Rash expressly recognized, the
foreclosure value is “typically lower.” Id. at 960. In our case,
however, the foreclosure value is acknowledged to be at least
$7 million, because a foreclosure would eliminate the
affordable housing restrictions, while the “fair market value”
based on an income stream method of valuation that accounts
for the affordable housing restrictions is substantially less.

    Disregarding “foreclosure value” in favor of an income
stream valuation based on the authority of Rash ignores what
the Court said about the reason for using the replacement
value instead:

       When a debtor surrenders the property, a
       creditor obtains it immediately, and is free to
24        IN THE MATTER OF SUNNYSLOPE HOUSING

         sell it and reinvest the proceeds. . . . If a
         debtor keeps the property and continues to use
         it, the creditor obtains at once neither the
         property nor its value and is exposed to
         double risks: The debtor may again default
         and the property may deteriorate from
         extended use. Adjustments in the interest rate
         and secured creditor demands for more
         “adequate protection,” 11 U.S.C. § 361, do
         not fully offset these risks.

Id. at 962–63. Applying the replacement value
standard—establishing a value higher than the foreclosure
value—was deemed by the Court to be more appropriate in
light of the double risks that must be borne by the creditor.
Sunnyslope’s proposed income stream valuation does not
account for the double risks. To the contrary, it imposes them
on the creditor at the same time that it provides the creditor
with a value about one-third of what the creditor could obtain
if the property were surrendered.

    Rash does not support assigning a value to First
Southern’s secured interest based on a method of valuation
that is substantially lower than the replacement cost of the
property. The replacement cost of a like property is the
standard that Rash commands, and the standard that should
have been applied.5

 5
   The dissent argues, at 37–39, that our opinion fails to determine value
with regard to the fact that Sunnyslope proposes to use the property as an
affordable housing complex. But Rash does not authorize the bankruptcy
valuation to be based on the income stream that would be derived from the
use of property as an affordable housing complex. It holds that “the
replacement-value standard accurately gauges the debtor’s ‘use’ of the
property.” 520 U.S. at 963. Replacement value is a measure of what it
           IN THE MATTER OF SUNNYSLOPE HOUSING                           25

    Under section 1325(a)(5) of the Code, a plan’s treatment
of a secured claim can be confirmed if one of three conditions
is satisfied: the creditor accepts the plan, the debtor
surrenders the property, or the debtor invokes the cram down
power. Rash, 520 U.S. at 957. That cram down option permits
confirmation of a plan under which the debtor will retain
property subject to the creditor’s security interest over the
objection of the creditor—the plan is “crammed down the
throat[] of [an] objecting creditor[ ].” Kham & Nate’s Shoes
No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1359 (7th
Cir. 1990). But that option does not authorize shortchanging
the creditor with regard to its current secured value. The
statute protects the creditor to the extent of that secured value.
Rash, 520 U.S. at 957. It does not authorize a substantial
reduction in the amount of the secured value simply because
the bankruptcy process itself means that the creditor cannot
actually foreclose on the property.

    In this instance, First Southern does not have a secured
claim in the full face amount of the note, $8.5 million,
because the property was not worth that much at the time of
the bankruptcy valuation. First Southern does not contend



would cost to produce or acquire an equivalent piece of property, in that
instance “the price the Rashes would have to pay to purchase a like
tractor.” Id. at 957. The seller of the tractor would not be expected to sell
it to the Rashes cheaper because the Rashes planned to use it in a way that
would not generate much income. Just as the replacement value of a
tractor would not take into account the buyer’s anticipated use of the
tractor, the replacement value of a 150-unit apartment complex does not
take into account the fact that there is a restriction on the use of the
complex. Thus, contrary to the dissent’s assertion, at 40, that we are using
a foreclosure method of valuation, we merely conclude that it was
erroneous to factor the restrictive covenants into the replacement value of
Sunnyslope.
26       IN THE MATTER OF SUNNYSLOPE HOUSING

that its secured claim should be valued that highly, but even
if it did, its claim would properly be rejected and it could be
forced to accept the reduced present value of its secured
claim. But the Bankruptcy Code does not authorize the
further reduction in First Southern’s secured value asserted by
Sunnyslope. The “cram down” does not go that far.

