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Litigation: Supreme Court to decide if secured creditors may credit bid in Chapter 11 asset sales

The high court takes up a case to resolve a circuit court split

The U.S. Supreme Court granted a petition for certiorari in RadLAX Gateway Hotel, LLC et al. v. Amalgamated Bank on Dec. 12, 2011. The question presented is, whether a debtor may pursue a Chapter 11 plan that proposes to sell assets free and clear of liens without allowing the secured creditor to credit bid up to the full amount of its claim, but instead, providing the secured lender with the indubitable equivalent of its claim.

The jointly administered debtors proposed plans to sell substantially all of their assets. Pursuant to the plans, the secured creditors would receive the “indubitable equivalent” of their claims and would not be permitted to credit bid at the sale. In connection with the proposed plans and sale, the debtors filed their motion to establish bidding procedures which specified that no credit bids were allowed. The secured lenders objected to the bidding procedures motion and argued that the sale could only be approved if credit bidding was allowed and since credit bids were prohibited, the plans were unable to be confirmed.

The Bankruptcy Court for the Northern District of Illinois denied the debtors’ bid procedures motion (thereby derailing the sales contemplated by the plans) and held that the secured lenders must have the right to credit bid in accordance with the bankruptcy code. Thereafter, the debtors directly appealed the bankruptcy court’s decision to the 7th Circuit, which affirmed the bankruptcy court’s ruling.

In affirming, the 7th Circuit analyzed the plain language of bankruptcy code section 1129(b)(2)(A) and concluded that subsection (iii) (where a plan provides for the secured creditor to receive the indubitable equivalent of its claim), does not indicate whether it applies to every type of Chapter 11 plan or only those that fall outside of a plan where the secured lender retains its lien on the property or receives deferred cash payments totaling at least the allowed amount of the claim and at least of a value of such holder’s interest in the property.

The 7th Circuit, therefore, found the bankruptcy code cramdown provisions to be ambiguous and looked to statutory interpretation. The 7th Circuit ultimately decided that it could not permit the sale under a plan without the possibility of credit bidding.

That holding is contrary to decisions on the same issue by the 3rd Circuit, In re Philadelphia Newspapers, (which encompasses the Delaware bankruptcy courts) and the 5th Circuit, Scotia Pacific Co., LLC v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.)Those two courts have denied the right of secured lenders to credit bid finding that the proposed sales through a plan provides the creditor with the indubitable equivalent of its claim under bankruptcy code section 1129 (b)(2(A)(iii). As a result, in Philadelphia Newspapers and Pacific Lumber, the secured lenders were forced to take the proceeds derived from the sale without the right to credit bid.

In granting review, the Supreme Court specifically found that the 7th Circuit’s decision created an untenable conflict with the decisions of the 3rd and 5th Circuits. The court noted that although Chapter 11 plans often involve asset sales, decisions on such plans are rarely reviewed because of inherently short time periods involved. The court welcomed the limited opportunity presented by the appeal of RadLAX Gateway to resolve an important and prevalent bankruptcy issue.

The Supreme Court’s decision is expected later this year. When decided, secured creditors and debtors will definitively know whether a secured creditor must always be afforded the right to credit bid in a sale of its collateral under a plan. Such a decision will be important to borrowers and lenders and will most certainly impact plan negotiations.

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