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Supreme Court Upholds Secured Party’s Right to Credit Bid at a Sale of Property Under a Reorganization Plan

June 4, 2012

On May 29, 2012 the United States Supreme Court ruled that a plan of reorganization may not be confirmed over the objection of a secured creditor if the plan provides for the sale of collateral free and clear of the creditor’s lien, but does not permit the creditor to credit bid at the sale. The ruling resolved a conflict between a decision from Seventh Circuit Court of Appeals, which denied confirmation of such a plan, and decisions from the Third and Fifth Circuit Courts of Appeal, which approved such plans.

The Supreme Court’s decision in Radlax Gateway Hotel, LLC v. Amalgamated Bank, grew out of a bank’s $142 million loan to two debtors to finance construction of a hotel and a parking lot at the Los Angeles International Airport. The loan was secured by a blanket lien on all of the debtors’ assets. The debtors filed a Chapter 11 bankruptcy case after defaulting on the loan. Thereafter, the debtors filed a plan of reorganization which proposed an auction sale all of their assets to the highest bidder, with an initial “stalking horse” bid of $47.5 million. The bank would receive the sale proceeds, but could not credit bid at the auction—in other words, could not use its debt to offset the purchase price. Anticipating that the bank would oppose their plan, the debtors proposed to confirm their plan over the bank’s opposition using the cramdown provisions in Section 1129(b)(2)(A) of the Bankruptcy Code. The bankruptcy court denied the debtors’ motion to approve sale procedures designed to implement their plan. The Seventh Circuit Court of Appeals affirmed the bankruptcy court’s decision.

Bankruptcy Code section 1129(b)(2)(A) provides three alternative means by which a Chapter 11 plan can be confirmed, or “crammed down,” despite a secured creditor’s opposition. Under the first alternative, in section 1129(b)(2)(A)(i), the secured creditor must retain the lien securing its claim and must also receive deferred cash payments having a present value equal to the value of the secured creditor’s collateral. The second alternative, in section 1129(b)(2)(A)(ii), permits a sale of the secured creditor’s collateral free and clear of liens, with the liens to attach to the sale proceeds. However, any such sale is subject to the secured creditor’s right to credit bid at the sale. Under the third alternative, in section 1129(b)(2)(A)(iii), the secured creditor must realize the “indubitable equivalent” of its secured claim.

The debtors could not utilize the second alternative, because their plan prohibited the bank from credit bidding at the auction sale. However, the debtors argued that their plan could still be confirmed under the third alternative by providing the secured creditor with the “indubitable equivalent” of its secured claim, in the form of cash proceeds from the auction. The debtors based their argument on the Bankruptcy Code’s use of the disjunctive “or” in listing the three alternative methods for cramdown. in the disjunctive.

The Supreme Court emphatically rejected the debtors’ position. It characterized the debtors’ argument that “clause (iii) permits precisely what clause (ii) prohibits...to be hyperliteral and contrary to common sense.” Specifically, the Supreme Court held that the debtors’ reading of subsections (ii) and (iii) of Bankruptcy Code section 1129(b)(2)(A) violated the well established canon of statutory construction that “the specific governs the general.” The Supreme Court observed that this canon was particularly applicable to the Bankruptcy Code, where “Congress has enacted a comprehensive scheme and has deliberately targeted specific problems with specific solutions.”

The Radlax Gateway Hotel decision imposes an significant limitation on a debtor’s ability to confirm a reorganization plan which is unacceptable to a secured creditor. The decision protects a secured creditor from the risk that an auction sale will undervalue the secured creditor’s collateral. The decision also protects lenders in a syndicated loan when some of the participants are either are unwilling or unable to provide the additional funding which the agent would require in order to bid cash bid at an auction sale. 

Should you have any questions about this ruling, please contact Rick Bendix, co-leader of the Firm's Bankruptcy and Restructuring practice and the author of this alert, at 312-627-5673.


As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2012 Dykema Gossett PLLC.

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2017 Dykema Gossett PLLC.