     Sunnyslope argues that valuing First Southern’s secured
interest without regard to the affordable housing restrictions
will have the negative effect of eliminating the use of the
Sunnyslope project for affordable housing. That is likely true,
and it is, in an immediate sense, unfortunate. But from a
broader perspective, failure to recognize the priority of a
senior secured creditor would discourage lenders from
making the loans in the first place or would make those loans
much more expensive. Future prospective lenders would have
to factor in the risk that the value of their secured interest
would be substantially diminished. It would, in addition,
surely make it much more difficult for HUD to sell defaulted
loans on the secondary market and would drastically reduce
the amount that HUD could obtain from reselling those loans.
Consider what a buyer would pay for HUD’s loan to
Sunnyslope if it were known that the affordable housing
restrictions would remain in place. HUD would either be
saddled with more underperforming loans that it could not
sell or would salvage substantially less money from defaulted
loans, leaving it with substantially less money for future
projects.

    HUD could have designed the financing in the way that
Sunnyslope advocates, by conditioning the sale of the
Capstone Loan to First Southern on continued application of
the Regulatory Agreement. Instead, it expressly released that
agreement. Similarly, the Capstone Loan could have been
         IN THE MATTER OF SUNNYSLOPE HOUSING                   27

made subject to the various affordable housing covenants and
restrictions related to the Phoenix IDA financing, the City
loan, the State loan, and the tax credits, but that is not how the
deal was put together. Those provisions were explicitly
subordinated to the Capstone Loan. We cannot disregard the
terms of the agreements.

    Sunnyslope also complains that First Southern should not
benefit from knowingly undertaking what Sunnyslope
describes as a “high risk/high reward” transaction, a point
echoed in the dissenting opinion, at 37. But the same
description could be applied to Sunnyslope’s new owners. It
is not persuasive for the pot to call the kettle black. There is
no reason why Cornerstone should be uniquely immune from
the risks that it knowingly undertook.

    More importantly, the argument fails to appreciate that
First Southern stands in the shoes of the original lender,
Capstone or, in practical terms, HUD. Suppose HUD (or
Capstone) still owned the loan. As the senior lender, its rights
would seem clearly established, and Sunnyslope’s argument
that the secured value of HUD’s position should be reduced
because of the affordable housing restrictions, based on junior
financing expressly subordinated to HUD’s position, would
lack force. HUD’s position was fully conveyed to First
Southern; there is no claim that HUD held anything back for
itself. Similarly, there is no claim that First Southern was not
a bona fide purchaser of HUD’s interest, so there is no basis
to treat First Southern as having an interest less than the
interest HUD would have.
28        IN THE MATTER OF SUNNYSLOPE HOUSING

    The value assigned by the bankruptcy court to First
Southern’s secured interest did not accurately reflect the
actual value of that interest.6

V. Conclusion

    Valuing First Southern’s secured interest as if the
affordable housing restrictions related to subordinated
positions still applied was not appropriate under section
506(a). As a result, the plan of reorganization confirmed by
the bankruptcy court and affirmed by the district court must
be set aside. It was based on an improper valuation of First
Southern’s interest. We reverse the judgment of the district
court and remand for additional proceedings consistent with
this opinion.

      REVERSED and REMANDED.



