The recently decided case of RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. ____ (2012), puts to rest a conflict among the Third, Fifth, and Seventh Circuits as to the right of secured creditors to credit bid at a proposed sale of their collateral under a plan of reorganization that the secured creditor opposes. The practice of credit bidding is codified in the Bankruptcy Code at 11 U.S.C. §363(k) and is the right of a secured creditor to bid the amount of its secured debt at a debtor’s sale of the creditor’s collateral in bankruptcy.
SUMMARY
On May 29, 2012, the U.S. Supreme Court unanimously held in RadLAX Gateway Hotel, LLC v. Amalgamated Bank1that a plan of reorganization that contemplates a sale of assets subject to validly perfected security interests cannot be “crammed down” over the objection of secured creditors who have not been afforded the right to credit bid for the assets.
BACKGROUND
The U.S. Supreme Court in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, ___ S. Ct. ___, 2012 WL 1912197 (May 29, 2012), held that a debtor may not confirm a chapter 11 "cramdown" plan that provides for the sale of collateral free and clear of existing liens, but does not permit a secured creditor to credit-bid at the sale. The unanimous ruling written by Justice Scalia (with Justice Kennedy recused) resolved a split among the Third, Fifth, and Seventh Circuits.
In a unanimous decision, on May 29, 2012, the Supreme Court of the United States upheld an important protection against “cramdown” afforded to lenders in Chapter 11 cases.RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. , No. 11-166 (May 29, 2012). In RadLAX, the Supreme Court held that a Chapter 11 debtor could not deprive a secured creditor of its right to credit bid for property to be sold under a plan of reorganization.
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).
In the recent case of RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 2012 WL 1912197 (May 29, 2012), the Supreme Court in a unanimous 8-0 opinion, delivered by Justice Scalia, held that the Bankruptcy Code statutory scheme mandates that secured creditors must be allowed to credit-bid in 363 sales of assets where the sale is incorporated into a plan of reorganization.
On May 29, 2012, the Supreme Court in In RadLAX Gateway Hotel, LLC (“RadLAX”) held that a Chapter 11 reorganization plan that proposes the sale of encumbered assets free and clear of liens must honor the secured creditor’s right to credit bid its claim in order to be confirmed under the “fair and equitable” standard of the Bankruptcy Code.
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.
The Court’s unanimous decision in RadLAX Gateway Hotel LLC v. Amalgamated Banksettles dispute over the credit-bid right, retaining this important creditor protection.