In a highly anticipated opinion decided on May 29, 2012, the United States Supreme Court held that Chapter 11 debtors could not sell collateral free and clear of secured lenders’ liens under a “cramdown” plan of reorganization without allowing such secured lenders to credit bid at the sale.1 RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166, slip op. (S. Ct. May 29, 2012).
As more fully discussed below, the Supreme Court’s decision in RadLAX resolved a much-debated issue that created a split among the Seventh Circuit and the Third and Fifth Circuits. More specifically, at issue was whether Bankruptcy Code Section 1129(b)(2)(A) — a “cramdown” provision — provides a basis for depriving dissenting secured creditors of the right to credit bid the amount of their debt when their collateral is proposed to be sold free and clear of liens pursuant to a bankruptcy plan and the plan provides the secured creditors with the indubitable equivalent of their claims.
The Supreme Court’s decision in RadLAX arose from two single-asset Chapter 11 bankruptcy cases filed in the Bankruptcy Court for the Northern District of Illinois (Nos. 09-B-30029, 09-B-30047). The debtors in the underlying bankruptcy cases had financed the construction of the Radisson Hotel at Los Angeles Airport and the InterContinental Chicago O’Hare Hotel with approximately $300 million in loans that were secured by liens on the applicable hotels. At the time the debtors filed for Chapter 11 relief, however, the amount of their secured lenders’ claims exceeded the value of the hotels that were subject to the liens.
Seeking to exit Chapter 11 without the support of their secured lenders, the debtors proposed bid procedures that contemplated plan sales of the secured lenders’ collateral free and clear of liens but without allowing such lenders the right to credit bid. Instead, the plans purported to provide the secured lenders with the “indubitable equivalent” of their claims by distributing most of the cash proceeds from the sale to such lenders. The secured lenders objected.
Statutory Framework and Circuit Split
The disagreement between the debtors and the secured lenders arose from their differing interpretations of the Bankruptcy Code’s cramdown provision — in particular, Section 1129(b)(2)(A). Pursuant to Bankruptcy Code Section 1129(b)(1), a Chapter 11 plan may be confirmed over the opposition of a dissenting class of claims so long as the plan does not discriminate unfairly against, and is fair and equitable to, the dissenting class of claims. Section 1129(b)(2)(A) provides further guidance by identifying three circumstances in which a plan may satisfy the “fair and equitable” requirement with respect to a dissenting class of secured claims:
(i) secured creditors retain their liens to the extent of their secured claims and receive deferred cash payments at least equal to their secured claims that have a present value that is not less than the claimholder’s interest in the collateral;
(ii) collateral is sold under the plan subject to the secured creditors’ right to credit bid under Bankruptcy Code Section 363(k);2 or
(iii) secured creditors receive the “indubitable equivalent” of their secured claims.
The debtors in RadLAX argued that their proposed bid procedures and the resulting plan satisfied the “fair and equitable” requirement because, even though the dissenting secured lenders were not allowed to credit bid, the plan provided such lenders with the indubitable equivalent of their claims. The debtors’ arguments were based upon the use of the disjunctive “or” in Bankruptcy Code Section 1129(b)(2)(A) and found support in decisions issued by the Third and Fifth Circuit Courts of Appeals. In this regard, the debtors relied on two circuit court opinions for support: the Third Circuit’s opinion in In re Philadelphia Newspapers, 599 F.3d at 301 (3rd Cir. 2010) and the Fifth Circuit’s opinion in Pacific Lumber Co. v. Official Unsecured Creditors Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. 2009).
Both the Third and Fifth Circuits had concluded that the statute’s use of the disjunctive “or” in describing the three alternative modes of cramdown meant that plan sales were not required to permit credit bidding so long as secured creditors received the indubitable equivalent of their claims. By contrast, the secured lenders in RadLAX argued that the proposed bid procedures were improper because any plan that contemplated a sale of their collateral must afford the secured lenders the right to credit bid to be confirmable. The secured lenders argued that the more specific subsection (ii) of Bankruptcy Code Section 1129(b)(2)(A) governed proposed plan sales of collateral over the objection of secured creditors and that this subsection required that dissenting secured creditors be given the right to credit bid.