PAEZ, Circuit Judge, dissenting:

     I do not agree with the majority that the bankruptcy court
erred in its valuation of First Southern’s collateral under 11
U.S.C. § 506(a). In my view, a straightforward application of
the Supreme Court’s decision in Associates Commercial
Corporation v. Rash, 520 U.S. 953 (1997), compels valuing
First Southern’s collateral—a 150-unit apartment complex—
in light of Sunnyslope’s proposed use of the property in its


  6
    In light of our resolution of this issue, it is not necessary for us to
consider other arguments made by the parties, including treatment of the
tax credits and the appropriate interest rate on payments owed to First
Southern under the plan.
          IN THE MATTER OF SUNNYSLOPE HOUSING                         29

plan of reorganization as affordable housing. I therefore
respectfully dissent from the majority’s holding that
Sunnyslope’s proposed use of the property and the attendant
restrictive covenants should not affect the value of First
Southern’s secured claim.1

   In reversing the bankruptcy court’s valuation ruling, the
majority errs in several major respects, which all relate to its
misapplication of the Supreme Court’s decision in Rash, the
key case in this appeal. Therefore, I begin with a discussion
of Rash and two lower-court opinions helpful in
understanding its holding. I then address the errors that result
from the majority’s misapplication of Rash. In the end, I
would affirm the bankruptcy court’s order valuing First
Southern’s collateral at $3.9 million.

                                    I.

    As the majority makes clear, First Southern’s secured
claim must be valued according to section 506(a), which
provides:

         An allowed claim of a creditor secured by a
         lien on property in which the estate has an
         interest . . . is a secured claim to the extent of
         the value of such creditor’s interest in the
         estate’s interest in such property, . . . and is an
         unsecured claim to the extent that the value of
         such creditor’s interest . . . is less than the
         amount of such allowed claim. Such value


  1
   I agree with the majority that First Southern’s appeal is not equitably
moot. See In re Transwest Resort Properties, Inc., 801 F.3d 1161, 1168
(9th Cir. 2015).
30       IN THE MATTER OF SUNNYSLOPE HOUSING

       shall be determined in light of the purpose of
       the valuation and of the proposed disposition
       or use of such property, and in conjunction
       with any hearing on such disposition or use or
       on a plan affecting such creditor’s interest.

11 U.S.C. § 506(a)(1).

     A proper understanding of the Supreme Court’s
interpretation of section 506(a) in Rash, and the majority’s
erroneous application, begins with our decision in In re Taffi,
96 F.3d 1190 (9th Cir. 1996) (en banc). In Taffi, the IRS had
attached a lien to the Taffis’ house to secure payment for a
tax liability. Id. at 1191. The parties disputed the value of
the IRS’s secured interest in the house. The Taffis advocated
for a foreclosure value—that is, the amount the house would
sell for under forced sale conditions. The IRS argued that the
claim was worth whatever a willing and informed buyer
would pay for the house under market conditions—what this
court referred to as the “fair market value.” Although the
bankruptcy court determined that the foreclosure value should
apply, sitting en banc we disagreed. Id. at 1191–92.

    The en banc court answered the same question we
confront here: “what is the appropriate method of valuation
prescribed in a reorganization under Chapter 11 where
collateral is retained by the debtors for the debtors’ use?” Id.
at 1192. The court answered the question thus:

           When a Chapter 11 debtor or a Chapter 13
       debtor intends to retain property subject to a
       lien, the purpose of a valuation under section
       506(a) is not to determine the amount the
       creditor would receive if it hypothetically had
         IN THE MATTER OF SUNNYSLOPE HOUSING                 31

       to foreclose and sell the collateral. Neither
       the foreclosure value nor the costs of
       repossession are to be considered because no
       foreclosure is intended. Instead, when the
       proposed use of the property is continued
       retention by the debtor, the purpose of the
       valuation is to determine how much the
       creditor will receive for the debtor’s
       continued possession. . . .

           In this case, the key fact is that the debtors
       are going to possess the House. This fact
       determines the disposition and use of the
       creditor’s interest. The foreclosure value is
       not relevant because no foreclosure is
       intended by the Plan. The Taffis are in, not
       outside of, bankruptcy. The IRS is not
       foreclosing. Valuation must be accomplished
       within the actual situation presented.
       Consequently, the value has to be the fair
       market value of what the debtors are using.

