The Supreme Court heard arguments yesterday in RadLAX Gateway Hotel over whether the Bankruptcy Code permits a debtor in a chapter 11 case to sell encumbered assets without providing its secured lenders an opportunity to credit bid their debt.
As previously described on this site, a circuit split arose last year, when the Seventh Circuit in River Road Hotel Partners, a companion case to RadLAX Gateway Hotel, declined to follow the Third Circuit’s 2010 decision in Philadelphia Newspapers. The debtor in River Road sought to rely on Philadelphia Newspapers in putting forward a plan of reorganization that proposed an auction of the secured lenders’ collateral, but would have expressly denied the lenders the right to credit bid.
Section 1129(b)(2)(A) of the Bankruptcy Code describes three different means by which a plan of reorganization can be found to be “fair and equitable” and thus capable of being confirmed without the consent of a secured lender class (i.e., “crammed down”):
(i) lender retention of liens securing the obligations and receipt of the present value of its secured claim,
(ii) sale of collateral free and clear of liens but subject to credit bidding, or
(iii) the realization by the creditor of the “indubitable equivalent” of its secured claim.
Notwithstanding the express reference in subsection (ii) of Section 1129(b)(2)(A) to the right to credit bid in connection with a sale “free and clear” of liens, the Third Circuit in Philadelphia Newspapers held that a sale “free and clear” could also take place without allowing the lenders to credit bid under subsection (iii), the “indubitable equivalent” prong. The Third Circuit concluded that the “plain meaning” of the use of the disjunctive “or” in the statute shows that subsection (ii) is not the “exclusive means” by which a secured lender’s collateral may be sold “free and clear” under a plan of reorganization and that, so long as the debtor or other plan proponent could show that the “indubitable equivalent” prong were being satisfied, the opportunity to credit bid need not be provided. The bankruptcy judge in River Road expressly rejected the reasoning of the Philadelphia Newspapers majority, and the Seventh Circuit unanimously affirmed.
The lawyers at yesterday’s oral argument faced a “hot bench”, as the justices sought to understand the particulars of the process of selling assets in chapter 11 cases, and the distinction between selling assets pursuant to a plan and asset sales outside of a plan. Somewhat surprisingly, the justices focused very little on whether the “plain meaning” of the disjunctive “or” in the statute mandated the result sought by the debtor in River Road / RadLAX, and grappled instead with the concept of “indubitable equivalence”, and whether it could be ever be realized through a sale process that did not permit the secured lender to credit bid. As Justice Alito somewhat inartfully but rather succinctly stated the issue:
“[I]f the [Secured Lenders] thought that what the judge would determine would indubitably provide the indubitable equivalent, then there wouldn’t be an issue here, right? The reason there’s an issue is because [the Secured Lenders] don’t think that what the judge will decide will indubitably provide the indubitable equivalent.”
An analysis focused on the practical difficulties of providing “indubitable equivalence” for secured lenders, rather than on the so-called “plain meaning” of a highly formalistic reading of the Bankruptcy Code, likely portends a result that will uphold the right to credit bid.