RadLAX: No Credit Bidding – No Confirmation

The impact of the RadLAX decision is that debtors will have fewer options to reorganize under Chapter 11.
United States Finance and Banking
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On May 29, 2012, in a case argued by Perkins Coie Bankruptcy attorneys, the U.S. Supreme Court held that a Chapter 11 plan involving the sale of collateral free of liens could be confirmed over a secured creditor's objection only by allowing the secured creditor to bid its debt (i.e., credit bid) at the sale pursuant to Section 1129(b)(2)(A)(ii) of the Bankruptcy Code.  The Court's decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166, 2012 WL 1912197 (U.S. May 29, 2012), resolves a split among the circuit courts regarding the proper interpretation of the secured creditor cram-down provision of the Bankruptcy Code, 11 U.S.C. § 1129(b)(2)(A).  Cf. River Road Hotel Partners, LLC v. Amalgamated Bank, 651 F.3d 642 (7th Cir. 2011), aff'd sub nom. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166, 2012 WL 1912197 (U.S. May 29, 2012); In re Phila. Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010); Pacific Lumber Co. v. Official Unsecured Creditors' Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. 2009).

In 2007, RadLAX Gateway Hotel, LLC and RadLAX Gateway Deck, LLC (the "Debtors") obtained a loan from Longview Ultra Construction Loan Investment Fund (with Amalgamated Bank serving as trustee, the "Secured Creditor") in the amount of $142 million to finance the purchase of the Radisson Hotel at Los Angeles International Airport ("LAX"), to renovate the hotel and to cover construction costs related to the building of a parking structure adjacent to the hotel.  Two years into construction of the parking structure, the Debtors ran out of funds and the Secured Creditor refused to advance additional funds to complete the project.  By August 2009, the Debtors  owed more than $120 million to the Secured Creditor, and the Debtors retained Perkins Coie to file voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.

The Debtors proposed a Chapter 11 plan of reorganization involving the sale of substantially all of their assets at a public auction pursuant to bid procedures that did not allow the Secured Creditor to credit bid (but did allow it to bid cash) at the sale.  The Debtors sought to cram down the plan over the Secured Creditor's objection by providing it with essentially all of the proceeds from the sale as the "indubitable equivalent" of its claim pursuant to clause (iii) of § 1129(b)(2)(A).  The Bankruptcy Court for the Northern District of Illinois rejected the Debtors' proposed bid procedures on the grounds that they did not comply with clause (ii) of § 1129(b)(2)(A), which provides secured creditors the right to credit bid when their collateral is sold under a plan.  The Bankruptcy Court's decision was affirmed on direct appeal to the U.S. Court of Appeals for the Seventh Circuit, and the Supreme Court granted certiorari.

The Supreme Court held that any Chapter 11 plan that proposes the sale of collateral free of liens may only be confirmed under clause (ii) of § 1129(b)(2)(A), which permits a secured creditor to credit bid at the sale.  Applying the canon of statutory construction that a specific provision will control a more general provision within the same statute, the Court rejected the Debtor's argument that such a plan may alternatively be confirmed without credit bidding by providing the secured creditor with the "indubitable equivalent" of its claim under clause (iii) of § 1129(b)(2)(A).  The Court reasoned that "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."  RadLAX Gateway Hotel, 2012 WL 1912197, at *5.  Because the Debtors' plan did not allow the Secured Creditor to credit bid, the plan could not be confirmed under § 1129(b)(2)(A).

The impact of the RadLAX decision is that debtors will have fewer options to reorganize under Chapter 11 and that secured lenders will have greater leverage in negotiating with distressed borrowers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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