Supreme Court Bids Adieu To Plans Denying Secured Creditors The Righ...

05/31/12

On May 29, 2012, only a little more than a month after the April 23, 2012 oral argument in the case, the U.S. Supreme Court issued its decision in RadLAX Gateway Hotel, LLC, et al. v. Amalgamated Bank on the question of "credit bidding." You can get a copy of the opinion by following the link in this sentence. (You are also welcome to follow my Twitter feed @BobEisenbach for updates; I tweeted a link to the opinion the afternoon it was issued.)

The Circuit Split. The Supreme Court took the case to resolve a split between the circuits on this issue. In an earlier case, In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010), the Third Circuit had confirmed a plan of reorganization that prevented credit bidding, and the Fifth Circuit had done so in a case involving an asset transfer under a plan, which was considered to be a sale. However, in the RadLAX case, decided as River Road Hotel Partners, LLC, et al. v. Amalgamated Bank, 651 F.3d 642 (2011), the Seventh Circuit took the opposite view. It rejected proposed bidding procedures that would have precluded the secured creditor from credit bidding at an auction contemplated by the plan of reorganization.  For more analysis of these issues and the split in the circuits, follow the link in this sentence to the Winter 2012 edition of Cooley's Absolute Priority newsletter.

The Supreme Court's Decision. By an 8-0 vote (Justice Kennedy did not participate), the Supreme Court held that a secured creditor has a right to credit bid its secured debt under a Chapter 11 plan of reorganization that provides for a sale of its collateral. The decision affirmed the Seventh Circuit's decision rejecting the bidding procedures in the RadLAX case.

  • The issue is important because with a "credit bid," a secured creditor is able to acquire the assets being sold by using its debt, up to the amount it's owed, without having to pay cash upfront for the assets. It can be challenging for secured creditors to raise large amounts of cash, especially when a syndicate of lenders (or, as the Supreme Court noted, the Federal Government) is involved, even though presumably they will later be paid back out of the sale proceeds.
  • Secured creditors argue that, without the right to credit bid, for these reasons they would be unable to participate in the sale and their collateral could be sold for an unreasonably low price.
  • Debtors argue that a secured creditor's credit bid could chill bidding by third parties, particularly if the secured creditor's debt, and thus potential credit bid, is substantially higher than what a cash bidder would be likely to pay.

Indubitable What? The Bankruptcy Code requires that if a secured creditor objects to a plan, it must receive "fair and equitable" treatment, a term of art under Section 1129(b)(2)(A) of the Bankruptcy Code. That section provides that "fair and equitable" means that a secured creditor must either (i) retain its lien and be paid deferred cash payments, (ii) be entitled to credit bid at a sale of its collateral, or (iii) realize the "indubitable equivalent" of its claim. The RadLAX debtor was attempting to sell its assets (the secured creditor's collateral) without permitting the secured creditor to credit bid, pay the resulting sale proceeds to the secured creditor, and "cram down" this treatment over the secured creditor's objection, arguing that it constituted the "indubitable equivalent" of its claim. 

The legal issue at the core of the decision involved the interpretation of Section 1129(b)(2)(A)(ii) and (iii) of the Bankruptcy Code. In RadLAX, although the Supreme Court did not decide what "indubitable equivalent" means, it held that even though Section 1129(b)(2)(A)(iii) may appear to permit a plan to provide a secured creditor with the "indubitable equivalent" of its claim, when a plan provides for a sale of the secured creditor's collateral, it must permit the secured creditor to credit bid under Section 1129(b)(2)(A)(ii).

  • Section 1129(b)(2)(A)(ii) provides that when a plan of reorganization calls for a sale of a secured creditor's collateral, the sale is "subject to Section 363(k)," which permits a credit bid as discussed below.
  • The Supreme Court held that the "indubitable equivalent" alternative may be available in some situations, but it's not an option when the Chapter 11 plan of reorganization calls for a sale of the secured creditor's collateral.
  • Although the RadLAX case involved a Chapter 11 plan sale, typical bankruptcy sales do not. Far more often, sales are conducted, separately from a plan, under Section 363 of the Bankruptcy Code. Section 363(k) specifically provides that a secured creditor has a right to credit bid and offset its secured claim at such a non-plan Section 363 sale, absent "cause" to take that right away. No such "cause" was present in the RadLAX case, and the Supreme Court held that Section 363(k)'s credit bid right applied.

An "Easy" Decision. Ultimately, as the unanimous decision reflects, the Supreme Court held that this was "an easy case," that the debtor's reading of Section 1129(b)(2)(A) was "hyperliteral and contrary to common sense," and that the more specific provisions of subsection (ii) controlled over the general "indubitable equivalent" language of subsection (iii). The Supreme Court's decision should put to rest efforts to sell a secured creditor's collateral without allowing for credit bids, except in cases where there are issues with the validity of the secured creditor's secured claim or cause exists under Section 363(k) of the Bankruptcy Code.

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