U.S. Supreme Court Holds that Bankruptcy Credit-Bidding May Not Be Denied

CRE Finance World, Autumn 2012

U.S. Supreme Court Holds That Bankruptcy Credit-Bidding May Not Be Denied and Resolves Circuit Shareholder J.D. Candidate, 2013Scott S. FrederickEric L. Pruitt Split in Favor of Secured Creditors Caldwell & Berkowitz, PC University of Alabama School of LawBaker, Donelson, Bearman, T secured creditors facing “cramdown” treatment in a plan class of claims.”7 If creditors do not consent, courts may still confirm the6consents.”plan—colloquially called a “cramdown” plan — “if the plan does notdiscriminate unfairly, and is fair and equitable, with respect to eachRadLAX Gateway settled an important1he Supreme Court’s recent decision inHotel, LLC v. Amalgamated Bankissue to secured creditors including holders of commercialmortgage backed securities. The case confirms that of reorganization can credit-bid the balance of the debt in a bankruptcy To be fair and equitable to a secured creditor, a cramdown plan sale. RadLAX settles a circuit split on the cramdown issue and, in must satisfy one of three requirements in Bankruptcy Code § today’s bleak economic climate, provides a bright spot for secured 1129(b)(2)(A). That means: (i) the creditor must be able to retain creditors. It also removes the consideration of multiple issues that a lien on the property8; (ii) if the property is sold free of the original could have faced special servicers, such as the ability to make lien, the creditor must be able to credit-bid at the sale or otherwise significant cash payments as property protection advances in take a lien on the sale proceeds9; or (iii) the plan must provide the bankruptcy auctions, had an opposite holding been delivered by secured creditor with the “indubitable equivalent” of its claim10. the Court. Prior to RadLAX, courts disagreed on how to read these requirements. The story of the RadLAX case is not unfamiliar or unlikely. The In In re Philadelphia Newspapers, LLC, for example, the Third debtors owned an airport hotel and parking garage, which was Circuit Court of Appeals focused on the statute’s use of “or” and pledged as collateral for a $142 million loan. Battered by the tough construed the requirements as alternatives.11 A debtor could choose economy and facing insolvency, the debtors filed for Chapter 11 one without having to satisfy the others.12 Even if a debtor conducted bankruptcy in 2009. The debtors ultimately proposed a plan of a sale (as in subsection (ii)), it need not allow credit-bidding as reorganization with a stalking horse bidder that expressly prohibited long as it permitted the secured creditor to receive the indubitable secured creditors from “credit-bidding” at the auction and, instead, equivalent of its claim (as in subsection (iii)). Cash payouts, required them to bid cash. liens on real estate, and exchanges of collateral may all serve as indubitable equivalents, meaning creditors had no right to Why does this matter? For secured creditors, bidding cash may be credit-bid if those or other alternatives sufficed.13 bad business or even impossible. Few creditors desire to sink new money into bankrupt ventures. Plus, creditors have their own cash In reaching this conclusion, the Third Circuit rejected the argument flow issues and policy limitations that may prevent them from bidding that subsection (ii) — a narrow provision — should control subsection cash in bankruptcy auction. (iii)14 — a catchall — despite the interpretive canon that specific provisions govern general ones.15 Looking to Varity Corp. v. Howe16 This sometimes provides third parties with opportunities to acquire for support—a Supreme Court case holding that a specific provision properties at auction at deep discounts, forcing secured creditors of ERISA § 502(a) did not limit a general one — the court said that to content themselves with returns far below the collateral’s full the Bankruptcy Code provides “no statutory basis to conclude that value. In contrast, if creditors are allowed to credit-bid, they can subsection (ii) is the only provision under which a debtor may step in and bid the amount of their lien.2 Often, they can take the propose to sell its assets free and clear of liens.”17 property without additional cash outlays, thus protecting themselves from being shortchanged by opportunistic third parties. Congress, the court reasoned, may have instead included “the indubitable equivalence prong of subsection (iii) to intentionally RadLAX tells us once and for all that, in Chapter 11 plans of leave open the potential for yet other methods of conducting reorganization, debtors cannot stop creditors from credit-bidding.3 asset sales, so long as those methods sufficiently protected the But how did we get here? The path begins in Chapter 11 of the secured creditor’s interests.”18 Since they are distinct alternatives, Bankruptcy Code4 and specifically in 11 U.S.C. § 1123 and 11 one section cannot govern the other. Furthermore, the court U.S.C. § 1129.5 Under Chapter 11, bankruptcy cases follow a “‘plan,’ concluded, allowing subsection (ii) to restrain subsection (iii) would typically proposed by the debtor, which divides claims against the cause “an outcome at odds with the fundamental function of the debtor into separate ‘classes’ and specifies the treatment each asset sale, to permit debtors to ‘provide adequate means for the class will receive. Generally, a bankruptcy court may confirm a plan’s implementation.’”19 Chapter 11 plan only if each class of creditors affected by the plan CRE Finance World Autumn 2012 44


CRE Finance World, Autumn 2012
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