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
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