Supreme Court Indubitably Grapples With Credit Bidding

The 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. 

As 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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