In re Houston Regional Sports Network, L.P.

          Appeal from the United States District Court for the Southern District of Texas

          Before WIENER, PRADO, and OWEN, Circuit Judges.

          PRISCILLA R. OWEN, Circuit Judge

         Comcast^[1] loaned Houston Regional Sports Network, L.P. (the Network) $100 million, secured by a lien on substantially all of the Network's tangible and intangible assets. Included in the assets was an Affiliation Agreement (the Agreement) pursuant to which a Comcast subsidiary agreed to pay the Network to carry the Network's content on its cable systems. The Network involuntarily entered bankruptcy, and before a plan of reorganization was confirmed, Comcast elected to treat its entire claim as secured. The bankruptcy court then conducted a valuation of the Network's assets, including the Agreement. The valuation was as of the date of the bankruptcy petition, and, after deducting the Network's unpaid media fees from the Agreement's valuation, the court concluded that the Agreement had no value. The district court affirmed. Because the district court did not consider the value of Comcast's collateral in light of the reality of the plan of reorganization and accordingly deducted waived Network liabilities from the Agreement's value, we remand for further proceedings consistent with this opinion.

         I

         Houston Regional Sports Network, L.P. is a television network that was formed by the Houston Astros baseball team and Houston Rockets basketball team (the Teams)^[2] to televise their respective games. The Network entered into media-rights agreements with each of the Teams, pursuant to which the Network was granted exclusive rights to broadcast games in exchange for fees. The Network also entered into an Affiliation Agreement with Comcast Cable Communications, LLC, pursuant to which Comcast would carry the Network on its cable systems through 2032, in exchange for a monthly fee based on the number of Comcast subscribers. In 2010, a Comcast affiliate provided a $100 million loan to the Network, secured by a lien on substantially all of the Network's tangible and intangible assets, including the Agreement but not the Teams' media rights.

         In July and August 2013, the Network defaulted on consecutive payments to the Astros. The Astros sent a notice of default stating that if the Network did not cure the default by September 29, the Astros would have the right to terminate its agreement with the Network. On September 27, various Comcast entities filed an involuntary Chapter 11 petition against the Network. The Astros filed a motion to dismiss the petition, which the bankruptcy court denied. After the petition was filed but before the bankruptcy court ruled on its validity, Comcast and the Teams began negotiations for Comcast to purchase the Network out of bankruptcy, but no agreement was reached. Instead, the Teams entered into an agreement with AT&T and DirecTV. The agreement provided that AT&T and DirecTV would acquire all of the equity in the Network and enter into separate agreements to pay the Network for the right to broadcast the Network's content.

         The sale agreement with AT&T and DirecTV was included in a plan of reorganization (the Plan), which the bankruptcy court confirmed in October 2014. Under the Plan, the Teams agreed to waive their rights to approximately $107 million in media-rights fees owed by the Network that had accrued during the bankruptcy.

         Before the Plan was confirmed, Comcast made an election pursuant to 11 U.S.C. § 1111(b), which permits an undersecured creditor-a secured creditor whose collateral is worth less than its claim-to elect to have its claim treated as fully, rather than partially, secured.^[3] This election guaranteed Comcast the right to receive a stream of payments. The present value of these payments is equal to the value of the collateral as determined by the court; the nominal value of the payments equals the amount of the claim.^[4]

         Under the amended Plan, the Network's tangible collateral-cash, accounts receivable, furniture, fixtures, and equipment-was to be sold, so Comcast's § 1111(b) election does not apply to that collateral.^[5] The parties stipulated to the bankruptcy court that the value of the tangible collateral was $26.2 million. To value the intangible collateral, the bankruptcy court projected the Network's net income through 2032, discounted it to present value, and apportioned it among the Network's intangible assets in proportion to the revenue that each would generate. Because the bankruptcy court was conducting the valuation as of the petition date, it apportioned income to agreements that did not exist as of the petition date based on the probability that such agreements would come to fruition. Comcast's expert and the Teams' expert disagreed about whether and how the $107 million in waived media-rights fees should be included in the calculation.