Id. In reversing the bankruptcy court and adopting a fair
market value approach—“the price which a willing seller . . .
and a willing buyer . . . would agree upon after the property
has been exposed to the market for a reasonable time,”
id.—the decision “put this circuit in harmony with all other
circuits, except the Fifth, that have considered the
question[.]” Id. at 1193.

    The Fifth Circuit had reached the opposite conclusion in
a case decided the same year. In In re Rash, 90 F.3d 1036
(5th Cir. 1996) (en banc), the debtor also elected to retain the
collateral, a tractor truck, securing the creditor’s lien in a
32       IN THE MATTER OF SUNNYSLOPE HOUSING

Chapter 13 cramdown. The creditor argued that the truck’s
value should be determined based on “what it would cost the
debtors to purchase an identical vehicle,” that is, its
replacement value. Id. at 1038. Both the bankruptcy court
and the Fifth Circuit, sitting en banc, disagreed. Id.

    The Fifth Circuit interpreted the text and structure of
section 506(a) to militate against replacement value. The
court determined that the first sentence of the statutory text
required valuing “the creditor’s interest in the estate’s interest
in” the secured property based on “the value of the collateral
to the creditor.” Id. at 1044. The court also rejected the
creditor’s argument that the bankruptcy court contravened the
statute’s “proposed disposition or use” language in the second
sentence by ignoring the Rashes’ proposed use of the truck
and instead valuing it according to what the creditor would
realize in a hypothetical disposition. Id. at 1047. The court
disagreed that just “because the collateral is being retained
and used by the debtor, its value is necessarily measured by
its worth to the debtor.” Id. at 1047–48. The Fifth Circuit
embraced the foreclosure value over a vigorous dissent,
which argued that “Section 506(a) is not difficult to interpret.
Read as a whole, it plainly means that when a reorganizing
debtor retains and uses collateral, we must value the property
according to its worth to the debtor (the actual user), not to
the creditor (a purely hypothetical seller).” Id. at 1061
(Smith, J., dissenting).

    The Supreme Court reversed. Rash, 520 U.S. at 959.
Interpreting section 506(a), the Court held that the truck’s
value was “the price a willing buyer in the debtor’s trade,
business, or situation would pay to obtain like property from
a willing seller.” Id. at 960. The Court referred to this as the
“replacement value,” but explained that its use of that term
         IN THE MATTER OF SUNNYSLOPE HOUSING                 33

was consistent with the Ninth Circuit’s understanding of the
term “fair market value” in Taffi: “the price a willing buyer
in the debtor’s trade, business, or situation would pay a
willing seller to obtain property of like age and condition.”
Id. at 959 n.2.

     The Court began by expressly rejecting the Fifth Circuit’s
“starting point”—what the creditor could realize in a
foreclosure sale. Id. at 960–61. The first sentence of section
506(a) contains no such requirement, the Court concluded.
It instructs only that the secured portion of a creditor’s claim
is limited to the value of the collateral; it says nothing of
“how that interest is to be valued.” Id. at 961 (emphasis in
original).     Instead, the second sentence’s “proposed
disposition or use” language “is of paramount importance to
the valuation question.” Id. at 962. The Court concluded that
the “disposition or use” of the collateral turns on the debtor’s
alternative choice to surrender collateral or retain and use it
pursuant to the cramdown provision, see 11 U.S.C.
§ 1325(a)(5), and that “[a]pplying a foreclosure-value
standard when the cram down option is invoked attributes no
significance to the different consequences of the debtor’s
choice . . . .” Rash, 520 U.S. at 962. In contrast, using
replacement value distinguishes between retention and
surrender, “renders meaningful the key words ‘disposition or
use,’” id., and “accurately gauges the debtor’s ‘use’ of the
property . . . in light of the proposed repayment plan
reality[.]” Id. at 963 (alterations and quotation marks
omitted). Thus, the Court interpreted section 506(a) to
require valuing property retained by a debtor as “the cost the
debtor would incur to obtain a like asset for the same
‘proposed . . . use.’” Id. at 965. On the facts presented in
Rash, the debtor “elected to use the collateral to generate an
income stream. That actual use, rather than a foreclosure sale
34       IN THE MATTER OF SUNNYSLOPE HOUSING

that will not take place, is the proper guide . . . .” Id. at 963;
see also id. at 964 (“Section 506(a) calls for the value the
property possesses in light of the ‘disposition or use’ in fact
‘proposed,’ not the various disposition or uses that might
have been proposed.”).

