A Preview of the Supreme Court's Decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank

Professor Kenneth Klee previews the issues that the U.S. Supreme Court will be addressing in the RadLAX Gateway Hotel decision, most specifically whether creditors holding liens on auctioned assets have the right to credit bid their claims at the auction. In resolving this matter, the Supreme Court likely will balance textualism against the legislative history and constitutional precedents recognizing the importance of the right to credit bid.

Excerpt:

In RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166, the Supreme Court of the United States will address consolidated appeals arising from two Seventh Circuit cases involving two sets of debtors that proposed chapter 11 plans that would auction off their respective assets to the highest bidder subject to a stalking horse bid. The issue to be decided involves whether creditors holding liens on the auctioned assets have the right to credit bid their claims at the auction. In resolving this question, the Supreme Court will consider provisions of the Bankruptcy Code providing for credit bidding in sales made outside the context of a plan, unless the court orders otherwise for cause.

Credit Bidding in Chapter 11 Cramdown Plans

When a debtor proposes to sell a secured creditor's collateral outside of a chapter 11 plan, Bankruptcy Code section 363(k) allows the secured creditor to credit bid its secured claim unless the court orders otherwise for cause. See 11 U.S.C. § 363(k) [an annotated version of this statute is available to lexis.com subscribers]. If a debtor proposes to sell a secured creditor's collateral pursuant to a chapter 11 plan (whether through an auction, a private sale, or otherwise), the secured creditor generally must vote to accept the treatment of its allowed secured claim under the plan or must hold a secured claim in a class that is unimpaired under the plan. See 11 U.S.C. §§ 1124 [annotated version] & 1129(a)(8) [annotated version] . Even if these requirements are not satisfied, a debtor can still sell a secured creditor's collateral free and clear under a non-consensual "cramdown" plan under Bankruptcy Code section 1129(b), provided that the plan is "fair and equitable." See 11 U.S.C. § 1129(b)(1). Bankruptcy Code section 1129(b) provides, in relevant part:

(b) (1) . . . the court, on request of the proponent of the plan, shall confirm the plan . . . if the plan . . . is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.

(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:

(A) With respect to a class of secured claims, the plan provides-

(i) (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;

(ii) 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

(iii) for the realization by such holders of the indubitable equivalent of such claims.

As described below, the Fifth and Third Circuits have interpreted the three prongs of section 1129(b)(2)(A) as disjunctive "alternatives" that do not provide a secured creditor an absolute right to credit bid in a sale effectuated through a cramdown plan. The Seventh Circuit, in contrast, held that application of the section 1129(b)(2)(A)(ii) credit bid right is mandatory if a sale free and clear of a secured creditor's lien is proposed in a cramdown context, creating a split among the circuits. The Supreme Court granted certiorari in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166, to resolve the split and has scheduled oral argument for April 23, 2012.

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