On May 29, the U.S. Supreme Court issued a unanimous decision holding that a debtor cannot obtain confirmation of a Chapter 11 “cramdown” plan that provides for the sale of collateral free and clear of a secured creditor’s lien without permitting the lienholder to credit bid at the sale. See RadLAX Gateway Hotel v. Amalgamated Bank , 2012 U.S. LEXIS 3944 (U.S. May 29, 2012). In issuing this important ruling, the Supreme Court resolved a circuit split that had developed among the Third, Fifth and Seventh circuits over whether a secured creditor has an absolute right to credit bid when its collateral is being sold through a Chapter 11 plan.
The U.S. Courts of Appeals for the Third and Fifth circuits, in In re Philadelphia Newspapers , 599 F.3d 298 (3d Cir. 2010), and Bank of N.Y. Trust v. Official Unsecured Creditors’ Committee ( In re Pac. Lumber ), 584 F.3d 229 (5th Cir. 2009), respectively, held that a Chapter 11 plan could deny an objecting class of secured creditors the right to credit bid so long as the plan provided the secured creditor with the “indubitable equivalent” of its secured claim. Conversely, the Seventh Circuit ruled in In re River Road Hotel Partners , 651 F.3d 642 (7th Cir. 2011), that a plan under which the secured creditor’s collateral was to be sold could not provide the creditor the “indubitable equivalent” of its claim without allowing credit bidding by the secured creditor. In departing from the earlier decisions of the Third and Fifth circuits, the River Road decision created a circuit split on this issue.
Section 1129(a) of the Bankruptcy Code sets forth the primary requirements for confirmation of a Chapter 11 plan. Under certain circumstances, a plan meeting those requirements can be confirmed even if an affected creditor class votes against it. Such “cramdown” is permitted where the plan is found to be “fair and equitable” with respect to the dissenting classes.
Subsection 1129(b)(2)(A) provides that for a plan to be “fair and equitable” with respect to a dissenting class of secured claims it must provide:
“(i) (I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and (II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property;
(ii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or
(iii) for the realization by such holders of the indubitable equivalent of such claims.” 11 U.S.C. 1129(b)(2)(A).
Notably, this Bankruptcy Code provision is written with the disjunctive “or” between clauses (ii) and (iii) with the interplay between subsections (i), (ii) and (iii) creating the circuit split and thus, the focus of the Supreme Court’s decision.
In RadLAX , the debtor argued that even though the secured creditor was being denied the ability to credit bid — a right the lender would have in a sale conducted under Section 363(k) of the Bankruptcy Code — the proposed sale procedures were permissible under Subsection (iii) because the creditor would receive the “indubitable equivalent” of its secured claim in the form of the cash generated by the auction. The secured creditor, however, asserted that it had a right to credit bid under Subsection (ii).
The unanimous Supreme Court opinion, authored by Justice Antonin Scalia, found that since the issue was purely a matter of statutory construction, its obligation was to “interpret the code clearly and predictably using well-established principles of statutory construction.” Applying those rules of interpretation, the court found that “this is an easy case.”
The Supreme Court used the commonplace rule of “statutory construction that the specific governs the general,” especially where, as in Section 1129(b)(2)(A), “Congress has enacted a comprehensive scheme and has deliberately targeted specific problems with specific solutions.” The court noted that the canon of construction is employed to avoid “the superfluity of a specific provision that is swallowed by a general one.”
Applying the rule, the court found that 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 a sale. The general/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 court, therefore, found that clause “(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.”
In upholding the Seventh Circuit’s decision, the Supreme Court in RadLAX found that a secured creditor has an absolute statutory right to credit bid when its collateral is being sold through a Chapter 11 plan of reorganization. This opinion resolves an issue of manifest importance and one that bankruptcy practitioners had been monitoring with great interest. Of particular note for practitioners in the Third Circuit is that the Supreme Court’s decision overturns the result reached in Philadelphia Newspapers , eliminating the leverage that decision provided debtors in their negotiations with their secured lenders. Moreover, by now having a uniform interpretation of Section 1129 (b)(2)(A) for courts to apply, there is a substantially smaller likelihood of forum shopping by debtors seeking a more hospitable circuit in which to apply this rule against secured creditors. •
Francis J. Lawall , a partner in the Philadelphia office of Pepper Hamilton, concentrates his practice in national bankruptcy and reorganization matters. He routinely lectures to various creditor groups concerning general bankruptcy issues, including preferences, reclamation, the role of creditors committees and related issues.
John Henry Schane II is an associate in the firm’s Wilmington, Del., office, where he concentrates his practice in national bankruptcy and reorganization matters.