On May 29, 2012, the United States Supreme Court unanimously1
upheld a secured creditor's statutory right to credit-bid for its collateral being sold as part of a chapter 11 plan. RadLAX Gateway Hotel, LLC v. Amalgamated Bank
, 566 U.S.
(2012). Credit-bidding means bidding with one's secured debt instead of cash at a sale of the collateral that is subject to the secured debt. In affirming the Seventh Circuit's decision in River Road
(In re River Road Hotel Partners, LLC
, 651 F.3d 642 (7th Cir. 2011)), the Supreme Court employed certain canons of statutory construction to hold that where a secured creditor's collateral is being sold pursuant to a contested chapter 11 "cramdown" plan, the more specific statutory provision of 11 U.S.C. § 1129(b)(2)(A)(ii), which preserves a secured creditor's right to credit-bid up to the amount of its claim in the sale of its collateral under a chapter 11 plan, governs over the more general statutory provision of 11 U.S.C. § 1129(b)(2)(A)(iii), which allows for a debtor to provide a secured creditor with the "indubitable equivalent" of its secured claim. The Supreme Court thus agreed with the Seventh Circuit that section 1129(b)(2)(A)(iii) cannot be used to deny a secured creditor its right to credit bid under section 1129(b)(2)(A)(ii). This is important for our Investment Management clients because, to the extent they hold secured debt, they can now be assured of their right to credit-bid in the sale of their collateral under a chapter 11 plan.
As we have previously reported,2
the Seventh Circuit's decision in River Road
was directly at odds with the rulings in Philadelphia Newspapers
(In re Philadelphia Newspapers, LLC
, 599 F.3d 298 (3d Cir. 2010)) and Pacific Lumber
(In re Pacific Lumber Co.
, 584 F.3d 229 (5th Cir. 2009)) in which the Fifth and Third Circuits, respectively, upheld bidding procedures in chapter 11 plans that permitted a sale of encumbered property free and clear of liens under section 1129(b)(2)(A)(iii) without giving secured creditors the opportunity to credit-bid during the sale. The Supreme Court's RadLAX
decision thus resolves the split among the Circuit Courts of Appeals. It represents a victory for secured creditors, who can now be sure that they will be able to exercise the right to credit-bid when their collateral is being sold pursuant to a chapter 11 plan. While debtors who wish to sell encumbered assets as part of a chapter 11 plan may have less flexibility post RadLAX
, they at least have more clarity on the rights and protections that must be afforded to secured creditors in order for a plan to receive the court's blessing.
Although the Supreme Court stated that "the pros and cons of credit-bidding are for the consideration of Congress," the Court nevertheless clearly approved of credit-bidding, noting that by allowing secured creditors to use debt as cash to bid for their collateral, credit-bidding enables secured creditors to acquire their collateral without a significant cash outlay and retain the benefits of any upside appreciation, thereby protecting secured creditors from the sale of their collateral at a depressed price. The Court further pointed out that credit-bidding is "particularly important for the Federal Government, which is frequently a secured creditor in bankruptcy and which often lacks appropriations authority to throw good money after bad in a cash-only bankruptcy auction."
Finally, the Supreme Court stated that secured creditors may credit-bid up to the face amount of their secured claim, thereby implicitly rejecting the argument that they may bid only up to the value of the collateral at the time of the sale. The rejection of this latter argument by the Third Circuit3
and other courts has now been reaffirmed by the Supreme Court.
If you have any questions concerning the Supreme Court's RadLAX
decision, please feel free to contact Ron Cohen
(212-574-1515), John Ashmead
(212-574-1366) or your primary attorney at Seward & Kissel LLP.
1 Justice Kennedy recused himself and took no part in the RadLAX decision.
2 For the history of this matter, please see our prior articles: To Bid or Not to Bid, Fall 2011 Distressed Debt Report, The War Over Credit Bidding in Chapter 11 Continues, Spring 2011 Distressed Debt Report, and Philadelphia Newspapers, October 2010 Distressed Debt Report.
3 Cohen v. KB Mezzanine Fund II, LP (In re SubMicron Systems Corp.), 432 F.3d 448 (3d Cir. 2006).
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