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CRE Finance World, Autumn 2012

U.S. Supreme Court Holds That Bankruptcy Credit-Bidding May Not Be Denied and Resolves Circuit Split in Favor of Secured Creditors Similarly, in In re Pacific Lumber Co., the Fifth Circuit found that With its decision in RadLAX, the Court put an end to the debate. secured creditors had no right to credit-bid at a sale.20 Stressing In a unanimous opinion29 that stands out for its brevity and clarity, substance over form, the court read Bankruptcy Code § 1129(b) the Court stated that secured creditors do have a right to credit-bid (2)(A) flexibly, concluding that a debtor need only satisfy one of based on a simple statutory construction of § 1129(b)(2)(A).30 the three requirements to be fair and equitable. If a debtor’s plan Describing the debtors’ reading of § 1129(b)(2)(A), as adopted by provided the creditor with the indubitable equivalent of its claim, the Third and Fifth Circuits, as “hyperliteral and contrary to common the creditor had no right to credit-bid. sense,” the Court instead applied the interpretative canon that the specific governs the general — the very canon rejected by the Like Philadelphia Newspapers, the court in Pacific Lumber held Third Circuit.31 Noting that § 1129(b)(2)(A)(ii) applies specifically that the statute’s use of “or” meant that it provided debtors with to sales of secured assets while § 1129(b)(2)(A)(iii) applies to all three alternatives.21 And since the statute prefaced them with the cramdown plans generally, the Court held that subsection (ii) must word “includes,” the court concluded that these alternatives were take effect when there is a sale of secured assets in order to give “not even exhaustive.”22 There may be times when none of the secured creditors a right to credit-bid.32 Only when subsection (ii) options provided a fair and equitable result, at which point debtors does not apply will subsection (iii) come into play as an option to would need to propose yet other ways to satisfy the Bankruptcy provide a secured creditor with the indubitable equivalent of its claim. Code.23 Under Pacific Lumber’s facts, the court nevertheless found that the debtor did not need to propose additional options; instead, Notably, the Court’s opinion avoids taking a stand on related by paying the secured creditor the cash value of the collateral, the bankruptcy issues, such as whether credit-bidding supports the debtor gave it the indubitable equivalent of its claim.24 This was goals of the bankruptcy system.33 Those issues, the Court says, true, according to the court, even if the secured creditor “forfeited are for Congress to decide.34 What the Court does take a stand the possibility of later increases in the collateral’s value,” since the on is nevertheless important — that secured creditors have a right “Bankruptcy Code . . . does not protect a secured creditor’s upside to credit-bid at bankruptcy auctions. For creditors that want to potential; it protects the ‘allowed secured claim.’”25 protect their collateral and keep their cash, this is a decision they can stand behind. In issuing their decisions, the Third and Fifth Circuits went against the clear weight of authority at the time. Bankruptcy courts in 1 RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. ____ places as diverse as New York, Florida, California, Oregon, and (2012). Pennsylvania had all ruled that Bankruptcy Code § 1129(b)(2)(A) 2 RadLAX, 566 U.S. at 3. gave secured creditors a right to credit-bid at auction.26 The New 3 Id. at 10. York court in In re Kent Terminal Corp. stated, for example, that “if 4 11 U.S.C.§ 101 et seq. (the “Bankruptcy Code”). a plan proposes the sale of a creditor’s collateral free and clear of 5 See generally 11 U.S.C.§ 1123, 11 U.S.C.§ 1129. liens, the lienholder has the unconditional right to bid in its lien.”27 6 RadLAX, 566 U.S. at 2. Likewise in In re SunCruz Casinos, LLC, the Florida court held that 7 11 U.S.C.§ 1129(b). a debtor’s attempts to eliminate credit-bidding violated the plain language of § 1129(b)(2)(A)(ii) which expressly gave creditors 8 11 U.S.C. § 1129(b)(2)(A)(i). that right.28 9 11 U.S.C. § 1129(b)(2)(A)(ii). 10 11 U.S.C.§ 1129(b)(2)(A)(iii). The Seventh Circuit agreed with the bankruptcy courts in re 11 In re Philadelphia Newspapers, LLC, 599 F.3d 298, 305 (3d. Cir. 2010). River Road Hotel Partners, LLC, a 2011 case that declined to 12 Id. follow Philadelphia Newspapers and Pacific Lumber and upheld 13 Id. at 311. a secured lender’s right to credit-bid when property is sold under 14 Id. at 307. § 1129(b)(2)(A). The resulting circuit split helped ensure Supreme 15 Id. Court attention to the matter. 16 Varity Corp. v. Howe, 516 U.S. 489 (1996). 17 In re Philadelphia Newspapers, LLC, 599 F.3d at 308. A publication of Autumn issue 2012 sponsored by CRE Finance World Autumn 2012 45


CRE Finance World, Autumn 2012
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