Canonized Credit-Bidding: The Supreme Court Unanimously Affirms Secured Creditor's Right to Credit-Bid at Free and Clear Sale in Plan
On May 29, 2012, the Supreme Court ruled 8-0 that a debtor could not confirm a plan over a secured creditor’s objection if the plan provided for the sale of the secured creditor’s collateral free and clear of liens, but did not provide the secured creditor with the option of credit-bidding at the sale. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166, 2012 U.S. LEXIS 3944 (U.S. May 29, 2012). Such a plan, the Supreme Court held, does not meet the statutory requirements for “fair and equitable” treatment of an objecting secured class in 11 U.S.C. § 1129(b)(2)(A).
Bankruptcy Code section 1129(b) requires that in order to confirm a chapter 11 plan of reorganization over the objection of an impaired class of creditors (i.e., in order to confirm a “cramdown” plan), the plan must be “fair and equitable” with respect to such class. 11 U.S.C. § 1129(b). As to an objecting secured creditor, which is often placed in its own class, the Code provides three options for fair and equitable treatment. Stated generally, these are: (i) allowing the secured creditor to retain its liens and providing it with deferred cash payments totaling the allowed amount of such claim; (ii) selling the property free and clear of liens, subject to Bankruptcy Code section 363(k), with the secured creditor’s liens attaching to the proceeds; or (iii) providing the secured creditor with “the indubitable equivalent” of its claim. See, 11 U.S.C. § 1129(b)(2)(A). Bankruptcy Code section 363(k) provides that unless the bankruptcy court orders otherwise, a secured creditor is allowed to “credit-bid” at a free and clear sale – that is, the secured creditor may bid on assets encumbered by its lien by using its debt as an offset against the purchase price. 11 U.S.C. § 363(k).
In RadLAX, the chapter 11 debtors proposed a plan that would dissolve the debtors and sell substantially all of their assets pursuant to a “Sale and Bid Procedures Motion.” The contemplated bid procedures were based on a stalking horse bid of $47.5 million, later increased to $55 million. The sale proceeds would fund the chapter 11 plan, primarily repaying the secured creditor, who was owed over $120 million. Importantly, the proposed bid procedures would not permit the secured creditor to credit-bid at the auction, and instead required the secured creditor to bid cash.
The bankruptcy court denied the debtors’ Sale and Bid Procedures Motion on the grounds that it was not fair and equitable to the secured creditor. The bankruptcy court certified the issue for direct appeal to the Seventh Circuit Court of Appeals, which affirmed. See, River Road Hotel Partners, LLC v. Amalgamated Bank, 651 F.3d 642 (7th Cir. 2011). The Supreme Court granted certiorari, likely to resolve a circuit split. The Third Circuit Court of Appeals, in In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010), had previously held that the “indubitable equivalent” option in 11 U.S.C. § 1129(b)(2)(A)(iii) allowed a debtor to confirm a cramdown plan based on a free and clear sale without providing the secured creditor with the right to credit-bid.
Justice Scalia authored the opinion of the Court, which is an exercise in statutory interpretation. The Court examined the three options for fair and equitable treatment of an objecting secured creditor set forth in clauses (i), (ii) and (iii) of section 1129(b)(2)(A). The Court noted that clause (ii) specifically deals with free and clear sales, and through the express incorporation of Bankruptcy Code section 363(k), requires that the secured creditor be allowed to credit-bid at such sales, unless the bankruptcy court orders otherwise. The Court stated that the debtors in RadLAX were seeking to implement a plan that did precisely what clause (ii) envisioned, without complying with the requirements of that clause. The Court rejected the debtors’ argument that the bid procedures were nonetheless permissible under the “indubitable equivalent” option in clause (iii) as “hyperliteral and contrary to common sense.”
In the Court’s view, this was “an easy case” that was resolved by the general/specific canon of statutory interpretation, pursuant to which a specific statutory provision governs over a general one. The Court found that the general language of clause (iii), though broad enough on its own to encompass a free and clear sale, does not apply to a free and clear sale because that situation is specifically dealt with in clause (ii). The Court stated that this was not an absolute rule, and it could be overcome by “textual indications that point in the other direction.” The Court found no such textual indications here. The Court also refrained from getting into an argument about the purposes of the Bankruptcy Code, pre-Code practices and credit-bidding, stating that pre-Code practices would only be relevant to the extent that there were textual ambiguities, which there were not, and that “the pros and cons of credit-bidding are for the consideration of Congress, not the Courts.”