• U.S. Supreme Court Requires "Credit Bidding" For Confirmation of Chapter 11 Plans
  • June 19, 2012 | Authors: Jonathan W. Hugg; William C. Price
  • Law Firms: Thorp Reed & Armstrong, LLP - Philadelphia Office ; Thorp Reed & Armstrong, LLP - Pittsburgh Office
  • Recently, the U.S. Supreme Court decided the RadLAXi case, which finally clarified that secured creditors are generally permitted to "credit bid" in connection with a sale being conducted as part of a chapter 11 "cramdown" plan.

    BACKGROUND

    RadLAX Gateway Hotel, LLC ("RadLAX") owned the Radisson Hotel at Los Angeles International Airport (LAX) and an adjacent lot contemplated to be a parking structure. RadLAX borrowed $142 million from Longview Ultra Construction Loan Investment Fund with Amalgamated Bank (the "Bank") serving as trustee, which was secured by substantially all of RadLAX's assets. Ultimately, RadLAX ran out of funds due to cost overruns on the project and filed for chapter 11 protection in the Bankruptcy Court for the Northern District of Illinois ("Bankruptcy Court").

    In connection with its bankruptcy, RadLAX proposed to sell substantially all of its assets free and clear of liens in an auction with an initial bid of $47.5 million (significantly below the $120 million still owing to the Bank). The sale procedures submitted by RadLAX mimicked the procedures approved in In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010), which barred "credit bidding" for a chapter 11 "cramdown" plan sale.

    The Bankruptcy Court and 7th Circuit Court of Appeals both denied RadLAX's sale and bid procedures motion holding, in essence, that secured lenders are generally permitted to "credit bid" their secured claims in all bankruptcy sales conducted in connection with a chapter 11 plan.

    A "cramdown" plan, in its simplest terms, is the debtor's last remaining option when its creditors reject the plan. The debtor is permitted to sell its assets in connection with a "cramdown" plan and, the Philadelphia Newspaper case, permitted the debtor to do so without permitting secured creditors the ability to "credit bid" due to a literal interpretation of a provision of the Bankruptcy Code, 11 U.S.C. ยง 1129(b)(2)(A).

    SUPREME COURT DECISION IN RADLAX

    The Supreme Court rejected the sale procedures that barred the Bank's "credit bidding" rights (and by extension the interpretation of the Third Circuit in Philadelphia Newspapers). The Supreme Court held that sale or bid procedures must allow "credit bidding" in order for debtors to proceed with sales or auctions of encumbered assets free and clear of liens (in a "cramdown" plan or otherwise). It is important to note, however, that courts may still deny "credit bidding" for cause.

    IMPLICATIONS OF THE DECISION

    This decision is significant because it removes any ambiguity on the "absolute" right of a secured creditor to "credit bid" in all scenarios absent a showing of cause. The RadLAX decision by the Supreme Court finally resolves the split between Philadelphia Newspapers from the Third Circuit and the RadLAX decision from the Seventh Circuit in favor of allowing secured creditors the ability to protect against the sale of their collateral without the typical right to "credit bid" the face amount of their secured debt. Secured creditors, debtors, and even statutory committees must now operate with the recognition of "credit bidding" rights in any sale submitted by the debtors absent a specific showing of cause to bar the "credit bidding." As such, RadLAX has shifted the "balance of power" in the bankruptcy context toward duly perfected secured lenders.


    [i] RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 2012 WL 1912197 (May 29, 2012)