• Supreme Court Upholds the Rights of Secured Creditors to Credit-Bid
  • July 23, 2012 | Authors: Elizabeth J. Austin; Irve J. Goldman; Jessica Grossarth
  • Law Firms: Pullman & Comley, LLC - Stamford Office ; Pullman & Comley, LLC - Bridgeport Office
  • As the Connecticut Bankruptcy Beat previously reported, the Supreme Court recently agreed to consider whether a chapter 11 cramdown plan can provide for the sale of collateral free and clear of the secured liens, but bar secured creditors from “credit-bidding” at the sale. In an opinion delivered on May 29, 2012, the Supreme Court resolved this important question in a unanimous decision that secured creditors must always be offered the right to credit-bid in cramdown plans that seek to sell encumbered collateral. Redlax Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 5 (2012). 

    Traditionally, a plan of reorganization involving the sale of encumbered assets must allow secured creditors to compete against new cash-bidders by “credit-bidding” for the assets with the entire amount they are owed.  The right to credit bid is an important privilege to secured creditors under the Bankruptcy Code and is particularly valuable to undersecured creditors who seek some control over the collateral.  Yet in 2010, the Third Circuit ruled in In re Philadelphia Newspapers LLC, 599 F. 3d 298 (3d Cir. 2010) that credit-bidding rights could be circumvented so long as the secured creditors were given the “indubitable equivalent” of their secured claims through the sale.  The Seventh Circuit quickly challenged this assertion in In re River Road Hotel Partners, LLC, 651 F.3d 642 (7th Cir. June 28, 2011), and the Supreme Court was tasked with resolving the circuit split.

    Despite what the Debtors had claimed was a textual ambiguity in 11 U.S.C. § 1129, the Supreme Court concluded that taking away the rights of secured creditors to credit-bid was “hyperliteral and contrary to common sense.” Redlax Gateway Hotel, 566 U.S. at 5.  The Court declared that § 1129(b)(2)(A)(ii) is a detailed provision that spells out the requirements of selling collateral free of liens, while subsection (iii) is a broadly worded provision that says nothing about a sale.  Examining the section as a whole, the Court held that “the specific governs the general.”  Thus, debtors may not sell their property free of liens under § 1129(b)(2)(A) without allowing secured creditors the right to credit-bid, as required by clause (ii).  The Court took no position on whether its ruling was good policy, as “[t]he pros and cons of credit-bidding are for the consideration of Congress, not the Courts.”