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’ reply brief, filed with Court on March 31, 2012. In the brief, RadLAX argues that the reading of section 1129 of the Bankruptcy Code by Amalgamated (the Respondent) is flawed and that credit bidding does not always maximize the value of the estate. Additionally, RadLAX denies Amalgamated’s allegations that the proposed plan prohibited credit bidding to benefit insiders or a favored third-party bidder and accuses Amalgamated of working to prevent confirmation of a plan that would benefit all creditors.
RadLAX first repeats its fundamental argument that under the plain language of section 1129 a plan that contemplates the sale of property free and clear of liens and encumbrances can be confirmed under section 1129(b)(2)(A)(ii) (which requires the allowance of credit bids) or section 1129(b)(2)(A)(iii) (which requires the provision of the indubitable equivalent of a secured creditor’s claim). RadLAX contends that because debtors must ultimately prove that they have provided secured creditors with the indubitable equivalent of their secured claim in order to confirm a plan under subsection (iii), secured creditors that are crammed down under this subsection receive the same amount of protection granted to secured creditors that are crammed down under subsection (ii).
RadLAX also argues that credit bidding is not an unalloyed good and that there are circumstances in which forcing the debtor to allow credit bids will harm the estate. RadLAX argues that credit bidders have an unfair advantage because they do not have to factor in the cost of financing and can bid with currency (credit) that is inherently less valuable than cash. As a result, less cash bidders are likely to participate resulting in a lower potential for the auction to yield the fair market value.
RadLAX repeatedly refers to the facts in Scotia Pacific Co. v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 228 (5th Cir. 2009). In Pacific Lumber, the debtors owned multiple properties including a sawmill, a power plant, a town and a large parcel of timberlands. The timberlands were pledged as security to the holders of one of the debtor’s notes. After the exclusive period to file a plan expired, the noteholders filed a plan that allowed the noteholders to credit bid on the timberlands. Other creditors filed a competing plan that addressed the disposition of all of the debtors’ properties and did not allow the noteholders to credit bid for the timberlands. The Fifth Circuit held that the competing plan could be confirmed under subsection (iii) and the noteholders were not guaranteed the right to credit bid. RadLAX contends that Pacific Lumber demonstrates how the alternative methods provided in section 1129(b) allow debtors the flexibility to confirm a plan where only a portion of property is encumbered but that property is crucial to a successful reorganization that benefits all creditors.
Finally, RadLAX disputes the claim made by Amalgamated and the amici that the its plan was designed to benefit RadLAX’s insiders and management by championing a below-market sale to a favored bidder. RadLAX argues that the connections between the Debtors’ insiders and the stalking horse bidder are de minimis and that under the bidding procedures the winning bidder does not have to retain current management.
