United States Supreme Court Approves Credit-Bidding in the RADLAX Case:
On May 29, 2012, the United States Supreme Court in a unanimous 8-0 decision (in which Justice Kennedy did not participate in the decision) ruled that a secured creditor cannot be denied the right to credit-bid in a sale involving property and other assets as part of a bankruptcy reorganization plan, thereby affirming the decision of the Seventh Circuit Court of Appeals. The majority decision was written by Justice Antonin Scalia, who held that that under plain language of the statute – Section 1129(b)(2)(A) of the Bankruptcy Code – a debtor may not obtain confirmation of a chapter 11 plan that provides for the sale of collateral of a secured lender free and clear of the lender’s lien but at the same time precludes the lender from credit bidding at the sale. This opinion is in direct contrast to the majority opinion issued in 2010 by the Third Circuit Court of Appeals in the Philadelphia Newspaper case.
Section 1129(b)(2)(A) of the Bankruptcy Code permits a debtor to confirm and “cram down” a plan over a class of secured creditor’s objection if the plan provides (i) the secured creditor may retain its lien on the property and receive deferred cash payments under Section 1129(b)(2)(A)(i); (ii) the debtors may sell the property free and clear of the liens subject to section 363(k) under Section 1129(b)(2)(A)(ii), or (iii) the plan provides the secured creditor with the “indubitable equivalent” of its claim under Section 1129(b)(2)(A)(iii). The Debtor in Radlax argued that their plan that precluded credit bidding by the secured lender nevertheless could be approved because after the sale the Debtors would be providing the secured lender with the proceeds of the sale which proceeds constituted the “indubitable equivalent” of its secured claim. The Court rejected this argument as “hyperliteral” and “contrary to common sense.” In this regard, the Court stated;
““[I]t is a commonplace of statutory construction that the specific governs the general.” Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384 (1992). That is particularly true, where, as in § 1129(b)(2)(A), “Congress has enacted a comprehensive scheme and has deliberately targeted specific problems with specific solutions.” Varity Corp. v. Howe, 516 U.S. 489, 519 (1996) (Thomas, J. dissenting); see also HCSC-Laundry v. United States, 450 U.S. 1, 6 (1981) (per curiam) (the specific governs the general “particularly when the two are interrelated and closely positioned, both in fact being parts of [the same statutory scheme]”).”
The Court further stated:
“Of course the general/specific canon is not an absolute rule, but is merely a strong indication of statutory meaning that can be overcome by textual indications that point in the other direction. The debtors point to no such indication here. Once can conceive of a statutory scheme in which the specific provision embraced within a general one is not superfluous, because it creates the so-called safe harbor. The debtors effectively contend that that is the case here – clause (iii) (“indubitable equivalent”) being the general rule, and clauses (i) and (ii) setting forth procedures that will always, ipso facto, establish an “indubitable equivalent,” with no need for judicial evaluation. But the structure here would be a surpassingly strange manner of accomplishing that result – which would normally be achieved by setting forth the “indubitable equivalent” rule first (rather than last), and establishing the two safe harbors as provisos to that rule. The structure her suggests, to the contrary, that (i) is the rule for plans under which the creditor’s lien remains on the property, (ii) is the rule for plans under which the property is sold free and clear of the creditor’s lien, and (iii) is a residual provision, covering dispositions under all other plans – for example, one under which the creditor receives the property itself, the “indubitable equivalent” of its secured claim. Thus, debtors may not sell their property free of liens under § 1129(b)(2)(A) without allowing lienholders to credit-bid, as required by clause (ii).”
The Court thus held that when the conduct at issue falls under both provisions, then the more specific provision – here being Section 1129(b)(2)(A)(ii) – governs. The Debtor attempted to argue that the Court of Appeals conflated the bidding procedures and that the Court should send the matter back to the bankruptcy judge to pursue the auction. The Debtor, in essence, was attempting to distinguish between the bid procedures and the results of the auction at the confirmation stage of the plan to justify another bite at the apple. The Court dismissed this argument as a “nonstarter” and “irrelevant.” Finally, the Court dismissed the parties’ arguments about the purposes of the Bankruptcy Code, pre-Code practices and the merits of credit-bidding. According to the Court: ‘[N]othing in the generalized statutory purpose of protecting secured creditors can overcome the specific manner of that protection which the text of § 1229(b)(2)(A) contains.” While acknowledging that such pre-Code practices can be relevant to the interpretation of ambiguous text, because the Court found that there was no ambiguity with the text at issue, consideration of such pre-Code practices was not a relevant consideration. “And the pros and cons of credit-bidding are for the consideration of Congress, not the courts.”
A full copy of the opinion is attached to this email for your review.
Judith Greenstone Miller
Jaffe Raitt Heuer & Weiss, P.C.
Chair, Legislation Subcommittee
Business Law Section
American Bar Association