On May 29, 2012, the U.S. Supreme Court decided the well-monitored appeal in RadLAX Gateway Hotel, LLC, et al. v. Amalgamated Bank, where a chapter 11 debtor appealed the ruling of Seventh Circuit Court of Appeals that a debtor may not confirm a cramdown plan, proposing to sell encumbered assets free and clear of liens, without permitting the secured lender with liens on the encumbered assets to bid its secured claim towards the purchase price of the assets being sold.
In as much as the underlying facts of the RadLAX opinion have been discussed in earlier blogs on this site, only a brief summary of the facts will be provided. In 2007, RadLAX purchased the Radisson Hotel at Los Angeles International Airport, together with an adjacent lot on which RadLAX planned to build a parking structure. To finance the purchase, renovation and construction costs, RadLAX obtained a $142 million loan from Longview Ultra Construction Loan Investment Fund (Longview), for which Amalgamated Bank (the named Appellee) served as the trustee. Within 2 years after acquisition, RadLAX ran out of funds to complete its renovation and construction project, but still owed $120 million to Longview for the original loan. Chapter 11 bankruptcy appeared to be the only option, and, in 2009, RadLAX took it.
In 2010, during the bankruptcy case, RadLAX submitted a chapter 11 plan that proposed to dissolve the debtor and sell substantially all its assets, free and clear of all liens, including, in particular, the liens of Longview. Prior to the auction provided for by the chapter 11 plan, a stalking horse bidder surfaced who proposed to buy the RadLAX‘s assets for $47.5 million, a fraction of the Longview’s loan. However, the stalking horse bid alone was not the problem. Rather, the problem was that Longview, the primary secured lender, was not permitted to credit bid its secured claim in the auction – a right otherwise honored by other provisions of the Code and a right specifically addressed as a confirmation requirement under section 1129(b)(2)(A)(ii) of the Code. The Bankruptcy Court denied the confirmation of the chapter 11 plan on these bases.
On appeal, the Debtor argued that it was authorized to confirm its plan, over the dissent of Longview, pursuant to a catch-all provision found in section 1129(b)(2)(A)(iii) (a provision adjacent to section 1129(b)(2)(A)(ii) providing for asset sales). The Supreme Court nonetheless denied the use of the catch-all provision for asset sales of encumbered property pursuant to a chapter 11 plan, in light of a specific confirmation provision that addressed the sale of encumbered assets free and clear of liens.
Cramdown of Secured Creditors
A bankruptcy court generally can confirm (approve) a chapter 11 plan if each class of creditors impaired (affected) by the plan consents. See 11 U.S..C. s. 1129(a)(8). Section 1129(b) creates an exception to that general rule, however, authorizing confirmation of nonconsensual plans–also known as cramdown plans– if the plan does not discriminate unfairly and is fair and equitable with respect to each impaired, dissenting class. See 11 U.S.C. s 1129(b)(2)(A).
The RadLAX opinion focused on whether the chapter 11 plan was “fair and equitable” to Longview, despite not allowing Longview to credit bid its secured claim during the auction process for sale of the debtor’s assets. Credit bidding is a practice whereby a secured creditor is allowed to offset its secured debt against the purchase price for the sale of a debtor’s assets.
In general, during a cramdown plan not approved by the secured creditor class, a debtor has 3 options to comply with the “fair and equitable” standard with respect to secured creditor class:
- The debtor can maintain the secured creditor’s lien on its collateral and pay the secured creditor the present value of its claim over time. See 11 U.S.C. s. 1129(b)(2)(A)(i).
- The debtor can propose to sell the the encumbered assets and use the sale proceeds to satisfy secured claims, provided, however, that secured creditors are allowed to credit bid their claims towards the purchase price. See id. at s. 1129(b)(2)(A)(ii).
- The debtor can also provide the secured creditor with a “indubitable equivalent” value for the creditors’ secured claim. See 11 U.S.C. s. 1129(b)(2)(A)(iii).
The last provision is commonly referred to as the catch-all provision, which subsumes the prior two provisions, and as “indubitable equivalent” value is not defined in the Bankruptcy Code, provides debtors with flexible options for satisfying secured claims.
The Debtor, RadLAX, argued that all cramdown chapter 11 plans involving secured creditors can be confirmed under the catch-all provision providing for “indubitable equivalent” value–a position maintained by the Third and Fifth Circuit Courts of Appeal. The Illinois Bankruptcy Court, the Seventh Circuit Court of Appeals and ultimately the U.S. Supreme Court rejected this position.
According to the Supreme Court, while literally accurate, RadLAX‘s arguments in favor of using the catch-all cramdown provision to block plan confirmation were too “hypertechnical” and “contrary to common sense.” The Supreme Court, instead, relied on the well-established canons of statutory construction that “it is a commonplace of statutory construction that the specific governs the general.” Citing Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384 (1992).
The specific provision in question, section 1129(b)(2)(A)(ii), addresses the procedures to comply with the “fair and equitable” standard for nonconsensual disposition of pledged assets under a chapter 11 plan. While the catch-all cramdown provision could theoretically encompass this situation, the Supreme Court favored applying the provision that specifically addressed the fact pattern in all cases. According to the Court:
Here, clause (ii) 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 sale. The generic/specific canon explains that the “general language” of clause (iii), “although broad enough to include it, will not be held to apply to a matter specifically dealt with” in clause (ii).
The U.S. Supreme Court held, with little trouble, that section 1129(b)(2)(A) of the Code did not permit RadLAX to confirm a cramdown plan that would sell the Debtor’s assets free and clear of liens without permitting the lienholder to credit-bid its claim towards the purchase price. In authoring the opinion for the almost unanimous Court, Justice Scalia concluded that: “[t]he Bankruptcy Code standardizes an expansive . . . area of law, and it is our obligation to interpret the Code clearly and predictably using well established principles of statutory construction . . . Under that approach, this is an easy case.”
Notwithstanding the divergent opinions of the Third, Fifth and Seventh Circuits on this very important issue, the Supreme Court’s opinion brings a uniform, nationwide standard for the protection of secured creditors’ rights when a debtor submits a plan proposing to sell assets free and clear liens and such plan is not approved by the secured class of claimants affected by the sale. This important right will allow secured creditors to establish a floor for the price of the assets that are sought to be sold and thereby likely increase the recovery to such creditors.
To be clear, the “indubitable equivalent” value still can be used in cramdown plans in other contexts; but, after RadLAX, it appears this tool is no longer available in cramdown plans involving asset sales.
- Valuation of Assets in Business Bankruptcies (corporaterestructuringreview.com)
- Supreme Court to Tackle Credit Bidding Rights in Chapter 11 Plans (corporaterestructuringreview.com)