Supreme Court in RadLAX Rules that Cramdown Plans Providing for Sales of Secured Creditors’ Collateral Must Allow for Credit Bid Rights
In what it described as "an easy decision," the U.S. Supreme Court issued its eagerly anticipated decision in RadLAX Gateway Hotel, LLC et al. v. Amalgamated Bank 1 on May 29, 2012. The high court's 8‑0 ruling, delivered by Justice Scalia, held that a Chapter 11 bankruptcy cramdown plan providing for the sale of a secured creditor's collateral free and clear of the secured creditor’s lien may not use Bankruptcy Code § 1129(b)(2)(A)(iii) to deny the secured creditor the right to "credit bid" on its own collateral.
The RadLAX decision resolves the split between the Third and Seventh Circuits as to whether, in the plan context, auction procedures may be crafted to prevent the secured creditor from using its claim as an offset against the purchase price for its collateral, and instead to require the secured creditor to bid with cash or receive the proceeds of the auction as the "indubitable equivalent" of its claims.2
Prior to the Third Circuit's March 2010 ruling in Philadelphia Newspapers3, it had been considered "common wisdom" among the bankruptcy community that non-recourse secured lenders were entitled either to be repaid for their loans or, absent repayment, to have the right to receive the collateral securing such loans. In the context of an auction, the secured creditor was protected from having to accept the proceeds of an unsatisfactory auction through its right to credit bid the full amount of its allowed claim and take back its collateral. Philadelphia Newspapers turned the "common wisdom" on its head.
Background of Bankruptcy Code § 1129(b)(2)(A)
The Bankruptcy Code provides two methods by which a debtor may sell substantially all of its assets. The first is a sale conducted pursuant to Bankruptcy Code § 363 and the second is pursuant to a plan under Bankruptcy Code § 1123(b)(4).
Although a bankruptcy court may generally confirm a Chapter 11 plan only if each class of creditors consents (and the other requirements of § 1129(a) are met), § 1129(b) would permit the court to approve a "cramdown" plan that includes the sale of a secured creditor's collateral over that creditor's objection, provided that "the plan does not discriminate unfairly, and is fair and equitable" with respect to that creditor, as determined by the bankruptcy court under § 1129(b)(2)(A).
Bankruptcy Code § 1129(b)(2)(A) requires the plan to provide:
(i) (I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and (II) that each holder of a claim of such class receive 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;
(ii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or
(iii) for the realization by such holders of the indubitable equivalent of such claims.
See 11 U.S.C. § 1129(b)(2)(A) (emphasis added).
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____________________1 See RadLAX Gateway Hotel, LLC, et al. v. Amalgamated Bank, 566 U.S. __ (2012).
The term "indubitable equivalent" was first coined by Judge Learned Hand in In re Murel Holding Corp.,
75 F.2d 941, 942 (2d Cir. 1935). The term "indubitable equivalent" was later codified in Bankruptcy Code § 1129(b)(2)(A)(iii). Since the Bankruptcy Code does not define the term, however, it is left to a court of competent jurisdiction to determine whether any particular proposed plan treatment meets the standard. 3 See In re Philadelphia Newspapers,
599 F.3d 298 (3d Cir. 2010).