    The Supreme Court’s instruction in Rash is plain, and its
application straightforward. When a debtor retains collateral
in a cramdown as in this case, its value turns on the debtor’s
“actual use” of the collateral as proposed in the
reorganization plan, id. at 963–64—not on a hypothetical
foreclosure value. As a leading treatise explains,

        The import of Rash is thus relatively clear: for
        purposes of determining the amount that must
        be paid to a secured creditor in the cramdown
        context, the question of value under section
        506(a) turns on the value of the debtor’s
        proposed use of the relevant property under
        the plan, not the value achievable in a
        foreclosure scenario that is not proposed.
        This is the case even though the
        reorganization may ultimately fail and the
        creditor may foreclose on its collateral as a
        result.

2 Alan N. Resnick & Henry J. Sommer, Collier Bankr.
Manual ¶ 506.02[6][a] (4th ed. 2015); see also id. ¶
506.02[7][d][I] (applying Rash to establish value in Chapter
11 cramdowns where the debtor retains the collateral). That
value is measured by what the debtor would pay for a “like
asset for the same ‘proposed . . . use,’” Rash, 520 U.S. at 965,
or put differently, by “what a willing buyer in the debtor’s
         IN THE MATTER OF SUNNYSLOPE HOUSING                     35

trade, business, or situation would pay to obtain like
property[,]” id. at 960.

    Here, Sunnyslope proposed in the reorganization plan to
use the property to provide affordable housing, and in fact
that was and remains the only permissible use of the property
because of the restrictive covenants—unless and until post-
confirmation default and foreclosure. “That actual use, rather
than a foreclosure sale that will not take place, is the proper
guide . . . .” Id. at 963. Because any willing buyer in
Sunnyslope’s trade or business would take “like” property for
the purpose of providing affordable housing and subject to
similar restrictive covenants, the collateral’s value must be
determined in light of the same purpose and burdens. See
Taffi, 96 F.3d at 1192 (“Valuation must be accomplished
within the actual situation presented. Consequently, the value
has to be the fair market value of what the debtors are
using.”). The bankruptcy court therefore did not err in
valuing the property as affordable housing.

                                II.

                                A.

    The foregoing discussion illuminates the majority’s
errors. Critically, the majority begins from the same
erroneous “starting point” as did the Fifth Circuit in its Rash
en banc opinion, valuing the collateral from the creditor’s
perspective. Indeed, the majority even borrows the same
“starting point” language. Compare Maj. Op. 20 (“The
starting point is that First Southern as a secured creditor
stands in the first position. . . . First Southern’s secured claim
is superior to the rights of other secured creditors. . . . If there
were a foreclosure sale, there is no doubt that the restrictive
36       IN THE MATTER OF SUNNYSLOPE HOUSING

provision would be swept away.”), with Rash, 90 F.3d at
1044 (describing the “logical starting point for valuation” as
“what the creditor could realize if it sold the estate’s interest
in the property according to the security agreement, taking
into account the rights of other creditors with liens secured by
the estate’s interest”), and Rash, 90 F.3d at 1051 n.18
(reading section 506(a) to “suggest[] a valuation that starts
with what the creditor could realize by repossession and sale
of the collateral”).

