On May 29, 2012, the US Supreme Court issued a unanimous opinion in the case of RadLAX Gateway Hotel, LLC v. Amalgamated Bank, finding that debtors must allow secured creditors the right to credit bid in a sale of collateral under a plan of reorganization. The ruling resolves a circuit split on the issue following the decision of the US Court of Appeals for the Third Circuit in the Philadelphia Newspapers case (see Practice Note, In Dispute: Philadelphia Newspapers). It gives greater certainty to secured creditors, as debtors may not obtain confirmation of Chapter 11 cramdown plans that provide for the sale of collateral free and clear of a secured creditor's liens, but deny the secured creditor the right to credit bid at the sale.

In 2007, RadLAX Gateway Hotel, LLC and RadLAX Gateway Deck, LLC (debtors) bought a hotel and adjacent parking structure. To finance the purchase, the debtors received a $142 million loan from Longview Ultra Construction Loan Investment Fund, for which Amalgamated Bank (bank) serves as trustee. The lenders received a blanket lien on all of the debtors' assets to secure a claim on the loan.

In 2009, the debtors filed voluntary Chapter 11 petitions, and in 2010 they submitted a Chapter 11 plan of reorganization to the US Bankruptcy Court for the Northern District of Illinois. Under the plan, the debtors would auction their assets to the highest bidder, with an initial bid of $47.5 million submitted by a stalking horse. However, under the proposed plan the bank would not be allowed to credit bid for the property but would be forced to bid cash, potentially decreasing the value of the winning bid.

Realizing the bank (whose claim far exceeded the stalking horse's initial bid) would reject the proposed plan, the debtors sought permission from the Bankruptcy Court to confirm their plan under the cramdown provisions of section 1129(b)(2)(A) of the Bankruptcy Code. The Bankruptcy Court rejected the debtors' plan, finding that the proposed auction procedures did not comply with the Bankruptcy Code's requirements for cramdown plans. The Bankruptcy Court then certified an appeal directly to the US Court of Appeals for the Seventh Circuit.

The Seventh Circuit affirmed, finding that the Bankruptcy Code does not allow debtors to sell an encumbered asset free and clear of a lien without permitting the lienholder to credit bid. The Supreme Court, likely because of the circuit split on the issue following the Philadelphia Newspapers decision, granted certiorari (see Legal Update, US Supreme Court to Rule on Credit Bidding: RadLAX Gateway Hotel LLC v. Amalgamated Bank).

The key issue decided by the Supreme Court was whether a Chapter 11 bankruptcy plan can be confirmed over the objection of a secured creditor if the plan provides for the sale of collateral free and clear of the creditor's lien, but does not allow the creditor to credit bid at the sale.

For a cramdown plan to be confirmed over the objection of a class of secured claims, it must meet one of three requirements set out in section 1129(b)(2)(A) of the Bankruptcy Code:

The Supreme Court held that the debtors' had failed to meet the requirements of clause (ii) of section 1129(b)(2)(A) by not permitting the bank to credit bid its claim, and that the debtors' proposed cramdown plan did not provide the secured creditor with the indubitable equivalent of its claim. The debtors' argued that a plan that satisfies clause (iii) of section 1129(b)(2)(A) does not need to permit the secured creditor to credit bid its claim at a sale of the collateral, as this requirement only applies to section 363 sales contemplated in clause (ii) of section 1129(b)(2)(A). However, the Supreme Court found the debtors reading of the third requirement of section 1129(b)(2)(A), which does not expressly preclude the possibility of a sale without credit bidding, to be both "hyperliteral and contrary to common sense."

Applying well established canons of statutory interpretation, the Supreme Court noted 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. It held that:

Therefore, debtors cannot sell their property free of liens under section 1129(b)(2)(A) without allowing lienholders to credit bid, as contemplated in clause (ii).

Following the Supreme Court's ruling in RadLax, secured creditors are assured that they will not be barred from credit bidding in cramdown plans. This ruling now makes it harder for debtors to prevent secured creditors from participating in bankruptcy auctions and allows secured creditors to receive the greatest return on their loans.