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 petitioners’ brief, arguing that section 1129(b)(2)(A) of the Bankrutpcy Code permits confirmation of a plan that denies secured creditors their right to credit bid.  Please click here for a link to our summary of the Respondents’ brief arguing that the the proposed plan must afford secured lenders their rights to credit bid and here for our summary of the key amicus briefs filed with the Supreme Court. 

On January 26, 2012, petitioners RadLAX Gateway Hotel, LLC and RadLAX Gateway Deck, LLC filed their brief with the United States Supreme Court.  In the brief, RadLAX urges the Court to reverse the decision of the Seventh Circuit.  The Circuit Court had prohibited a debtor from moving forward with a plan sale process for a plan that provided for the sale of assets free and clear of liens and encumbrances without also permitting a secured creditor the opportunity to credit bid.  In its brief, RadLAX argues that (i) the plain language of section 1129(b)(2)(A) of the Bankruptcy Code authorizes confirmation of a plan that denies secured creditors the right to credit bid under certain circumstances, (ii) the denial of credit bidding rights is consistent with the general purposes of the Bankruptcy Code and the Bankruptcy Code’s treatment of secured creditors, and (iii) the question of whether RadLAX’s proposed plan satisfied the indubitable equivalent prong of subsection 1129(b)(2)(A)(iii) was decided prematurely and should not have been addressed  until the confirmation hearing.

Textual Arguments

RadLAX asserts that the plain language of section 1129(b)(2)(A) does not require 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), 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, Rad LAX contends that:

• Use of the word “or” in section 1129(b)(2)(A) indicates that plans proposed under subsection (iii) need not comply with the credit bidding requirement of subsection (ii).
• Use of the term “the plan provides” allows the plan proponent to choose the subsection of section 1129(b)(2)(A) under which it intends to satisfy its obligations to the secured creditor.
• Congress did not intend to limit the “indubitable equivalent” option only to scenarios where the proponent allows credit bidding because Congress did not include limiting language.  In contrast, Congress limited the use of indubitable equivalent in the context of adequate protection in section 363(k)) of the Bankruptcy Code.
• If Congress intended to create an absolute right for secured creditors to credit bid when collateral is sold pursuant to a plan, Congress would have included this right in the Bankruptcy Code.  Notably, Congress explicitly included such language in section 363(k), which grants a nearly absolute right for secured creditors to credit bid when collateral is sold free and clear of liens under section 363 of the Bankruptcy Code.
• Subsection (ii) of section 1129(b)(2)(A) (which directs plan proponents to allow credit bidding) is not a specific provision that supersedes subsection (iii) (which does not require credit bidding) because subsection (ii) provides a procedural protection that allows secured creditors to participate in the sale process via a credit bid while subsection (iii) provides a substantive protection that protects the secured creditor by ensuring that it receives the indubitable equivalent of its claim.
• Allowing confirmation of plans under subsection (iii) without requiring proponents to allow credit bidding would not render subsection (ii) superfluous because plan proponents could still use subsection (ii) in instances where they believed that allowing credit bidding would bring in more value or where they could not confirm a plan under subsection (iii) due to an inability to provide the secured creditor with the indubitable equivalent of its claim.
• Contradictory statements in the legislative history with respect to Congress’s intent to allow secured creditors the absolute right to credit bid renders the legislative history unclear and unenlightening.

Policy Arguments

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

• Under section 1129(A), secured creditors are only entitled to protection of the present value of their claim.  Accordingly, so long as the creditor receives the present value of its claim under a plan proposed under subsection (iii) – i.e., the indubitable equivalent – the secured creditor will have received the same protection afforded under subsection (i) and (ii).
• Because undersecured creditors are entitled to a deficiency claim for unsecured amounts, these creditors can further protect themselves by voting their unsecured deficiency claim in a manner that furthers their position as secured creditors.
• The Bankruptcy Code does not entitle secured creditors to partake in the future appreciation of their collateral by either credit bidding or retaining the lien on the collateral.
• Requiring a proponent to allow credit bidding effectively provides a deeply undersecured creditor with a veto over the process, deprives debtors of the flexibility they need to restructure, and does not benefit the estate.

Finally, RadLAX argues that the Seventh Circuit erred in rejecting the proposed bidding procedures, because it was premature for the court to conclude that the plan would not provide the secured creditors with the indubitable equivalent of their claim.  Only after completion of the sale and the debtors’ attempt to confirm the plan could a court decide whether the plan satisfied subsection 1129(b)(2)(A)(iii).  Accordingly, RadLAX maintains that the Seventh Circuit should have waited until the confirmation hearing before deciding the issue.

RadLAX’s arguments closely track the reasoning of In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010) in which a majority of the Third Circuit held that a debtor could confirm a chapter 11 plan under section 1129(b)(A)(2)(iii) without allowing secured creditors the right to credit bid.  In particular, RadLAX noted that the Third Circuit had found that the plain language of section 1129(b)(A), compelled allowance of a sale without credit bidding so long as the debtor provided the secured creditor with the indubitable equivalent of its claim and that requiring credit bidding in these circumstances would provide secured creditors greater protection than the protections granted by Congress.

This post is the latest in Restructuring Review’s ongoing coverage of the Supreme Court proceedings in RadLAX Gateway Hotel.  In the coming weeks we will be previewing how we expect the Court to rule, taking a look at the arguments and then looking at the Court’s ruling.