    But the Supreme Court expressly rejected starting the
valuation from the creditor’s perspective. See Rash, 520 U.S.
at 960–61. Instead, the Court directed valuation from the
debtor’s perspective. Id. at 963 (“Of prime significance, the
replacement-value standard accurately gauges the debtor’s
‘use’ of the property.”); see also Taffi, 96 F.3d at 1192. The
majority opinion ignores this directive, instead adopting the
approach utilized by the Fifth Circuit in its en banc opinion
and advocated by Justice Stevens’s dissent in Rash. See
520 U.S. at 966 (Stevens., J., dissenting) (“[T]he value should
be determined from the creditor’s perspective, i.e., what the
collateral is worth, on the open market, in the creditor’s
hands, rather than in the hands of another party.”).

                                B.

     The majority’s erroneous focus on First Southern’s
perspective stems from a concern that the bank got a raw deal
in light of its senior position. At the outset of its analysis, the
majority recognizes that no foreclosure sale occurred, yet
nonetheless concludes, “But that does not mean that the
secured value of First Southern’s secured claim may be
suppressed by conditions subordinated to its position and
attached to loans made by junior creditors.” Maj. Op. 20.
         IN THE MATTER OF SUNNYSLOPE HOUSING                 37

Rash instructs, however, that the priority of First Southern’s
secured claim with respect to other creditors simply has no
place in an analysis that “turns on the value of the debtor’s
proposed use of the relevant property under the plan.” 2
Resnick & Sommer, Collier Bankr. Manual ¶ 506.02[6][a].

    In any event, the majority’s concern is misplaced. First
Southern purchased its interest knowing that covenants
restricted the property’s use. When the bank purchased the
rights of the senior lender from HUD, HUD expressly
warranted in the loan sale agreement that First Southern
would obtain “a valid and enforceable lien on the related
Mortgaged Property having the lien priority indicated on the
Mortgage Loan Schedule, except for . . . (5) covenants,
conditions and restrictions, rights of way, easements and
other matters of public record[.]” (emphasis added).
Although HUD released First Southern from the Regulatory
Agreement, it did not purport to vitiate the other restrictive
covenants requiring the property to be used as affordable
housing. Those publicly recorded restrictions, which run with
the land, arose from agreements subordinate to the loan First
Southern purchased and to the HUD Regulatory Agreement,
but, in the absence of a foreclosure, still require Sunnyslope
and its successors to operate the property as an affordable
housing complex. Thus, when First Southern purchased the
loan, it did so with knowledge of the restrictions, which likely
had already “suppressed” the value of the security interest
First Southern purchased: it bought an $8.5 million note for
approximately $5 million.

                              C.

   The majority’s two direct attempts to avoid the conclusion
required by Rash are also unpersuasive. First, the majority
38       IN THE MATTER OF SUNNYSLOPE HOUSING

concludes that the reference to “use” in Rash means simply
the “alternative to ‘surrender’” rather than the “particular use
to which the debtor elects to devote the property[.]” Maj. Op.
22. Thus, according to the majority, Rash does not compel
looking to Sunnyslope’s particular use of the property as
affordable housing. Maj. Op. 22–24 & n.5. This is
unpersuasive given the Supreme Court’s direction that the
collateral must be valued from the debtor’s perspective and
in light of the “economic benefit for the debtor derived from
the collateral.” Rash, 520 U.S. at 963. Ascertaining an
“accurate[] gauge of the debtor’s ‘use’ of the property”
requires determining present value with regard to how the
debtor proposes to use the property—and any restrictions on
the debtor’s use of the property—rather than focusing simply
on the fact the debtor retains ownership. See id. (emphasis
added). Indeed, in Rash the Supreme Court referred to the
debtor’s use of the collateralized truck not generally but
specifically “to generate an income stream” “in the freight-
hauling business.” Id. at 957, 963.

