INTRODUCTION
On May 29, 2012, the United States Supreme Court held that a a Chapter 11 cramdown plan can not be confirmed over the objection of secured creditor, where the plan called for the sale of collateral free and clear of the secured creditor’s lien, without permitting the secured creditor to credit bid at the sale. RadLAX Gateway Hotel LLC v. Amalgamated Bank. No. 11-166. The decision in RadLAX settled a split amongst the circuit courts in interpreting Bankruptcy Code Section § 1129(b)(2)(A).
FACTUAL BACKGROUND
In 2007, Petitioners RadLAX Gateway Hotel, LLC and RadLAX Gateway Deck, LLC (collectively, the “Debtors”) borrowed $142 million from Longview Ultra Construction Loan Investment Fund, for which Amalgamated Bank serves as trustee (the “Lender”), to finance the purchase and renovation of the Radisson Hotel at Los Angeles International Airport as well as to cover the construction costs related to the building of a parking garage next to the hotel. To secure the loan, the Lender obtained a blanket lien on all of the Debtors’ assets.
Construction costs were more expensive than originally anticipated, and the Debtors ran out of funds and was unable to obtain additional funding. The Debtors filed for Chapter 11 bankruptcy in August 2009 in the United States Bankruptcy Court for the Northern District of Illinois, with a balance of over $120 million due on the loan.
In 2010, the Debtors submitted a Chapter 11 plan, which proposed to sell nearly all of the Debtors’ assets at public auction, free and clear of the Lender’s lien. The plan did not permit the Lender to bid on the assets using the debt to offset the purchase price (known as “credit-bidding”), but instead required the Lender to bid in cash. The Lender objected and the Debtors sought to confirm the plan through the cramdown process of § 1129(b)(2)(A).
RELEVANT CODE SECTIONS
The Debtors sought to have the plan confirmed through 1129(b), which creates an exception to the rule that generally allows a plan to be confirmed only if each class of creditors affected by the plan consents. § 1129(b) allows for a plan to be forced upon a class that does not consent if the plan does not discriminate unfairly and is fair and equitable to each class that is impaired but has not accepted the plan.
§ 1129(b)(2)(A) outlines three circumstances in which a plan is “fair and equitable” to a dissenting class of secured creditors. § 1129(b)(2)(A)(i) says that a plan may satisfy the fair and equitable requirement if secured creditors retain their liens to the extent of their secured claim and receive deferred cash payments equal to or greater than their secured claims, which payments have a present value of no less than the their interest in the collateral. § 1129(b)(2)(A)(ii) says that a plan may satisfy the fair and equitable requirement if collateral is sold free and clear subject to the right of a secured creditor to credit bid, pursuant to 363(k). § 1129(b)(2)(A)(iii) says that a plan may satisfy the fair and equitable requirement if secured creditors receive the indubitable equivalent of their secured claims.
CIRCUIT SPLIT
The Third, Fifth and Seventh Circuit Court of Appeals have addressed the issue of whether, pursuant to § 1129(b)(2)(A), a plan proponent is required to allow a secured creditor a credit bid on its collateral, with the Fifth and Third Circuits holding that a plan does not need to allow a secured creditor to credit bid, while the Seventh Circuit held that it did.
The Fifth Circuit Court of Appeals addressed the issue in Pacific Lumber Co. v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. 2009). There, a class of secured creditors appealed the decision of the bankruptcy court confirming a plan which sold the secured creditors collateral without providing the secured creditors a right to credit bid on the basis that such treatment was not “fair and equitable” under § 1129(b)(2)(A). In upholding the bankruptcy court, the Fifth Circuit held that § 1129(b)(2)(A)(ii) was not exclusively applicable, but rather, because the three subsections of § 1129(b)(2)(A) are joined by “or”, they are alternatives. Further, the Fifth Circuit held that the language of§ 1129(b)(2) that states that the “condition that a plan be fair and equitable includes the following requirements” indicates that three subsections are not exhaustive. Therefore, the Fifth Circuit held that “Clause (iii) affords a distinct basis for confirming a plan if it offered the Noteholders the ‘realization…of the indubitable equivalent of such claims.”
Soon after the decision in Pacific Lumber, the Third Circuit also had occasion to address the same issue in In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3rd Cir., 2010). The Third Circuit held that the statutes unambiguously permits an asset sale under the “indubitable equivalent” subsection without requiring secured lenders the opportunity to credit bid. Further, the Third Circuit held that the use of “or” in § 1129(b)(2)(A) meant that a plan proponent could comply with either § 1129(b)(2)(A)(ii) or § 1129(b)(2)(A)(iii) or both. In so holding, the Third Circuit rejected the secured creditors’ argument that a specific term prevails over a general term, finding that that canon of statutory interpretation is only applicable if the specificity of subsection (ii) operated as a limitation of the broader language of (iii), which it held it did not. Rather, “it is apparent here that Congress’ inclusion of the indubitable equivalence prong intentionally left open the potential for yet other methods of conducting asset sales, so long as those methods sufficiently protected the secured creditor’s interests.”
In contrast, the Seventh Circuit held in In re River Road Hotel Partners LLC v. Amalgamated Bank, 651 F.3d 642 (7th Cir. 2011) that § 1129(b)(2)(A) does not authorize the plan proponent to use subsection (iii) to confirm a plan that seeks to sell assets free and clear without providing the secured creditors with the right to credit bid. The Seventh Circuit held that interpreting § 1129(b)(2)(A)(iii) to allow a debtor to sell an asset free and clear without permitting credit bidding would render the other subsections of § 1129(b)(2)(A) superfluous. Instead, Subsection (iii) must be relied on only if the proposed disposition of assets was not included in Subsection (i) or (ii). The Petitioners appealed the decision of the Seventh Circuit, and the Supreme Court granted a writ of certiorari.
SUPREME COURT DECISION
The Supreme Court (Scalia, J.) described the Petitioners proposed plan of selling their property free and clear of the Lender’s liens and repaying the Lender using the sale proceeds as being precisely what is contemplated by § 1129(b)(2)(A)(ii); however, the Court noted that the Petitioner’s proposed auction procedures do not permit the Lender to credit bid, and therefore the sale cannot satisfy § 1129(b)(2)(A)(ii). Instead, the Petitioners attempt to proceed under § 1129(b)(2)(A)(iii).
The Court held, “We find the debtors’ reading of § 1129(b)(2)(A) – under which clause (iii) permits precisely what clause (ii) proscribes – to be hyperliteral and contrary to common sense.” In so holding, the Court relied on the canon of statutory interpretation that holds that effect shall be given to every clause of a statute, and the more specific clause most govern the more general. The general language of Subsection (iii) cannot be held to deal with the requirements specifically spelled out in Subsection (ii).
The Court did opine that there may be some circumstances where a specific provision within a general one is not superfluous because it creates a safe harbor; however, such was not the case with § 1129(b)(2)(A).
CONCLUSION
The Supreme Court’s decision in RadLax settled a conflict among the courts of appeal, and also emphasized the Court’s reliance on traditional canons of statutory construction. While the case has obvious importance to Chapter 11 debtors and secured creditors, it also has importance outside of the bankruptcy context, as the Court’s statutory interpretation is of universal importance.