On Monday April 23, 2012, the U.S. Supreme Court heard oral arguments in RadLAX Gateway Hotel, LLC v. Amalgamated Bank.  In this case, the Debtors proposed a plan of reorganization that prohibited their secured lenders from credit bidding on collateral to be sold pursuant to the plan under the indubitable equivalent prong of the cram down provisions of the Bankruptcy Code.  Contrary to prior opinions of the Third and Fifth Circuits, the Seventh Circuit held that the plan was improper.  Click here to view our previous posts on this case.  The Court allotted thirty minutes of argument to RadLAX; and Amalgamated and the U.S. Government shared another thirty minutes of argument time.  Restructuring Review attended the argument and, although it is generally difficult to predict how the Court will rule based on the questions directed to counsel during the argument, we note the following observations:

• The majority of the questions raised by the Court focused on the policy implications of its ultimate decision.  This may indicate that the Court was not convinced by RadLAX’s argument that section 1129(b)(2)(A) unambiguously permits a debtor to sell collateral without providing the secured lender the right to credit bid as long as the secured lender receives the indubitable equivalent.  Justice Breyer specifically noted that the section could also be read in a manner that would prohibit such sales and at times appeared to suggest that the indubitable equivalent prong might not apply to plans involving sale of collateral.
• The Court appeared to be trying to ascertain what – if any – detrimental effects would result if it determined that credit bidding was always mandated.  In particular, Justice Breyer noted “a creditor loaned you a million dollars. For the million dollars, he got an interest, a secured interest in a piece of property. And that property is worth . . . less than a million. And he says that’s the deal. I have a secured interest in this; I want the property. . . . I don’t see anything unfair about saying, give him the property if he wants it.”
• Several justices appeared skeptical of the process that would emerge if the court reversed the Seventh Circuit, because bankruptcy courts would be required to approve bid procedures that allowed the sale of collateral without credit bidding only to deny confirmation later in the process at a confirmation hearing when a secured lender argued that it was prepared to enter a higher credit bid.  Justice Scalia wondered “wouldn’t the court always say, when it’s confronted with this situation . . . that that price is probably so low because nobody could credit bid. Wouldn’t that always be a — a frailty of whatever — whatever price it sold for? Wouldn’t it always be?”
• Several justices generally expressed skepticism that the sale of collateral without allowing credit bids could yield the indubitable equivalent of a secured creditor’s claim.  As Justice Breyer put it “since we are trying to give the — the creditor the indubitable value, at the very least — the best way to do that would be let the creditor credit bid.”
• The Court spent a fair amount of time discussing the United States’ frequent role as a secured creditor and the effect that curtailing credit bids would have because it would require the government to obtain express Congressional authorization every time it wishes to bid cash on collateral at a bankruptcy auction.  Justice Scalia raised this issue with RadLAX’s counsel and referred to the case as a “big case” for the United States
• To the extent that the Court addressed the textual analysis of section 1129, the Court elicited both parties’ view of the canon of statutory interpretation that where a specific clause is applicable, a general clause such as the indubitable equivalent prong cannot apply.  Although the interplay between sections 1111(b) and 1129(a) was a prominent feature of the Seventh Circuit’s decision below, Judge Ambro’s dissent in Philadelphia Newspapers and the briefs filed with the Court, the Court did not raise the issue and counsel only mentioned it briefly.

Although we cannot predict how the Court will rule, based on these observations and the general tone of the argument, secured lenders appeared to have a good day in court.