         The bankruptcy court concluded that the value of the Agreement would be $54.3 million on the date that the Plan would go into effect, but subtracted the waived media-rights fees from the Network's income in the period between the petition and the effective date, yielding large net losses for that period. Since the Agreement was the only significant intangible asset during that period, these costs lowered the Agreement's value as of the petition date to zero. Because a creditor cannot make a § 1111(b) election as to collateral of "inconsequential value, "^[6] Comcast was unable to elect to have its claim treated as fully secured.

         After the bankruptcy court confirmed the Plan, Comcast appealed the bankruptcy court's valuation of the Agreement to the district court. It also sought a stay of implementation of the Plan pending appeal. The district court denied the stay, but the Teams later agreed that they would be required to pay the debt if Comcast prevailed on appeal. The district court affirmed the valuation, holding that the petition date was the proper date from which to value the Agreement and that the expenses incurred by the Network during bankruptcy were appropriately offset against the Agreement's value. Comcast appeals.

         II

         When we review a district court sitting as an appellate court, we apply "the same standards of review to the bankruptcy court's findings of fact and conclusions of law as applied by the district court."^[7] This court "review[s] the bankruptcy court's findings of fact under the clearly erroneous standard, and the bankruptcy court's conclusions of law de novo."^[8] The Bankruptcy Code does not require a particular method to value collateral, and "[v]aluation is a mixed question of law and fact, the factual premises being subject to review on a 'clearly erroneous' standard, and the legal conclusions being subject to de novo review."^[9]

         III

         Comcast challenges the valuation date utilized by the bankruptcy court. The bankruptcy court valued Comcast's claim as of the petition date because it assumed In re Stembridge^[10] controlled, and in the alternative, because it had the flexibility to select a fair date. Comcast asserts that the statutory text and case law dictate that the appropriate valuation date is the effective date of the Plan, which would result in a higher valuation of the Agreement that is eligible for a § 1111(b) election. The Teams allege that Stembridge mandates valuation as of the petition date, and that the bankruptcy court correctly held that the Agreement was of inconsequential value and ineligible for § 1111(b). We conclude that a court is not required to use either the petition date or the effective date. Courts have the flexibility to select the valuation date so long as the bankruptcy court takes into account the purpose of the valuation and the proposed use or disposition of the collateral at issue.

         The Bankruptcy Code itself does not dictate the appropriate valuation date for Chapter 11 bankruptcies. Under 11 U.S.C. § 506(a)(1), the value of a secured claim "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] Section 506(a) is often used in conjunction with other parts of the Bankruptcy Code.^[12] This includes the cram-down provision in § 1129(b), which requires valuation of collateral in the context of plan confirmation when the debtor retains possession of the collateral.^[13] Under this cram-down provision, a bankruptcy court may confirm a plan over a creditor's objection subject to certain conditions, so long as the plan "does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan."^[14]

         At issue in this case is § 1129(b)(2)(A)(i)(II), which provides that a bankruptcy plan is "fair and equitable" with respect to a class of claims-and thus confirmable over a creditor's objection-if under the plan:

each holder of a claim of such class receives on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property.^[15]

         This provision thus provides for the value of the collateral to be discounted to present value when considering whether the proposed plan provides adequate payment to the creditor. However, it is § 506 that instructs the court on how to make the initial valuation, before the collateral's present value is calculated under § 1129. Accordingly, whatever the valuation date, the language of § 1129 is not superfluous, as § 1129 presumes the collateral has been assigned value.^[16] Section 1129 merely uses that value to set a floor for what sum the creditor must receive in deferred cash payments while the debtor retains possession of the collateral. It does not provide any guidance as to how the initial valuation should be made. That is left to § 506.

