The secured lender industry experienced a collective sigh of relief on May 29 after the Supreme Court ruled in RadLAX Gateway Hotel, LLC, et al. v. Amalgamated Bank that credit bidding remains a viable option to protect collateral in a cramdown bankruptcy plan. Expressly inscribed in Sections 363(k) and 1129(b)(2)(A) of the Bankruptcy Code, credit bidding has long been understood as a fairly uncontroversial right; until recently. In the past three years, both the Third and Fifth Circuits concluded that a debtor could sell assets free of liens in a Chapter 11 plan without permitting credit bidding. (In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3 rd Cir. 2010) and In re Pacific Lumber Co., 584 F.3d 228 (5 th Cir. 2009)). Recognizing the negative impact these decisions could have on the lending industry, the Supreme Court agreed to hear the issue.
To confirm a Chapter 11 plan over the objection of a secured creditor, a plan proponent must satisfy one of three requirements, set out in Section 1129(b)(2)(A), for the plan to be considered “fair and equitable” with regard to the dissenting secured creditor. The plan must provide (in the disjunctive) that (i) the secured creditor retains its lien on the property and receives deferred cash payments, (ii) the property is sold free and clear of the lien “subject to section 363(k),” and the creditor receives a lien on the proceeds of the sale, or (iii) the secured creditor receives the “indubitable equivalent” of its claim. The principle behind each of the subsections above is that fair treatment of a dissenting secured creditor requires it remain protected to the full value of its collateral: either by maintaining its current lien on the collateral, receiving the proceeds from a fair market value sale of the collateral, or exchanging its current collateral for collateral of equivalent value and risk.
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