On May 29, 2012, the United States Supreme Court issued an opinion in the Radlax Gateway Hotel bankruptcy proceeding regarding the viability of a plan of reorganization that prohibited a bank from credit-bidding on the debtors’ assets.  See Radlax Gateway Hotel, LLC, et al., v. Amalgamated Bank, __S.Ct.__ No. 11-166, 2012 WL 1912197 (U.S. May 29, 2012)(hereinafter “Opinion at * ___”).  The debtors in Radlax (“Debtors”) purchased a hotel at the Los Angeles International Airport, along with an adjacent property. Debtors intended to renovate the hotel and develop the adjacent lot into a parking garage.  Opinion at *1.  Things did not go as planned for the Debtors.  The costs to develop the garage were greater than originally expected.  Debtors were $120 million in debt to their lenders and out of funds needed to complete the project.  Opinion at *2.  Soon thereafter, Debtors filed chapter 11 petitions for reorganization in the United States Bankruptcy Court for the Northern District of Illinois.  Id.

During the course of the bankruptcy proceeding, Debtors filed a plan of reorganization whereby they proposed to auction off substantially all of their assets to the highest bidder, with a “stalking horse” bidder providing an initial bid of $55 million.  Under the Debtors’ auction procedures, however, the Debtors’ secured lender would not be allowed to bid on the Debtors’ property using the debt it owed to offset the purchase price.  Said another way, the plan prohibited the lenders from credit-bidding on the assets.  Opinion at *3.  Instead, under the plan the lenders would be required to bid on the assets using cash.  Id.

The Bankruptcy Court denied the Debtors’ sale procedures motion, finding that the proposed auction procedures violated 11 U.S.C. sec. 1129(b)(2)(A)’s requirements of cramdown plans.  Opinion at *3.  Debtors’ appealed and the Bankruptcy Court certified the appeal directly to the United States Court of Appeals for the Seventh Circuit.  The Seventh Circuit accepted the certification and affirmed the decision of the Bankruptcy Court.  Id.  In doing so, the Seventh Circuit held that sec. 1129(b)(2)(A) “does not permit debtors to sell an encumbered asset free and clear of a lien without permitting the lien holder to credit-bid.”  Id., citing River Road Hotel Partners, LLC, et al. v. Amalgamated Bank, 651 F.3d 642 (7th Cir. 2011).  

The Supreme Court noted that “[t]he parties debate at some length the purposes of the Bankruptcy Code, pre-Code practices, and the merits of credit-bidding.”  Opinion at *10.  To the Court, however, the focus should be on the language of the relevant Code section - 1129(b)(2)(A), as it governs when a plan may be confirmed over the objection of secured creditor.  In order for a plan to be “fair and equitable” with respect to an objecting creditor’s claim, the plan must provide:     

  1. (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;     
  2.  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 (iii) of this subparagraph; or          
  3. for the realization of such holders of the indubitable equivalent of such  claims. 

11 U.S.C. sec. 1129(b)(2)(A); Opinion at *4. 

Under clause (ii) above, debtor’s property may be sold free and clear of a secured creditor’s lien, “subject to section 363(k).”  Section 363(k) permits a creditor to credit-bid on the sale of a debtor’s assets up to the amount of its claim.  Opinion at *4.  The Radlax Debtors, however, sought to confirm a plan that did not authorize credit-bidding, arguing that the plan was confirmable under clause (iii) which allows a creditor to receive its indubitable equivalent of its claim.  The Court, however, rejected Debtors’ argument, finding it “hyperliteral and contrary to common sense.”  Opinion at *5.  

The Court observed that it “is a commonplace of statutory construction that the specific governs the general.”  Opinion at *5, citing Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384.  In the present Code section, clause (ii) is a specific Code provision that spells out the requirements for selling collateral free of liens, whereas clause (iii) is broader provision that says nothing about a sale free of liens.  Opinion at *7.  Therefore, the Court held that as a matter of law, no bid procedures like the one proposed by the Debtors (prohibiting credit bidding) could satisfy the requirements of 11 U.S.C. sec. 1129(b)(2)(A).  Opinion at *9.  In doing so, the Court affirmed the decision of the Court of Appeals below.  Opinion at *10.