Contributed by Abigail Lerner
The United States Supreme Court justices needed just a little over one month from when they heard oral argument on the RadLAX Gateway Hotel, LLC v. Amalgamated Bank case to render their decision on whether to overturn the Seventh Circuit’s affirmation of the bankruptcy court’s decision denying confirmation of the RadLAX debtors’ chapter 11 plan because the plan sought to sell encumbered assets free and clear of liens without allowing Amalgamated Bank, the secured lender, to credit bid its debt in the sale. In an 8-0 decision, the Supreme Court affirmed the Seventh Circuit’s decision. In holding that the debtors may not obtain confirmation of their chapter 11 cramdown plan that provides for the sale of collateral free and clear of the Bank’s lien but does not permit the bank to credit bid at the sale, the Supreme Court, no doubt, provided comfort to secured lenders across the country.
Justice Scalia delivered the opinion of the Court. Because the debtors sought to confirm their plan over the objection of the Bank, Justice Scalia began the Court’s decision with an examination of the text of section 1129(b)(2)(A) of the Bankruptcy Code. Specifically, the Court considered the condition that a “cramdown” plan must, among other things, meet one of the three requirements of section 1129(b)(2)(A) to be deemed fair and equitable with respect to the non-consenting creditor’s claim. A plan may be confirmed over the objection of a secured creditor if it proposes to sell, subject to section 363(k) of the Bankruptcy Code, property that is subject to a secured creditor’s claim, with the secured creditor’s lien attaching to the sale proceeds. Section 363(k) allows a creditor to “credit bid” its debt in connection with a debtor’s proposed sale of property subject to the secured creditor’s lien. A debtor also may satisfy section 1129(b)(2)(A) by either allowing the secured creditor to retain its liens and providing the secured creditor with deferred cash payments or providing the secured creditor with the “indubitable equivalent” of its claim.
In RadLAX, the debtors proposed to sell their property free and clear of the Bank’s liens and to repay the Bank using the sale proceeds. Although section 1129(b)(2)(A)(ii) expressly contemplates a sale of assets under a plan, the RadLAX debtors did not seek to confirm their plan pursuant to clause (ii) of section 1129(b)(2)(A) because the debtors’ auction procedures did not permit the Bank to credit bid. Instead, the debtors sought plan confirmation pursuant to clause (iii) of section 1129(b)(2)(A) and asserted that their plan provided the Bank with the “indubitable equivalent” of its claims. Disagreeing with the approach, the Court found the debtors’ reading of section 1129(b)(2)(A) to be “hyperliteral and contrary to common sense.” The asset sale proposed by the debtors in their plan, according to the Court, was “precisely … the disposition contemplated by clause (ii) [of section 1129(b)(2)(A) of the Bankruptcy Code.]” Calling on canons of statutory construction, the Court relied on the rule that the specific governs the general in its analysis of section 1129(b)(2)(A). The Court recognized 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.” Accordingly, the Court reasoned that “[t]he 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).” While recognizing that the general/specific canon is not an absolute rule, the Court explained that the debtors failed to point to any textual indication that would overcome the canon. The Court concluded that because clause (ii) is the rule for plans under which property is sold free and clear of a creditor’s lien, the debtors may not sell their property free of liens under section 1129(b)(2)(A) without allowing lienholders to credit bid, as required by the statute. In examining clause (ii) and its reference to section 363(k), the Court also stated, in a footnote, that the ability to credit bid is “particularly important for the Federal Government, which is frequently a secured creditor in bankruptcy and which often lacks appropriations authority to throw good money after bad in a cash-only bankruptcy auction.” This point was raised by Justice Scalia and the United States, as amicus curiae, during oral argument.
Finally, the Court dismissed the debtors’ argument that the Court of Appeals conflated the approval of bid procedures with plan confirmation as well as the debtors’ assertion that they may pursue their auction now and that the bankruptcy judge should determine, at the confirmation stage, whether the plan proposed to provide the Bank with the indubitable equivalent of its secured claim. The Court found that approach to be “simply a nonstarter” and held that, as a matter of law, no bid procedures such as the ones proposed by the debtors could satisfy the requirements of section 1129(b)(2)(A) and, therefore, the distinction between approval of bid procedures and plan confirmation was irrelevant.
Characterizing the matter as an “easy case” and finding “no textual ambiguity here,” the Court affirmed the judgment of the Court of Appeals. Not only will the RadLAX debtors have to revise their proposed plan but, with the RadLAX decision, all debtors must think twice before proposing a plan to sell their assets free and clear pursuant to section 1129(b)(2)(A) of the Bankruptcy Code without also permitting credit bidding.