I. Introduction
Today, the United States Supreme Court in RadLAX Gateway Hotel, LLC, et al. v. Amalgamated Bank unanimously1 affirmed the decision of the Seventh Circuit in In re River Road Hotel Partners, LLC2 that a secured creditor has the right to credit bid at a foreclosure sale of its collateral, even if such sale is conducted pursuant to a plan of reorganization. Specifically, the Supreme Court held that the debtors could not confirm a plan under the so-called cramdown provisions of the Bankruptcy Code where the debtors were seeking to sell the bank's collateral free and clear without allowing the bank to credit bid its secured claim at the sale.
The Supreme Court's decision resolved a circuit split between the Third and Fifth Circuits, on the one hand, and the Seventh Circuit, on the other hand. Both the Third Circuit in Citizens Bank of Penn. v. Phila. Newspapers, LLC (In re Philadelphia Newspaper, LLC)3 and the Fifth Circuit in Bank of N.Y. Trust Co., NA v. Official Unsecured Creditors' Comm. (In re Pacific Lumber Co.)4 had ruled that a debtor may, pursuant to a bankruptcy plan, sell the secured creditor's collateral free and clear of liens, and need not provide the secured creditor with a right to credit bid in the sale process, so long as the plan provides the secured creditor with the "indubitable equivalent" of its secured claim. The Seventh Circuit in River Road concluded that a secured creditor must be provided with the right to credit bid.
In affirming the Seventh Circuit's decision in River Road, the Supreme Court removed a cloud of uncertainty surrounding the ability of secured lenders to utilize credit bidding in the context of chapter 11 plans. Secured lenders may breathe a sigh of relief.
II. Background
The decisions in RadLAX, Philadelphia Newspapers, and Pacific Lumber Co., each arise under the "cramdown" provisions of Bankruptcy Code section 1129(b). That section permits a debtor (or other plan proponent) to confirm a chapter 11 plan over the objection of a class of creditors (such as secured creditors), so long as the plan (i) does not discriminate unfairly among classes of claims or interests and (ii) is fair and equitable with respect to those classes of claims or interests that have not accepted the plan.
Section 1129(b)(2)(A) provides that a plan is "fair and equitable" with respect to a class of secured claims if the plan provides that: (i) the secured creditors retain their liens and receive deferred cash payments equal to the present value of the lenders' secured interest in the collateral as of the effective date of the plan, and totaling at least the allowed amount of the creditors' secured claim; (ii) the collateral is sold free and clear of liens with the secured creditors having the opportunity to credit bid at the sale (absent specific cause to deny such right) and with the liens attaching to the proceeds of the sale; or (iii) the secured creditors realize the "indubitable equivalent" of their secured claims.5 The Bankruptcy Code does not define "indubitable equivalent," however, and examples in case law vary widely.
The chapter 11 debtors in RadLAX, owners of the Radisson Hotel at Los Angeles International Airport, had sought approval from the Bankruptcy Court of certain bid procedures that would have provided for the sale of the secured lender's collateral free and clear of the secured lender's lien, without permitting the secured lender to credit bid at the auction. The secured lender objected to the proposed bid procedures on the ground that they violated the cramdown requirements of section 1129(b)(2)(A) of the Bankrupcty Code. The Bankruptcy Court agreed with the secured lender that the debtors could only sell their assets free and clear of liens by proceeding under clause (ii) of section 1129(b)(2)(A), which expressly requires a sale to be subject to the credit bidding.6 The Seventh Circuit affirmed the decision of the Bankruptcy Court.7
III. The Supreme Court's Decision
The Supreme Court affirmed the decision of the Seventh Circuit.8 In a brief opinion delivered by Justice Scalia, the Court found nothing ambiguous about section 1129(a)(2)(A) of the Bankruptcy Code. Applying the well-established canon of statutory construction that the specific governs the general, the Supreme Court found 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. 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).9
The Supreme Court therefore concluded that the proper interpretation of the structure in section 1129(b)(2)(A) was that clause (i) provides the rule for plans under which the creditor's lien remains on the property, clause (ii) provides the rule for plans under which the property is sold free and clear of the creditor's lien, and clause (iii) is a residual provision covering dispositions under all other plans. The Supreme Court rejected the debtors' reading of section 1129(b)(2)(A), i.e., that a plan may be confirmed under clause (iii) without complying with the requirements of clause (ii), as "hyperliteral" and "contrary to common sense."10
Accordingly, the Supreme Court held that the debtors could not obtain confirmation of a chapter 11 cramdown plan that provides for the sale of collateral free and clear of the secured lender's lien, but does not permit such lender to credit bid at the sale. Having resolved the matter by statutory construction alone, the Supreme Court refused to enter the debate concerning the generalized statutory purpose of the Bankruptcy Code of protecting secured creditors, the relevance of pre-Code practices, and the pros and cons of credit bidding. Nonetheless, while avoiding policy arguments, the 3 Supreme Court did note, in a footnote, the importance of the right to credit bid to protect a secured creditor against the risk that its collateral will be sold at a depressed price, particularly in the case where the federal government is the secured creditor, which often lacks appropriations authority to bid cash.11
Footnotes
1 Justice Scalia delivered the opinion of the Supreme Court, in which all other justices joined, except Justice Kennedy, who took no part in the decision of the case.
2 651 F.3d 642 (2011). We prepared a Client Alert addressing the Seventh Circuit Court of Appeal's decision in River Road in June 2011, a copy of which can be viewed at http://www.paulhastings.com/assets/publications/1946.pdf .
3 599 F.3d 298 (3d Cir. 2010). We prepared a Client Alert addressing the Third Circuit Court of Appeal's decision in Philadelphia Newspapers in March 2010, a copy of which can be viewed at http://www.paulhastings.com/assets/publications/1554.pdf .
4 584 F.3d 229 (5th Cir. 2009).
5 See 11 U.S.C. § 1129(b)(2)(A).
6 See In re River Road Hotel Partners, LLC, Case No. 09 B 30029 (Bankr. N.D. Ill. Oct. 5, 2010).
7 See River Road Hotel Partners, LLC, et al. v. Amalgamated Bank, 651 F.3d 642 (2011).
8 RadLAX Gateway Hotel, LLC et al. v. Amalgamated Bank, 566 U.S. ____ (2012).
9 Id. at 7 (citing D. Ginsberg & Sons, Inc. v. Popkin, 285 U.S. 204, 208 (1932)).
10 Id. at 5.
11 Id. at 4 note 2.
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