The Bankruptcy Court for the Northern District of Illinois and, thereafter, the Seventh Circuit Court of Appeals, agreed with the secured lenders in RadLAX, finding that the debtors’ proposed plan was not confirmable. River Road Hotel Partners, LLC v. Amalgamated Bank (In re River Road Hotel Partners LLC), 651 F.3d 642 (7th Cir. 2011). In so holding, the Bankruptcy Court and the Seventh Circuit disagreed with the Third and Fifth Circuits’ respective conclusions that the plain language of Section 1129(b)(2)(A) unambiguously permits a plan sale of collateral free and clear of liens when secured creditors are prohibited from credit bidding. Rather, the Bankruptcy Court and the Seventh Circuit concluded that the better interpretation of the statute was that denying secured creditors the right to credit bid in a sale of their collateral based upon the “indubitable equivalence” prong under Section 1129(b)(2)(A)(iii) would render the more specific subsection 1129(b)(2)(A)(ii) (providing for the right to credit bid in a sale of collateral) superfluous. Accordingly, the Bankruptcy Court and the Seventh Circuit held that Section 1129(b)(2)(A) requires that a cramdown plan of reorganization that provides for the sale of secured creditors’ collateral free and clear of liens also must provide secured creditors the opportunity to credit bid their claims.
The Supreme Court granted certiorari with respect to the Seventh Circuit’s decision.
The Supreme Court’s Decision
The Supreme Court, in a unanimous opinion (other than Justice Kennedy, who took no part in the decision), affirmed the Seventh Circuit’s decision. The opinion turned on the Supreme Court’s textual analysis of Section 1129(b)(2)(A).
Applying the canon of statutory interpretation that specific provisions must be read to govern general provisions, the Supreme Court determined that the specific requirement that secured creditors be permitted to credit bid must be read to encompass all sales of collateral free and clear of liens in cramdown plans. The Court found that the debtors’ proposed reading of Section 1129(b)(2)(A) — under which subsection (iii) would permit that which was proscribed by subsection (ii) — was “hyperliteral.”3
The Supreme Court’s decision in RadLAX resolves a significant conflict among the circuit courts of appeal. In so doing, the Supreme Court has once again focused on the “plain language” of the Bankruptcy Code, and has confirmed secured creditors’ right to credit bid at plan sales of their collateral. Of course, the right to credit bid itself remains subject to certain exceptions, such as where a secured creditor’s lien is disputed or in circumstances involving fraud or collusion. It will be interesting to see whether the RadLAX ruling is extended to other situations involving “indubitable equivalent” constructs. Regardless, however, the Supreme Court’s decision in RadLAX has important implications for debtors, secured creditors, parties seeking to acquire distressed assets and other parties in interest.
1 In RadLAX, the Supreme Court noted that the Bankruptcy Court had found that there was no “cause” to deny the secured creditors the right to credit bid and that the debtors had not appealed this ruling. Thus, the Supreme Court did not consider whether cause existed to deny secured creditors the right to credit bid. However, courts have generally found such “cause” to exist in relatively limited circumstances, such as fraud, collusion or a failure to satisfy a senior or pari passu lien.
2 Bankruptcy Code Section 363(k) grants secured creditors the right to credit bid “unless the court for cause order otherwise” when their collateral is proposed to be sold pursuant to Bankruptcy Code Section 363(b). Bankruptcy Code Section 363(b), in turn, provides inter alia that, subject to certain qualifications, a debtor may sell property outside of the ordinary course of business after notice and a hearing. 11 U.S.C. § 363(b), (k).
3 While the Supreme Court allowed that the general/specific canon was not absolute and could be overcome by textual indications that pointed in the other direction, the Court found that the debtors had not demonstrated any such indications. The Supreme Court rejected the debtors’ argument that the Seventh Circuit conflated approval of bid procedures with plan confirmation and that the debtors should be permitted to pursue their auction, with the Bankruptcy Court to determine at confirmation whether the resulting plan provided secured lenders with the indubitable equivalent of their secured claims. In this regard, the Supreme Court held that no bid procedures like the ones proposed could satisfy the requirements of Bankruptcy Code Section 1129(b)(2)(A) and, thus, the distinction between bid procedures and plan confirmation was irrelevant in this context.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.