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Supreme Court heard arguments yesterday in RadLAX Gateway Hotel over
whether the Bankruptcy Code permits a debtor in a chapter 11 case to sell
encumbered assets without providing its secured lenders an opportunity to
credit bid their debt.
previously described on this site, a circuit split arose last year, when
the Seventh Circuit in River Road Hotel Partners, a companion case to RadLAX
Gateway Hotel, declined to follow the Third Circuit's 2010 decision in Philadelphia
Newspapers. The debtor in River Road sought to rely on Philadelphia
Newspapers in putting forward a plan of reorganization that proposed an
auction of the secured lenders' collateral, but would have expressly denied the
lenders the right to credit bid.
Section 1129(b)(2)(A) of the Bankruptcy Code describes
three different means by which a plan of reorganization can be found to be
"fair and equitable" and thus capable of being confirmed without the consent of
a secured lender class (i.e., "crammed down"):
(i) lender retention of liens securing the obligations
and receipt of the present value of its secured claim,
(ii) sale of collateral free and clear of liens but
subject to credit bidding, or
(iii) the realization by the creditor of the "indubitable
equivalent" of its secured claim.
Notwithstanding the express reference in subsection (ii)
of Section 1129(b)(2)(A) to the right to credit bid in connection with a sale
"free and clear" of liens, the Third Circuit in Philadelphia Newspapers
held that a sale "free and clear" could also take place without allowing the
lenders to credit bid under subsection (iii), the "indubitable equivalent"
prong. The Third Circuit concluded that the "plain meaning" of the use of
the disjunctive "or" in the statute shows that subsection (ii) is not the
"exclusive means" by which a secured lender's collateral may be sold "free and
clear" under a plan of reorganization and that, so long as the debtor or other
plan proponent could show that the "indubitable equivalent" prong were being
satisfied, the opportunity to credit bid need not be provided. The
bankruptcy judge in River Road expressly rejected the reasoning of the Philadelphia
Newspapers majority, and the Seventh Circuit unanimously affirmed.
Read this article in its entirety at Kelley Drye &
Warren LLP's Bankruptcy
Law Insights blog
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