Secured creditors had a big win in the Supreme Court this week. The Court ruled 8-0 Tuesday that debtors may not obtain confirmation of a Chapter 11 cramdown plan that provides for the sale of collateral free and clear of the bank's lien, but does not permit the bank to credit-bid at the sale.
In the opinion, Justice Antonin Scalia outlined the Bankruptcy Code's three alternative standards for determining if a Chapter 11 plan is "fair and equitable" to an objecting class of secured creditors. The alternatives are:
- The secured creditor retains its lien on the property and receives deferred cash payments.
- The property is sold free and clear of the lien -- subject to section 363(k) -- and the creditor receives a lien on the proceeds of the sale. (Section 363(k) provides, "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" - i.e., the creditor may credit-bid at the sale, up to the amount of its claim.)
- The plan provides the secured creditor with the 'indubitable equivalent' of its claim.
The case involved the purchase and redevelopment of the Radisson Hotel at the Los Angeles International Airport (LAX). To finance the purchase, the renovation of the hotel, and construction of the parking structure, the RadLAX Gateway Hotel, LLC, and RadLAX Gateway Deck, LLC (the debtors), obtained a $142 million loan from Longview Ultra Construction Loan Investment Fund. (Respondent Amalgamated Bank serves as Longview Ultra Construction's trustee.) The lenders obtained a blanket lien on all of the debtors' assets to secure the loan.
The project was more expensive than anticipated, and the debtors ran out of funds within two years, halting construction. The debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.
In 2010, the RadLAX debtors submitted a Chapter 11 plan to the bankruptcy court. Under the debtors' proposed auction procedures, Amalgamated would be forced to bid in cash instead of credit bidding. RadLAX anticipated that Amalgamated would object, so it tried to get the plan approved through the cramdown provision.
RadLAX claimed that its plan could satisfy the third clause by ultimately providing the bank with the 'indubitable equivalent' of its secured claim, in the form of cash generated by the auction. The Court disagreed, finding the debtors' interpretation of the provision to be "hyperliteral and contrary to common sense."
While the Court's holding makes it harder for bankrupt companies to complete reorganization, it makes the cramdown rules consistent among the circuits. Previously, the Seventh Circuit Court of Appeals ruled that the Bankruptcy Code allows a secured lender to credit bid, while the Third and Fifth Circuits held that there was no absolute right to credit bid when a Chapter 11 plan provides other protections for the secured lender, reports Bloomberg.
- RadLAX Gateway Hotel, LLC v. Amalgamated Bank (FindLaw's CaseLaw)
- Radisson at LAX Needs a New Bankruptcy Plan (Courthouse News)
- SCOTUS: Chapter 12 Tax Theory on Selling the Farm Buys the Farm (FindLaw's Supreme Court Blog)