Chapter 11 Once Again Safe for Undersecured Lenders - Supreme Court ...

The U.S. Supreme Court today in Radlax Gateway Hotel, LLC, et al. v. Amalgamated Bank unanimously upheld the right of secured creditors to credit bid their debt upon a sale of their collateral pursuant to a nonconsensual chapter 11 plan of reorganization.  As described in numerous prior posts on this site, the ruling resolves a split between circuits and removes a cloud of ambiguity from chapter 11 cases. 

The debtors in RadLax had strongly argued in favor of a “plain meaning” approach to the cramdown provisions of Section 1129(b) of the Bankruptcy Code.  However, the debtors’ proposed construction of Section 1129(b) was too tenuous even for Justice Scalia, probably the Court’s strongest advocate of that mode of statutory interpretation.  Justice Scalia, in authoring the Court’s short opinion, wrote that a reading of the statute permitting a sale “free and clear” to take place without allowing the lenders to credit bid would “be hyperliteral and contrary to common sense.”  Relying on another well-established rule of statutory interpretation, that “the specific governs the general”, Justice Scalia held that in view of the express reference in subsection (ii) of Section 1129(b)(2)(A), the right to credit bid in connection with a sale “free and clear” of liens cannot be abrogated by reference to the amorphous concept of “indubitable equivalence” in subsection (iii).     

The Court’s opinion today ends what had been an aggressive but highly creative effort on the part of certain debtors to overcome what most practitioners had long believed to be established law.  Justice Scalia describes the Bankruptcy Code as “an expansive (and sometimes unruly) area of law”, and writes of the Court’s “obligation to interpret the Code clearly and predictably using well established rules of statutory construction.”   While some may suggest that the Court has more often honored this obligation in the breach rather than the observance (e.g., Till v. SCS Credit Corp.), today the Court unquestionably spoke in a concise voice.