Supreme Court Decision in Radlax Gateway Hotel, LLC v. Amalgamated Bank Affirms a Secured Creditor's Absolute Right to Credit-bid under § 1129(b)(2)(A)
In the case Radlax Gateway Hotel, LLC v. Amalgamated Bank, the Supreme Court recently considered the issue of whether a Chapter 11 bankruptcy plan may be confirmed over the objection of a secured creditor pursuant to § 1129(b)(2)(A) of the Bankruptcy Code if the plan provides for the sale of the secured creditor's collateral free and clear of its lien, but does not provide the secured creditor with the opportunity to credit-bid its debt.
The right of a secured creditor to credit-bid within the context of a Chapter 11 plan had been called into question following the Third Circuit decision in In re Philadelphia Newspapers LLC, which held that a plan of reorganization that proposes an auction of the debtor's assets is confirmable even if it denies a secured party with a lien on the assets being sold the right to credit-bid its debt at the sale. More recently, the Seventh Circuit held the opposite – that § 1129(b)(2)(A) does not permit debtors to sell encumbered assets free and clear of a lien without allowing the lienholder to credit-bid its debt. See River Road Hotel Partners, LLC v. Amalgamated Bank, 651 F. 3d 642 (2011). The Supreme Court granted certiorari from the Seventh Circuit decision in order to resolve the Circuit Court split on this issue.
The facts of the Radlax Gateway Hotel, LLC v. Amalgamated Bank case are straightforward. The Debtors filed for bankruptcy protection in August 2009 after running out of funds and halting construction of a parking structure and renovations to the Radisson Hotel at Los Angeles International Airport. At the time of the bankruptcy filing Debtors owed their secured lender, an investment fund for which Amalgamated Bank ("Lender") serves as trustee, in excess of $120 million. Debtors ultimately submitted for approval a Chapter 11 Plan which called for the sale of the debtor’s assets which were subject to Lender’s mortgage and lien pursuant to Debtor's "Sale and Bid Procedures Motion." The stalking horse bid for the assets was initially $47.5 million, an indication that the sale would not result in proceeds in excess of the amounts due to Lender. Under the proposed bidding procedures, Lender was not allowed to credit-bid its debt. If Lender believed that the assets were being undervalued by prospective purchasers at the auction, it would be required to bid cash at the auction in order to acquire the assets. Lender objected to the plan, and the Bankruptcy Court denied the bidding procedures, finding that they did not comply with the requirements of § 1129(b)(2)(A).
In a relatively straightforward decision, or what the Supreme Court deemed to be an "easy case", the Court voting 8 – 0 applied established principles of statutory construction to interpret Bankruptcy Code § 1129(b)(2)(A). A Chapter 11 Plan cannot be confirmed over the objection of a secured claimant unless it meets one of the three requirements under § 1129(b)(2)(A) in order to be considered fair and equitable as to the secured claimant. The three requirements are summarized as follows: (i) secured creditor retains its lien on the property and receives deferred cash payments; (ii) the collateral is sold free and clear of liens, which attach to sale proceeds, and the secured creditor is afforded the opportunity to credit-bid at the sale; and (iii) the secured creditor is provided with the indubitable equivalent of its claim. § 1129(b)(2)(A).
The Debtors argued in the case that their plan was fair and equitable with respect to the treatment of Lender's claim despite the failure to provide Lender with the right to credit-bid because the cash proceeds from the sale satisfied the § 1129(b)(2)(A)(iii) requirement of "indubitable equivalent" of the claim. The Court found this interpretation to be "hyperliteral and contrary to common sense" on the grounds that it is contrary to the canon of statutory interpretation that "the specific governs the general." The Court noted that although the canon most often applies to statues in which a "general permission or prohibition is contradicted by a specific prohibition or permission," it is also applicable to statues such as § 1129(b)(2)(A) "in which a general authorization and a more limited specific authorization exist side-by-side." Therefore, the construction of § 1129(b)(2)(A) suggested that clauses (i) and (ii) provide for rules in specific situations - where a creditor’s lien remains on the property and where the property is sold free and clear of the lien - while clause (iii) is a residual provision covering dispositions in all other situations. The Supreme Court found the Debtors textual arguments to the contrary unavailing. Specifically, the Supreme Court noted that the debates regarding the merits of credit-bidding, which were addressed at length by both sides, to be for the "consideration of Congress, not the courts." Ultimately, the Court held in an 8-0 decision that the Debtors could not confirm their cramdown plan as proposed because their proposed sale did not allow for the Lender to credit-bid its debt.