    Even if the majority were correct that a section 506(a)
valuation looks only to the fact of “use,” its methodology still
contravenes the Supreme Court’s direction that replacement
value should measure the cost to obtain similar property.
Rash, 520 U.S. at 955 (describing replacement value as “what
the debtor would have to pay for comparable property”)
(emphasis added); id. at 957 (“the price the Rashes would
have to pay to purchase a like vehicle”) (emphasis added); id.
at 960 (“the price a willing buyer in the debtor’s trade,
business, or situation would pay to obtain like property from
a willing seller”) (emphasis added); id. at 965 (“the cost the
debtor would incur to obtain a like asset for the same
‘proposed . . . use’”) (emphasis added).
           IN THE MATTER OF SUNNYSLOPE HOUSING                           39

    No willing buyer would purchase similar property for a
price that does not reflect the restrictive covenants because,
as discussed above, those covenants burden how future
buyers could use the property. The most obvious evidence of
this is that First Southern paid significantly less for the
complex than it would have if the property were not burdened
by restrictive covenants. The majority is correct that the
“cost to build or buy an apartment complex like Sunnyslope
would be much more than the valuation . . . allowed by the
district court,” Maj. Op. 23, only if such a complex were not,
in fact, like the Sunnyslope complex, i.e., a 150-unit complex
used to provide affordable housing and restricted to that use
by covenants that run with the land.2

    Second, the majority believes Rash should not apply
because using the replacement-value standard provides First
Southern with only one-third the value it would obtain in a
foreclosure sale. Thus, the majority concludes, using the
replacement-value standard here would disserve the policies
motivating Rash—protecting the creditor from the “double
risks” of a cramdown. Maj. Op. 24. Although the Supreme
Court recognized that foreclosure value is “typically lower”
than replacement value, 520 U.S. at 960, it did not direct a
different section 506(a) valuation in an atypical situation.
Rather, its methodology is derived directly from the text of
the statute: using foreclosure value (whether it be higher or

 2
   For this reason, the analogy the majority draws in footnote five is inapt.
Even if a seller were not expected to sell property at a discount based on
the buyer’s intended use, the seller would be expected to accept a
discounted purchase price where, as here, the buyer’s use of the property
is limited by law. The correct valuation does not turn on any particular
projected income stream, but on the fact that the economic benefit from
the property is limited by Sunnyslope’s proposed use and the restrictive
covenants.
40       IN THE MATTER OF SUNNYSLOPE HOUSING

lower than replacement value) would render superfluous the
terms “disposition or use” and therefore is inappropriate. Id.
at 962.

    Moreover, First Southern and the majority overstate the
bank’s equities and need for protection. As noted above, First
Southern purchased its loan from HUD at a discount price
that presumably accounted for the risk of bankruptcy and the
property’s limitations, both of which are expressly identified
in the loan sale agreement. This distinguishes the bank from
the “innocent” lender First Southern hypothesizes in its
opening brief, that extends a mortgage to a farmer who
subsequently grants a conservation easement over the land,
depressing its value. First Southern purchased a lien on
property worth less than its foreclosure value, for less than its
foreclosure value; it cannot now be heard to complain that the
bankruptcy court also valued it at less than foreclosure value.

                           *   *    *

    The majority ignores Rash’s directive to value the
collateral from the debtor’s perspective rather than from the
creditor’s when the debtor elects to retain it. Unsurprisingly,
this erroneous “starting point” leads to an erroneous ending
point: although the majority purports to use a “replacement
cost,” Maj. Op. 24–25, in essence it uses a hypothetical
foreclosure method of valuation—assigning to the
Sunnyslope complex the same value that would obtain if First
Southern foreclosed on the property and swept away the
restrictive covenants. As a result, the majority contravenes
the Supreme Court, and in doing so all but assures a post-
confirmation default that will “have the negative effect of
          IN THE MATTER OF SUNNYSLOPE HOUSING                          41

eliminating the use of the Sunnyslope project for affordable
housing,” Maj. Op. 26. I respectfully dissent.3




 3
   As a result of the majority’s ruling, Sunnyslope’s cross-appeal is moot
and the appeal and cross-appeal in No. 13-1614 are also moot. Under
these circumstances, there is no need to address the issues raised in those
separate appeals.