         A 2005 amendment to § 506 provides that in Chapter 7 and Chapter 13 personal bankruptcies involving claims of personal property, the valuation shall be as of the date of the petition and based on replacement value of the property.^[17] But the Code provides no similar guidance for Chapter 11 business reorganizations, nor for other types of property. Rather, § 506(a)(1) directs the court to consider (1) "the purpose of the valuation;" (2) "the proposed disposition or use of [the] property;" and to do so (3) "in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest."^[18] This provision allows the bankruptcy court to make valuations of collateral throughout the proceeding based on the purpose of each valuation.^[19]

         Precedent also does not mandate a specific valuation date in the Chapter 11 cram-down context. Rather, case law requires that courts consider the purpose of the valuation and the proposed use or disposition of the collateral at issue. In Associates Commercial Corp. v. Rash, ^[20] the Supreme Court stated that when considering possible valuations, the "debtor's 'use' of the property" was "[o]f prime significance, " and the "actual use" of the property rather than a "foreclosure sale that will not take place" should guide the court's valuation.^[21]Though the court was considering whether foreclosure value or replacement value was appropriate in the Chapter 13 cram-down context, ^[22] the language provides guidance on the proper interpretation of § 506(a) as applied to plan-confirmation valuations when the debtor proposes to retain property.^[23]

         In addition, the Third and Eighth Circuits have held that the effective or confirmation date of the plan is the appropriate valuation date in a Chapter 11 cram-down valuation. The Third Circuit adopted the confirmation date- albeit in a case where neither party challenged the timing of the valuation- based on the purpose of the valuation.^[24] As that court explained:

[T]he value of the property should be determined as of the date to which the valuation relates. Where, as here, the purpose of the valuation is to determine the treatment of a claim by a plan, the values determined at the § 506(a) hearing must be compatible with the values that will prevail on the confirmation date.^[25]

         The Eighth Circuit likewise determined that "[t]he allowed secured claim will equal the value of the collateral at the time the plan is confirmed" in a Chapter 11 cram-down, ^[26] and bankruptcy courts have generally adopted the same rule.^[27] These holdings are consistent with the leading bankruptcy treatise's discussion of the issue.^[28]

         However, the Third Circuit recognized that a valuation conducted under § 506(a) may not always relate to the confirmation or effective date of the plan.^[29] This is because § 506(a) valuations are used in a variety of contexts. For example, the First Circuit considered § 506(a) in the context of determining the amount of post-petition interest an oversecured creditor should receive.^[30]The First Circuit determined that the flexible nature of § 506(a), as contrasted with the inflexible exception in § 506(a)(2), suggested the bankruptcy court was not bound to use the value of the collateral on either the petition date or the plan effective date.^[31] Rather, when the value of collateral fluctuated over the course of the proceedings, the bankruptcy court could determine the value of the collateral as of the first point in time that the creditor became oversecured, and thus entitled to post-petition interest.^[32] The First Circuit's opinion echoed this court's logic in In re T-H New Orleans Ltd. Partnership, where we held that, when considering a valuation for the purpose of determining an award of interest under § 506(b) "valuation of the collateral and the creditor's claim should be flexible and not limited to a single point in time, such as the petition date or confirmation date."^[33] This court thus found no error in the bankruptcy court's use of the date at which it determined the claim "probably" became oversecured.^[34]

         That § 506(a) valuations may be made at different times under different circumstances does not lessen the force of the Third and Eighth Circuit holdings that the appropriate valuation date is the date of plan confirmation in the Chapter 11 cram-down context. When a court values collateral to confirm a cram-down plan under § 1129(b)(2)(A)(i), the proposed use or disposition of the property under the plan of reorganization is critical, precisely because the debtor is choosing to retain the collateral, rather than sell it or return it to the creditor.^[35] Yet the bankruptcy court can determine the appropriate date of valuation on a case-by-case basis and we need not adopt a bright-line rule.

         Contrary to the Teams' assertions and the bankruptcy court's holding, this court's decision in Stembridge does not compel a fixed valuation as of the date of the petition for Chapter 11 cram-downs. Though some language in the opinion could be broadly read to include all cram-downs, ^[36] the holding that "the value of the collateral should be ...