High Court: Debtor May Not Sell Property Free Of Lien; Must Allow Credit-Bidding

WASHINGTON, D.C. - The U.S.Supreme Court today affirmed that a debtor company may not obtain confirmation of a nonconsensual Chapter 11 plan that permits the debtor to sell collateral free and clear of a creditor bank's lien without permitting the bank to credit-bid at the sale (RadLAX Gateway Hotel LLC v. Amalgamated Bank, No. 11-166, Chapter 11, U.S. Sup.)( subscribers may access Supreme Court briefs for this case).

Justice Antonin Scalia wrote for the court that the cramdown plan was not "fair and equitable" with respect to the bank's secured claim pursuant to 11 U.S. Code Section 1129(b)(2)(A)'s exception to the general rule that a bankruptcy court may confirm a Chapter 11 plan only if each class of creditors affected by the plan consents.

Cramdown Plan

RadLAX Gateway Hotel LLC and RadLAX Gateway Deck LLC (collectively, RadLAX) filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Illinois.   Under the plan, RadLAX sought to auction its assets to the highest bidder and to use the sales proceeds to repay creditor Amalgamated Bank.  The proposed auction procedures did not permit the bank to bid for the property using the debt it was owed to offset the purchase price, which is known as "credit-bidding."  Rather, the bank would be required to bid cash.

Amalgamated Bank opposed RadLAX's Chapter 11 reorganization plan on grounds that it was not fair and equitable to secured creditors.The Bankruptcy Court ruled that the planwas unconfirmable under Section 1129(b)(2)(A), and a panel of the Seventh Circuit U.S. Court of Appeals affirmed the Bankruptcy Court's ruling.  RadLAX filed a petition for a writ of certiorari on Aug. 5.

In affirming, the Supreme Court ruled that the cramdown plan did not satisfy any of three requirements necessary for such a plan to be "fair and equitable" with respect to the nonconsenting creditor's claim. The plan did not satisfy Section 1129(b)(2)(A)(ii) because clause (ii) expressly forecloses the possibility of a sale without credit-bidding.  Moreover, the plan did not satisfy Section 1129(b)(2)(A)(iii), which provides "for the realization by [the secured creditors] of the indubitable equivalent of [their secured] claims."

General/Specific Canon

Although clause (iii) does not expressly foreclose the possibility of a sale without credit-bidding, it is not satisfied by providing the bank with the "indubitable equivalent" of its secured claim in the form of cash generated by the auction, the court concluded.

Justice Scaliawrotethat a "reading of §1129(b)(2)(A)-under which clause (iii) permits precisely what clause (ii) pro­scribes-[is] hyperliteral and contrary to common sense," relying on the canon of statutory interpretation that "the specific governs the general."

"Here, clause (ii) is a detailed provision that spells out the requirements for selling collateral free of liens, while clause (iii) is a broadly worded provision that says nothing about such a sale.  The general/specific canon explains that the 'general language' of clause (iii), 'although broad enough to include it, will not be held to apply to a matter specifically dealt with' in clause (ii)," Justice Scalia wrote.

The court rejected RadLAX's argument that clause (iii) is the general rule and that clauses (i) and (ii) establish safe harbors.

"[N]othing in the generalized statutory purpose of protecting secured creditors can overcome the specific manner of that protection which the text of §1129(b)(2)(A) contains," Justice Scalia wrote.

All of the justices joined in the opinion, except Justice Anthony Kennedy, who took no part in the decision.

RadLAX is represented by David Neff, Brian A. Audette and Eric E. Walker of Perkins Coie in Chicago.  Amalgamated is represented by Adam A. Lewis of Morrison & Foerster in San Francisco, Norman S. Rosenbaum of the firm's New York office, John W. Costello of Edwards Wildman Palmer in Chicago and Deanne E. Maynard, Brian R. Matsui and Marc A. Hearron of Morrison & Foerster in Washington.

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