As a practical and legal matter, this decision removes the uncertainty surrounding a lender's right to credit-bid its debt at a sale of its collateral within the context of a cramdown Chapter 11 plan that arose following the Third Circuit decision in In re Philadelphia Newspapers LLC and the Fifth Circuit decision in In re Pacific Lumber Co. A Lender can now be confident in its ability to protect against the sale of its collateral at a price lower than what it deems to be market value without having to commit additional cash to the deal.
The right of a secured creditor to credit-bid within the context of a Chapter 11 plan had been called into question following the Third Circuit decision in In re Philadelphia Newspapers LLC, which held that a plan of reorganization that proposes an auction of the debtor's assets is confirmable even if it denies a secured party with a lien on the assets being sold the right to credit-bid its debt at the sale. More recently, the Seventh Circuit held the opposite – that § 1129(b)(2)(A) does not permit debtors to sell encumbered assets free and clear of a lien without allowing the lienholder to credit-bid its debt. See River Road Hotel Partners, LLC v. Amalgamated Bank, 651 F. 3d 642 (2011). The Supreme Court granted certiorari from the Seventh Circuit decision in order to resolve the Circuit Court split on this issue.
The facts of the Radlax Gateway Hotel, LLC v. Amalgamated Bank case are straightforward. The Debtors filed for bankruptcy protection in August 2009 after running out of funds and halting construction of a parking structure and renovations to the Radisson Hotel at Los Angeles International Airport. At the time of the bankruptcy filing Debtors owed their secured lender, an investment fund for which Amalgamated Bank ("Lender") serves as trustee, in excess of $120 million. Debtors ultimately submitted for approval a Chapter 11 Plan which called for the sale of the debtor’s assets which were subject to Lender’s mortgage and lien pursuant to Debtor's "Sale and Bid Procedures Motion." The stalking horse bid for the assets was initially $47.5 million, an indication that the sale would not result in proceeds in excess of the amounts due to Lender. Under the proposed bidding procedures, Lender was not allowed to credit-bid its debt. If Lender believed that the assets were being undervalued by prospective purchasers at the auction, it would be required to bid cash at the auction in order to acquire the assets. Lender objected to the plan, and the Bankruptcy Court denied the bidding procedures, finding that they did not comply with the requirements of § 1129(b)(2)(A).
In a relatively straightforward decision, or what the Supreme Court deemed to be an "easy case", the Court voting 8 – 0 applied established principles of statutory construction to interpret Bankruptcy Code § 1129(b)(2)(A). A Chapter 11 Plan cannot be confirmed over the objection of a secured claimant unless it meets one of the three requirements under § 1129(b)(2)(A) in order to be considered fair and equitable as to the secured claimant. The three requirements are summarized as follows: (i) secured creditor retains its lien on the property and receives deferred cash payments; (ii) the collateral is sold free and clear of liens, which attach to sale proceeds, and the secured creditor is afforded the opportunity to credit-bid at the sale; and (iii) the secured creditor is provided with the indubitable equivalent of its claim. § 1129(b)(2)(A).
The Debtors argued in the case that their plan was fair and equitable with respect to the treatment of Lender's claim despite the failure to provide Lender with the right to credit-bid because the cash proceeds from the sale satisfied the § 1129(b)(2)(A)(iii) requirement of "indubitable equivalent" of the claim. The Court found this interpretation to be "hyperliteral and contrary to common sense" on the grounds that it is contrary to the canon of statutory interpretation that "the specific governs the general." The Court noted that although the canon most often applies to statues in which a "general permission or prohibition is contradicted by a specific prohibition or permission," it is also applicable to statues such as § 1129(b)(2)(A) "in which a general authorization and a more limited specific authorization exist side-by-side." Therefore, the construction of § 1129(b)(2)(A) suggested that clauses (i) and (ii) provide for rules in specific situations - where a creditor’s lien remains on the property and where the property is sold free and clear of the lien - while clause (iii) is a residual provision covering dispositions in all other situations. The Supreme Court found the Debtors textual arguments to the contrary unavailing. Specifically, the Supreme Court noted that the debates regarding the merits of credit-bidding, which were addressed at length by both sides, to be for the "consideration of Congress, not the courts." Ultimately, the Court held in an 8-0 decision that the Debtors could not confirm their cramdown plan as proposed because their proposed sale did not allow for the Lender to credit-bid its debt.
As a practical and legal matter, this decision removes the uncertainty surrounding a lender's right to credit-bid its debt at a sale of its collateral within the context of a cramdown Chapter 11 plan that arose following the Third Circuit decision in In re Philadelphia Newspapers LLC and the Fifth Circuit decision in In re Pacific Lumber Co. A Lender can now be confident in its ability to protect against the sale of its collateral at a price lower than what it deems to be market value without having to commit additional cash to the deal.
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