Supreme Court Sides With Secured Lenders: 'Credit Bidding' Affirmed In Plan Context
The Business Advisor
February 21, 2013
Secured lenders can breathe a sigh of relief because of a Supreme Court decision that affirmed their ability to “credit bid” on collateral, up to the full amount of the debt, in a sale pursuant to a plan of reorganization. In RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S.Ct. 2065 (2012), decided on May 29, 2012, the Court held that a plan of reorganization providing for the sale of assets subject to perfected security interests cannot be “crammed down” over a non-consenting secured creditor who has not been given the opportunity to credit bid — that is, to forgive all or part of the debt owed, rather than pay cash — on the collateral. The decision cleared up a circuit split between the Seventh Circuit Court of Appeals, which sided with secured creditors, and the Third and Fifth Circuits, which had held that section 1129(b)(2)(A)(iii) of the Bankruptcy Code permits the sale of collateral under a reorganization plan even when secured creditors are not permitted to credit bid. Although the Supreme Court did not expressly announce an “absolute right” to credit bid—the practice may still be denied for “cause,” perhaps where it would chill other bidders or where several assets are sold as a package—the decision is still a major victory for secured creditors, especially those who lack easy access to cash, such as the U.S. government, lenders on syndicated or securitized loans, and even smaller lenders in tight credit markets. One group sure to benefit from the decision is mortgage lenders in single asset realty cases.
In deciding RaxLAX, the Court addressed an inconsistency in the Bankruptcy Code. In asset sales outside of a plan, unless the bankruptcy court orders otherwise, a secured creditor retains the right to credit bid. 11 U.S.C. § 363(k). Section 363(k) is intended to protect secured creditors from lowball sales. If the cash price offered for the collateral is not high enough, the creditor can simply credit bid and walk away with the collateral. In contrast, when a debtor proposes to sell collateral under a chapter 11 plan, the Bankruptcy Code provides a mechanism to “cram down” the plan over a non-consenting secured creditor. A “cram down” may occur so long as the plan is “fair and equitable” to the non-consenting creditor. Section 1129(b)(2)(A) sets forth three alternative methods by which a Chapter 11 plan can be made “fair and equitable” to secured creditors: (i) the creditor receives the collateral, (ii) the creditor is permitted to credit bid at a sale of the collateral, or (iii) the creditor receives the “indubitable equivalent” of its collateral. The question before the RadLax Court was whether a sale without credit bidding provided the creditor the “indubitable equivalent” of its secured claim.
Justice Scalia, writing for the unanimous Court, called RadLAX an “easy case” based on the well established statutory canon of construction that “the specific governs the general.” Justice Scalia reasoned that because clause (ii) in section 1129(b)(2)(A) is a “detailed provision that spells out the requirements for selling collateral free of liens, while clause (iii) is a broadly worded provision that says nothing about such a sale,” the language in clause (iii) would not be held to apply to matters dealt with in clause (ii). Thus, debtors may not sell their property free and clear of liens under a plan of reorganization without allowing secured creditors the ability to credit bid provided for in clause (ii).
Although the RadLAX opinion purported to rely solely on statutory analysis and expressly declined to consider the policy arguments behind credit bidding—concluding that those are best left to Congress—the end result is supported by practical and equitable considerations. The decision eliminates the inherent uncertainty for secured creditors that often results from a reliance on judicial valuation of collateral in asset sales under a bankruptcy plan. The decision is also important because it reaffirms well-settled guidelines for statutory construction of the Bankruptcy Code. As one expert noted, however, the “plain meaning” relied upon by the Supreme Court is the “same plain meaning that led the Court of Appeal for the Third Circuit to the exact opposite result.” Thus, practitioners should be mindful that the Bankruptcy Code is best understood as a system; reading individual provisions in isolation will rarely yield the correct interpretation.