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On May 29, 2012, the United States Supreme Court upheld a
secured creditor's absolute right to credit bid when a debtor
files a Chapter 11 plan proposing to sell the secured
creditor's collateral free and clear of the secured
creditor's liens. RadLAX Gateway Hotel, LLC v. Amalgamated
Bank, 566 U.S. ___ (2012). In just a little over one month
since oral argument, the Supreme Court resolved a conflict between
two circuit courts of appeal as to whether a plan could prohibit a
secured creditor from credit bidding on its collateral at a sale.
The Court's decision provides considerable assurance to lenders
that they will have the ability to credit bid (unless for cause the
bankruptcy court orders otherwise) in the event a debtor seeks to
sell collateral through a Chapter 11 plan.
In an opinion authored by Justice Scalia, eight justices
unanimously affirmed a decision of the Seventh Circuit1 that
created a split between the Seventh Circuit on the one hand and the
Third and Fifth Circuits on the other.
In RadLAX, the debtors' secured lender objected to
the Chapter 11 debtors' plan, which proposed to sell the
debtors' property free and clear of the lender's liens and
to repay the lender using the sale proceeds. The bidding procedures
proposed in connection with the plan attempted to prevent the
lender from credit bidding its debt at the auction. The debtors
claimed that the auction procedure provided the lender with the
"indubitable equivalent" of its claims because it would
receive proceeds of the auction. The Supreme Court noted that in
order for a plan to be confirmable, it must be "fair and
equitable with respect to each class of claims or interests that is
impaired under, and has not accepted, the plan." For a secured
claimant who has an impaired claim and who has not accepted a plan,
fairness may generally be met in one of three ways: (i) the
claimant's lien securing the claim is retained; (ii) the lien
is removed, and the claimant may credit bid on the now "free
and clear" property at auction; or (iii) the claimant realizes
the "indubitable equivalent" of the secured claim.
The debtors in RadLAX proposed a plan under which the
objecting lender's lien would be removed as in option (ii), but
the lender would not be permitted to credit bid. In this situation,
the lender would have to either wait to see what other bidders paid
through the auction process or would have to bid "real cash
money" through the auction process if it wanted to retain its
collateral. The Court indicated that this approach was "simply
a nonstarter" and held that such bid procedures could not
satisfy the requirements of the Bankruptcy Code.
By rejecting an interpretation "contrary to common
sense," the Supreme Court has reinstated some level of
predictability to sales proposed as part of a Chapter 11 plan.
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