In what it described as “an easy decision,” the U.S. Supreme Court issued its eagerly anticipated decision in RadLAX Gateway Hotel, LLC et al. v. Amalgamated Bank1 on May 29, 2012. The high court’s 8-0 ruling, delivered by Justice Scalia, held that a Chapter 11 bankruptcy cramdown plan providing for the sale of a secured creditor’s collateral free and clear of the secured creditor’s lien may not use Bankruptcy Code § 1129(b)(2)(A)(iii) to deny the secured creditor the right to “credit bid” on its own collateral.
The RadLAX decision resolves the split between the Third and Seventh Circuits as to whether, in the plan context, auction procedures may be crafted to prevent the secured creditor from using its claim as an offset against the purchase price for its collateral, and instead to require the secured creditor to bid with cash or receive the proceeds of the auction as the “indubitable equivalent” of its claims.2
Prior to the Third Circuit’s March 2010 ruling in Philadelphia Newspapers 3, it had been considered “common wisdom” among the bankruptcy community that non-recourse secured lenders were entitled either to be repaid for their loans or, absent repayment, to have the right to receive the collateral securing such loans. In the context of an auction, the secured creditor was protected from having to accept the proceeds of an unsatisfactory auction through its right to credit bid the full amount of its allowed claim and take back its collateral. Philadelphia Newspapers turned the “common wisdom” on its head.
Background of Bankruptcy Code § 1129(b)(2)(A)
The Bankruptcy Code provides two methods by which a debtor may sell substantially all of its assets. The first is a sale conducted pursuant to Bankruptcy Code § 363 and the second is pursuant to a plan under Bankruptcy Code § 1123(b)(4).
Although a bankruptcy court may generally confirm a Chapter 11 plan only if each class of creditors consents (and the other requirements of § 1129(a) are met), § 1129(b) would permit the court to approve a “cramdown” plan that includes the sale of a secured creditor’s collateral over that creditor’s objection, provided that “the plan does not discriminate unfairly, and is fair and equitable” with respect to that creditor, as determined by the bankruptcy court under § 1129(b)(2)(A).
Bankruptcy Code § 1129(b)(2)(A) requires the plan to provide:
- (I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and (II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property;
- for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or
- of this subparagraph; or (iii) for the realization by such holders of the indubitable equivalent of such claims.
See 11 U.S.C. § 1129(b)(2)(A) (emphasis added).
In Philadelphia Newspapers, the assets being auctioned off included two newspapers (the Philadelphia Inquirer and Philadelphia Daily News) and the online publication “philly.com.” Holding by a 2-1 majority that a secured lender could be crammed down and denied the right to credit bid, the Third Circuit reasoned that Bankruptcy Code § 1129(b)(2)(A) unambiguously permits a debtor to proceed with any plan under § 1129(b)(2)(A)(iii) that provides the secured lender with the “indubitable equivalent” of its secured interest in the assets and contains no statutory right to credit bidding. As a result of this ruling the secured lenders were not allowed to credit bid for their collateral at the auction conducted by the Debtors. The Philadelphia Newspapers decision created a furor among the bankruptcy community.
In explaining its holding that the plain meaning of § 1129(b)(2)(A) permits a debtor to conduct an asset sale under subsection (iii) without allowing secured lenders to credit bid, the Third Circuit stated as follows:
The Lenders concede, as they must, that § 1129(b)(2)(A) is phrased in the disjunctive. The use of the word “or” in this provision operates to provide alternatives—a debtor may proceed under subsection (i), (ii), or (iii), and need not satisfy more than one subsection. This approach is consistent with the definitions provided by the Code. Section 102(5) provides “that ‘or’ is not exclusive[.]” 11 U.S.C. § 102(5).
As explained by the Third Circuit, “[w]e are asked here not to determine whether the ‘indubitable equivalent’ would necessarily be satisfied by the sale; rather, we are asked to interpret the requirements of § 1129(b)(2)(A) as a matter of law. This distinction is critical. The auction of the Debtors’ assets has not yet occurred.”
In his dissent, Judge Ambro, a former bankruptcy lawyer, argued (among other things) that the majority’s reading of the statute was at odds with the settled expectations of lenders and borrowers, as well as the text of the Bankruptcy Code itself.
