June 4, 2012
Previously published on May 31, 2012
Two years ago we published an alert about the decision of the United States Court of Appeals for the Third Circuit in In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010). That case held that in a sale of a debtor's assets under a Chapter 11 bankruptcy plan of reorganization, the debtor could prohibit credit bidding by secured creditors. Now the Supreme Court of the United States has rejected the reasoning behind that holding and ruled that under normal circumstances a secured creditor's right to credit bid cannot be taken away by a plan's bidding structure. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166 (U.S. May 29, 2012) ("Amalgamated Bank").
Amalgamated Bank involved a failed construction loan for hotel facilities at the Los Angeles airport. The debtor filed a Chapter 11 petition in Chicago, along with a Chapter 11 petition for a related entity in Chicago, and their cases were jointly administered. Each debtor later filed reorganization plans calling for the sale at auction of substantially all their assets, free and clear of all liens, and each disclosed that it had a "stalking horse" bidder in place. As in Philadelphia Newspapers, the debtors proposed bidding procedures that would forbid credit bidding for the assets by the secured creditor. The Bankruptcy Court sustained the secured creditor's objection to this, finding persuasive Judge Ambro's dissent in Philadelphia Newspapers, and the Court of Appeals for the Seventh Circuit affirmed on the same grounds. The conflicting court of appeals decisions led the Supreme Court to agree to hear the case.
In an 8-0 decision (Justice Kennedy did not participate), the Supreme Court affirmed the Seventh Circuit's judgment. Writing for the Court, Justice Scalia dismissed the debtor's use of the "indubitable equivalent" prong of the secured creditor "cramdown" provisions of the Bankruptcy Code (11 U.S.C. § 1129(b)(2)(A)(iii)) to bar credit bidding by a secured creditor as "hyperliteral and contrary to common sense." (Slip Op. at 5.) He concluded, as had Judge Ambro in Philadelphia Newspapers, that the specific terms of another cramdown prong, which expressly permits credit bidding (Subsection (A)(ii)), applied to a free and clear auction sale. The more general "indubitable equivalent" prong of cramdown did not independently override the other more specific cramdown statutory provisions. The opinion also rejected the debtor's argument that Subsection (A)(ii) was "procedural" while Subsection (A)(iii) was "substantive," calling it "quite beside the point" (Slip Op. at 9), and dismissed an argument that there is a distinction between approval of bidding procedures and plan confirmation as "irrelevant." (Id.)
The Amalgamated Bank decision does not answer all questions that could arise about sales under plans. For example, Section 363(k) of the Code, which is incorporated in the free and clear sale cramdown subsection of Code Section 1129, expressly provides that a secured creditor's right to credit bid is not absolute. The opinion gives no guidance on what might cause a secured creditor to lose that right, and the issue is left for future cases. The decision does, however, deal a death blow to plan proponents who seek to follow the Philadelphia Newspapers method of taking away credit bidding rights. Secured creditors (and their lawyers) no longer need to worry about whether their efforts to "write around" the Philadelphia Newspapers result will be enforced by a bankruptcy court.
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