On June 22nd, the Federal Deposit Insurance Corporation ("FDIC") and the Treasury Department issued a final rule on the calculation of the maximum obligation limitation ("MOL"), as specified in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The MOL limits the aggregate amount of outstanding obligations that the FDIC may issue or incur in connection with the orderly liquidation of a covered financial company. The new rule is effective July 23, 2012.
The Issue
The issue is whether the insolvency of a borrower under a non-recourse loan can trigger recourse liability for itself and its “bad boy,” non-recourse carve-out guarantors.
The Issue
The issue is whether the insolvency of a borrower under a non-recourse loan can trigger recourse liability for itself and its “bad boy,” non-recourse carve-out guarantors.
The Bottom Line:
In a unanimous decision (with Justice Kennedy not participating), the Supreme Court issued a decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 2012 WL 1912197 (U.S. May 29, 2012), (“RadLAX”) in which it held that section 1129(b)(2)(A) of the Bankruptcy Code does not permit a debtor to “cram down” a plan of reorganization that provides for the sale of encumbered assets free and clear of liens at auction without permitting the lienholder to credit bid at such auction.
Occasionally we find a bankruptcy case that we know will be of interest to lenders, and this is one of them. I’m calling this one a “two-step” not just because it makes for a catchy title, but also because this is the second time we’ve seen this case, and this time the outcome is less favorable.
The United States Supreme Court, in the case of Radlax Gateway Hotel, LLC v. Amalgamated Bank (“Radlax”), ruled that secured creditors have the same right to credit bid in collateral sales under a plan of reorganization as they do in sales under Section 363 of the Bankruptcy Code (“Section 363 Sales”).
Whether a secured creditor has an absolute right to credit bid at a sale under a chapter 11 plan has been the subject of conflicting decisions rendered by the Third, Fifth and Seventh Circuits.1 The United States Supreme Court has resolved these inconsistent rulings with its decision in RadLAX Gateway Hotel, LLC, et al., v. Amalgamated Bank, 2 which affirmed the Seventh Circuit’s holding that a secured creditor has an absolute right to credit bid in a sale under a chapter 11 plan.
In Radlax Gateway Hotel, LLC v.
On May 29, 2012 the United States Supreme Court ruled that a plan of reorganization may not be confirmed over the objection of a secured creditor if the plan provides for the sale of collateral free and clear of the creditor’s lien, but does not permit the creditor to credit bid at the sale. The ruling resolved a conflict between a decision from Seventh Circuit Court of Appeals, which denied confirmation of such a plan, and decisions from the Third and Fifth Circuit Courts of Appeal, which approved such plans.
The United States Supreme Court emphatically upheld a secured creditor’s right to credit bid in bankruptcy cases. In RadLAX Gateway Hotel, et al. v. Amalgamated Bank, 566 U.S.___ (May 29, 2012), the Court found the case an "easy" one to resolve: when a secured creditor is denied the right to credit bid its debt in the sale of its collateral as a part of a bankruptcy plan, it will not receive the "indubitable equivalent" of its secured claim in the form of cash generated from the sale. The Court's unanimous decision should help restore certainty in lending.