River Road Hotel Partners/RadLAX
The River Road Hotel Partners4 case involved two sets of jointly administered debtors (the “River Road” debtors and the “RadLAX” debtors )5, with two groups of lenders. Pursuant to the loan documents, Amalgamated Bank was
designated as administrative agent and trustee of both lender groups. The assets of the River Road Debtors consisted of a hotel and event space, and the River Road Debtors owed at least $140 million on the loans at the time the petition was filed. The assets of the RadLAX Debtors consisted of a hotel and parking facility, and the RadLAX Debtors owed at least $120 million on the loans at the time the petition was filed.
Picking up on the reasoning of the majority in Philadelphia Newspapers, the debtors in River Road Hotel Partners, LLC filed reorganization plans premised upon the sale of substantially all of the debtors’ assets, with the proceeds to be distributed among the debtors’ creditors in accordance with the Bankruptcy Code’s priority rules. The debtors moved for approval of proposed procedures for conducting the assets sales, in which the assets would be auctioned off to the highest bidder. The proposed sale procedures did not permit the secured creditor (who held a blanket lien over the assets) to credit bid its claim for the assets. The debtors’ secured lenders objected, to which the debtors responded, among other things, that to require them to comply with the credit bid requirements of § 1129(b)(2)(A)(ii) would be to convert the “or” contained therein to an “and.”
The United States Bankruptcy Court for the Northern District of Illinois denied the debtors’ bid procedures motions, and the cases were directly appealed to the Seventh Circuit. On November 30, 2010, the Seventh Circuit entered an order authorizing and consolidating the River Road and RadLAX appeals.
In June 2011, the Seventh Circuit Court of Appeals issued a ruling in In re River Road Hotel Partners, LLC,6 where it approved credit bidding in cramdown sale plans and rejected the majority’s reasoning from Philadelphia Newspapers. Borrowing heavily from Judge Ambro’s dissent, the Seventh Circuit concluded that “the Code requires that cramdown plans that contemplate selling encumbered assets free and clear of liens at an auction satisfy the [credit bidding] requirements set forth in [Bankruptcy Code § 1129(b)(2)(A)(ii)].”
The Seventh Circuit’s River Road Hotel Partners decision was subsequently appealed to the Supreme Court, which granted a writ of certiorari to hear the appeal.7 The Supreme Court’s RadLAX decision is the result of that appeal.
The Supreme Court’s Decision
The Supreme Court affirmed the Seventh Circuit’s River Road Hotel Partners ruling, holding that the “the debtor’s reading of § 1129(b)(2)(A)—under which clause (iii) permits precisely what clause (ii) proscribes—to be hyperliteral and contrary to common sense.”
Indeed, as explained by the Supreme Court, “the [secured lender] itself might wish to obtain the property if the alternative would be receiving auction proceeds that fall short of the property’s value. Under the debtors’ proposed auction procedures, however, the [secured lender] would not be permitted to bid for the property using the debt it is owed to offset the purchase price . . . .”
RadLAX resolves the debate as to the interplay between Bankruptcy Code §§ 1129(b)(2)(A)(i), (ii) and (iii), holding that “the structure of 1129(b)(2)(A) suggests that (i) is the rule for plans under which the creditor’s lien remains on the property, (ii) is the rule for plans under which the property is sold free and clear of the creditor’s lien, and (iii) is a residual provision covering dispositions under all other plans—for example, one under which the creditor receives the property itself, the “indubitable equivalent” of its secured claim. Thus, debtors may not sell their property free of liens under § 1129(b)(2)(A) without allowing lienholders to credit bid, as required by clause (ii).”
The Supreme Court further reasoned that it views clause § 1129(b)(2)(A)(ii) to be entirely a subset of § 1129(b)(2)(A)(iii), stating “Clause (iii) applies to all cramdown plans, which include all of the plans within the more narrow category described in clause (ii).”
The RadLAX decision is being touted as a victory for secured creditors. RadLAX restores consistency and predictability to the plan treatment of secured creditors whose collateral is being sold under a plan. Post-RadLAX, the secured creditor whose collateral is being sold will have the right to credit bid at the sale, regardless of whether such sale takes place pursuant to a plan under Bankruptcy Code § 1123(a)(4), at an auction under Bankruptcy Code § 363, or in the state law context outside of bankruptcy.8