As part of our continuing coverage of RadLAX Gateway Hotel, LLC v. Amalgamated Bank, this is one of a series of posts summarizing the briefs filed with the Supreme Court.  This post summarizes the respondents’ brief, which urges the Court to affirm the decision of the Seventh Circuit prohibiting a debtor from pursuing confirmation of a plan that provides for the sale of certain assets free and clear of liens and encumbrances without permitting a secured creditor the opportunity to credit bid.   Please click here for a more detailed description of the Seventh Circuit’s decision.  Click here for a summary of the petitioners’ brief.

In its brief, Amalgamated argues that (i) the plain language of section 1129(b)(2)(A) of the Bankruptcy Code only allows for the sale of collateral free and clear of liens if the secured creditor is granted the right to credit bid, and (ii) the denial of credit bidding is inconsistent with the general purposes of the Bankruptcy Code and the Bankruptcy Code’s treatment of secured creditors.  Amalgamated also refutes the textual and policy arguments presented in RadLAX’s brief.

Textual Arguments

Amalgamated asserts that the plain language of section 1129(b)(2)(A) requires a debtor to permit secured creditors to credit bid in connection with an asset sale under a plan (as opposed to a sale under section 363 where the credit bidding rights of secured creditors are expressly recognized in section 363(k)), even if the plan provides the secured creditor the indubitable equivalent of its claim under subsection 1129(b)(2)(A)(iii)[i].

In interpreting the plain language of this provision, Amalgamated contends that:

• Read together, the three subsections of section 1129(b)(2)(A) indicate that Congress provided debtors with three separate options for crafting a cramdown plan and a plan governed by one subsection could not be confirmed under a different subsection.
• Subsection (ii) of section 1129(b)(2)(A) (which directs plan proponents to allow credit bidding) is a specific provision that supersedes subsection (iii) (which does not require credit bidding) because subsection (ii) explicitly addresses a cramdown plan that contemplates the sale of property free and clear of liens while subsection (iii) governs plans that are not covered by subsections (i) and (ii).
• Because subsection (ii) incorporates the section 363(k) standard which only allows denial of credit bidding for cause, subsection (iii) should not be read as a sub silentio broader exception to denying credit bidding.
• Allowing confirmation of plans under subsection (iii) without requiring proponents to allow credit bidding would render subsection (ii) superfluous because plan proponents could easily evade the express credit bidding requirement in subsection (ii) by proposing a plan that does not allow credit bidding under subsection (iii).
• The legislative history of subsection (iii) suggests that subsection (iii) is only applicable in situations other than those governed by subsection (ii).

Policy Arguments

Amalgamated also argues that providing a secured creditor with the indubitable equivalent of its claim while prohibiting such creditor from credit bidding is inconsistent with the Bankruptcy Code’s treatment of Secured Creditors.  In support of this position, Amalgamated asserts:

• Congress recognized that credit bidding is an efficient means of ensuring that secured creditors receive the actual current value of their collateral by  requiring debtors to allow secured creditors to credit bid at a sale pursuant to section 363.
• Congress created a comprehensive framework of protections for secured creditors. Undersecured creditors can protect themselves against undervaluation of collateral by electing to have their entire claim treated as a secured claim pursuant to section 1111(b)(2) when a plan is proposed under 1129(b)(2)(A)(i).  When a plan is proposed under subsection (ii), undersecured creditors can protect themselves against undervaluation by credit bidding.  Allowing plan proponents to sell collateral free and clear without providing the right to credit bid would undermine the protections provided by Congress.
• Secured lenders bargain for the right to foreclose and take possession of their collateral and price their loans accordingly.  State law has long recognized the right to credit bid at a foreclosure sale and Congress intended to protect the expectations of the parties.
• Credit bidding furthers the goal of maximizing the bankruptcy estate by forcing other bidders that want to purchase the property to compete with the credit bid.  Additionally, if the credit bid results in a sale to a third party at a price greater than the secured creditors claim, other creditors also benefit from the credit bid.
• Denying credit bidding serves no legitimate bankruptcy policy.  The only reason to deny credit bidding in this case is to allow the third party bidder to obtain the property at below-market values.
• Requiring a secured creditor to pay cash to the estate and then take the cash back to satisfy its claim against the estate was senseless.

Refuting Petitioners’ Arguments

• Use of the words “or” and “provides” in section 1129(b)(2)(A) merely indicates that the plan proponent may choose any of the three subsections when attempting to confirm a cramdown plan – not the scope of each subsection.
• The argument that subsection (ii) provides a procedural protection while subsection (iii) provides a substantive protection is unpersuasive because both subsections are aimed at ensuring that the secured creditor receives fair and equitable treatment.  Additionally, even if subsection (iii) were characterized as substantive, there is no reason to believe that Congress intended to allow plan proponents to evade the protections in subsection (ii) by resorting to subsection (iii).
• RadLAX’s argument that the court should have waited until the confirmation hearing before deciding whether the secured creditors received the indubitable equivalent under the plan was unavailing because the plan and the proposed bidding procedures were interrelated.
• RadLAX’s reliance on section 363(k) to prove that Congress knew how to limit credit bidding when it wanted to was incorrect because Congress did indeed limit credit bidding in the context of a plan – in 1129(b)(2)(A)(ii).

Amalgamated’s brief tracks Judge Ambro’s dissenting opinion in In re Philadelphia Newspapers, 599 F.3d 298, 319-38 (3d Cir. 2010) in many aspects.  Specifically, Amalgamated notes that the dissent properly determined that allowing a debtor to sell collateral free and clear of liens under 1129(b)(2)(A)(iii) without requiring the debtor to allow credit bidding would (i) render 1129(b)(2)(A)(ii) superfluous; (ii) create an unexplained anomaly where a creditor could propose such a sale under a plan but not pursuant to section 363; (iii) defeat the settled expectations of the parties to the secured loan; and (iv) undermine the Bankruptcy Code by maximizing benefits to insiders at the expense of creditors.

Restructuring Review will summarize the important points raised in the amicus briefs filed in this case, including the brief of the United States, two briefs filed by groups of law professors and a brief filed by a group of financial trade associations.  As the scheduled date for oral arguments approaches, we will also be providing in-depth analysis from legal and financial observers.