October Term, 2011
May 29, 2012
Today the Supreme Court issued one decision, described below, of interest to the business community.
Bankruptcy – Right to Credit Bid in Chapter 11
RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166 (previously discussed in the December 13, 2011 Docket Report).
In general, a bankruptcy plan may be confirmed only if all of the debtor’s secured creditors agree to the plan. But Section 1129(b) of the Bankruptcy Code allows the confirmation of a non-consensual plan—colloquially known as a “cramdown” plan—if the plan is deemed “fair and equitable.” 11 U.S.C. § 1129(b). To be confirmed over the objection of secured creditors, a cramdown plan must satisfy one of three conditions, each of which is set forth in a distinct sub-clause of Section 1129(b). Clause (i) requires, among other things, that the secured creditors’ lien survive the sale of the debtor’s property. Clause (ii) allows the lien to be released from the underlying property and attached instead to the proceeds of the sale, but requires that the plan comply with Section 363(k), which guarantees secured creditors the right to “credit bid,” i.e., to bid on the debtor’s property using the debt that they are owed to offset the purchase price if they win the auction. Clause (iii) requires that the plan provide the creditors with “the indubitable equivalent” of their claims.
The interaction of these clauses had divided the Courts of Appeals, which disagreed over whether a bankruptcy court could approve a cramdown plan as “fair and equitable” under clause (iii), even if the plan releases liens on the property in question without credit bidding, as clause (ii) would require. Today, in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, the Supreme Court resolved the question, holding that objected-to plans that release a property lien cannot be approved unless they permit credit bidding.
The RadLAX debtors proposed to auction certain property. The debtor argued that the court could approve the proposed sale, free and clear of property liens, because it provided objecting secured creditors with the ”indubitable equivalent” of their claims, even though it did not allow them to credit bid. The courts below refused to approve the plan, holding that the debtors could not obtain approval under the general “indubitable equivalence” standard in clause (iii) when seeking a result that was addressed more specifically in clause (ii).
In a unanimous opinion by Justice Scalia, the Supreme Court affirmed (without the participation of Justice Kennedy, who was recused). The Court found that selling the property free and clear of the creditors’ liens is “precisely . . . the disposition contemplated by clause (ii),” but that the prohibition on credit bidding meant that the plan did not satisfy clause (ii). Slip op. 5. Concluding that confirmation of the plan under clause (iii) would violate two canons of statutory interpretation—according to which a specific provision trumps a general one, and every provision must be given meaning—the Court held that clause (ii) governs “the requirements for selling collateral free of liens” and that the general standard in clause (iii) does not apply to matters specifically dealt with in clause (ii). Id. at 7.
The Court considered and rejected the debtors’ position that clauses (i) and (ii) establish safe harbors that will always be deemed to satisfy the general standard. The Court found that reading “surpassingly strange” (slip op. 7), in part because the general rule in such statutes is usually set forth first, not last. The Court read the section instead to mean that clause (i) sets “the rule for plans under which the creditor’s lien remains on the property,” clause (ii) “is 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.” Id. at 8.
Though the Court declined to make any broad pronouncements about the merits of credit bidding itself, concluding that that policy issue was irrelevant when the statute was clear, today’s decision shuts off one route for debtors to avoid credit bidding and thereby enhances the position of secured creditors in Chapter 11 reorganizations.
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