RadLAX: Credit Bidding Is Cleared for Takeoff by U.S. Supreme Court
The U.S. Supreme Court in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, ___ S. Ct. ___, 2012 WL 1912197 (May 29, 2012), held that a debtor may not confirm a chapter 11 "cramdown" plan that provides for the sale of collateral free and clear of existing liens, but does not permit a secured creditor to credit-bid at the sale. The unanimous ruling written by Justice Scalia (with Justice Kennedy recused) resolved a split among the Third, Fifth, and Seventh Circuits. The RadLAX decision is important because it clarifies the application of section 1129(b)(2)(A) of the Bankruptcy Code and establishes that when collateral is sold free and clear of a creditor's liens under a plan, the creditor must be permitted, subject to the provisions of section 363(k) of the Bankruptcy Code, to bid on the assets using its outstanding secured debt.
As described in more detail below, the Supreme Court essentially concluded that section 1129(b)(2)(A)(i) is used for plans under which the creditor's lien remains on the property; section 1129(b)(2)(A)(ii) is the rule for plans under which the property is sold free and clear of the creditors lien; and section 1129(b)(2)(A)(iii) is a residual provision covering asset dispositions under all other plans—for example, one under which the secured creditor receives the property itself (i.e., the "indubitable equivalent" of its secured claim).
What is a Cramdown?
"Cramdown" is the procedure for approval of a nonconsensual chapter 11 plan where not all of the classes of creditors have agreed to the terms of the proposed plan. In particular, section 1129(b) of the Bankruptcy Code contains the applicable standards that must be met before the bankruptcy court can confirm a proposed plan despite the plan's rejection by a class of creditors whose rights will be impaired by the plan. These cramdown requirements for secured creditors are found in section 1129(b)(2)(A), which provides:
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.
Under clause (i), the secured creditor retains its lien on the property and receives deferred cash payments. Under clause (ii), the property is sold free and clear of the lien, "subject to section 363(k)," and the creditor's lien attaches to the proceeds of the sale. Section 363(k) provides that, "unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property." Finally, under clause (iii), the secured creditor realizes the "indubitable equivalent" of its claim.
RadLAX Gateway Hotel, LLC, and RadLAX Gateway Deck, LLC (collectively, the "Debtors"), purchased the Radisson Hotel at Los Angeles International Airport in 2007. The Debtors also purchased adjacent lots to the hotel on which the Debtors planned to build a parking structure. Within two years of obtaining financing for the refurbishment of the hotel and construction of the parking structure, the Debtors had run out of funds and were forced to halt construction. In August 2009, with more than $120 million outstanding, more than $1 million in interest accruing each month, and no additional funds available to complete the project, the Debtors filed for relief under chapter 11 in Illinois.
In 2012, the Debtors proposed a liquidating chapter 11 plan (the "Plan") in which they would dissolve and sell substantially all of their assets through an auction to the highest bidder. There was a "stalking horse bidder"—a potential purchaser who was willing to start the bidding—and the proceeds of the auction were to be used to fund the Plan, primarily by repaying the Debtors' secured creditor who loaned the Debtors money for the construction project (the "Secured Creditor"). The Debtors proposed to sell their property free and clear of the Secured Creditor's liens and repay the Secured Creditor with the sale proceeds. Rather than allowing the Secured Creditor to credit-bid under clause (ii) of section 1129(b)(2)(A), the Debtors argued that the approved auction procedures satisfied clause (iii) because providing cash generated by the auction represented the "indubitable equivalent" of the Secured Creditor's claim.
The Seventh Circuit disagreed and held in River Road Hotel Partners, LLC, et al. v. Amalgamated Bank, 651 F.3d 642 (7th Cir. 2011), that when a debtor proposes to sell assets subject to a security interest pursuant to a chapter 11 plan, the debtor must comply with subparagraph (i) or (ii) of section 1129(b)(2)(A). Specifically, the court of appeals ruled that the debtor must either: (i) sell the encumbered asset with the secured creditors retaining their liens; or (ii) sell the encumbered asset free and clear of liens, with the liens attaching to the sale proceeds, and permit the secured creditor to credit-bid as part of the sale. The Supreme Court agreed to hear the Debtors' appeal in December 2011 to resolve the circuit split on this issue.
The Supreme Court's Decision
The Supreme Court affirmed the Seventh Circuit's ruling. It concluded that the Debtors' reading of section 1129(b)(2)(A)—under which clause (iii) would permit exactly what clause (ii) prohibits—to be "hyperliteral and contrary to common sense."
In reaching this conclusion, the Supreme Court relied on a well-established canon of statutory interpretation: the specific governs the general. Writing for the unanimous court, Justice Scalia explained:
[C]lause (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).
RadLAX, 2012 WL 1912197, at *7 (internal citations and quotations omitted). Thus, the Supreme Court determined that when the conduct at issue falls within the scope of both provisions, the specific provision presumptively governs, whether or not the specific provision also applies to some conduct that falls outside the general provision. In reaching this conclusion, the Supreme Court noted that clause (ii) addresses a subset of cramdown plans and that clause (iii) applies to all cramdown plans, including all of the plans within the narrower description in clause (ii).
Implications of RadLAX
The Supreme Court's RadLAX ruling clarifies the parameters under which credit bidding must be allowed in connection with a chapter 11 plan. The Supreme Court's RadLAX ruling sets forth a clear framework for applying section 1129(b)(2)(A) and is consistent with the practice in bankruptcy cases that a secured creditor may use its secured debt as all or part of its bid to acquire the collateral subject to its lien.
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Kevyn D. Orr
Beth R. Heifetz
Daniel T. Moss
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