CLIENT
ALERT
Supreme
Court Upholds Right to Credit-Bid in 363 Sales Embedded in
Reorganization Plans
by Richard L. Epling, Kerry A. Brennan and Alex Parachini
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. While many in the finance and bankruptcy space view the right of a secured creditor to credit-bid as sacrosanct and uncontroversial, several recent circuit court opinions suggested that credit-bidding was not required for a 363 sale in connection with a plan of reorganization so long as the debtor provided such creditor alternatively with the "indubitable equivalent" of its claim. The Supreme Court resolved any uncertainty in favor of the right of a secured creditor to credit-bid.
Debtors'
Plan Proscribed Credit-Bidding
In
2007, the debtors purchased the Radisson Hotel at Los Angeles
International Airport. To finance the purchase, renovation of the
hotel and construction of a parking garage, the debtors obtained a
$142 million loan, secured by a blanket lien on all of the debtors'
assets. Amalgamated Bank (the "Bank") served as trustee for the
loan. The debtors filed for bankruptcy in August 2009, with over
$120 million remaining unpaid on the loan. In 2010, the debtors
filed a plan of reorganization under Chapter 11. The proposed
procedures for the auction of the debtors' assets forbade the Bank
from "credit-bidding," that is, using the debt owed as a credit
against the bid price. Instead, the plan forced the Bank to bid
cash. Upon a challenge by the Bank, the bankruptcy court held that
the plan did not satisfy the requirements of Bankruptcy Code §
1129(b)(2)(A) and certified an appeal directly to the Seventh
Circuit. In June 2011, the Seventh Circuit affirmed, holding that §
1129(b)(2)(A) does not permit a debtor to sell an encumbered asset
free and clear of a lien without permitting the lienholder to
credit-bid. Its decision was in direct conflict with the Third
Circuit's 2010 decision in In re Philadelphia
Newspapers, 599 F.3d 298 (3d Cir. 2010), and the Fifth
Circuit's 2009 decision in In re Pacific Lumber
Co., 584 F.3d 229 (5th Cir. 2009) which had concluded
that credit-bidding was not required. The Supreme Court granted
certiorari.