In December, SCOTUS agreed to hear a 7th Circuit case, RadLAX Gateway Hotel, LLC v. Amalgamated Bank, on whether a secured creditor can be denied a right to credit bid its note when a debtor sells its collateral, pre-confirmation, pursuant to a plan. The issue arises when a court is evaluating whether a plan satisfies the “fair and equitable” requirement for cram down on non-consenting impaired classes of secured claims, under an 1129(b). 1129(b)(2)(A) provides a set of three disjunctive descriptions of how a plan can provide secured claims with fair and equitable treatment, (i), (iii), or (iii).
The first prong involves either transfer of collateral or use by the debtor whereby the secured creditor’s lien remains, and the creditor receives a cash stream with present value of at least the collateral value and payments totaling the claim.
This is essentially the 1111(b) election.
The second prong involves sale of the collateral free and clear of liens, the secured creditor’s lien attaching to the cash proceeds of sale, and the creditor having a 363(k) right to credit bid its claim.
The third is for the secured creditor to receive the “indubitable equivalent” of its secured claim.
The 3rd Circuit in Philadelphia Newpapers LLC, following the 5th Circuit, held that 1129(b)(2) was unambiguous and did not prevent a debtor from selling substantially all of the assets of the estate, prior to plan confirmation, without allowing the secured creditor to credit bid its claim. In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d. Cir. 2010).
The Philadelphia Newspapers Court was presented debtor’s request to sell without credit bid in a relatively early stage of the case, prior to plan confirmation and before 506(a) collateral valuation. It was not possible for the court to determine what value would be offered to the secured creditors in addition to the cash proceeds from the sale of the collateral. The statement at page 32, footnote 10, that “The ‘indubitable equivalent’ standard is tied only to the value of the secured claim” (emphasis added), suggests that this court was not focusing on fairness in relation to the secured creditor’s entire claim recovery under the plan.
The 7th Circuit, in River Road Partners, found 1129(a)(2)(A) ambiguous and denied the debtor’s attempt to prohibit the secured creditor from credit bidding. River Road Hotel Partners v. Amalgamated Bank, 651 F.3d 642 (7th Cir. 2011).
The River Road Partners Court had already been presented with the debtor’s plan of reorganization and could more readily determine the value being offered to the secured creditor, unlike the Philadelphia Newspaper Court.
I think the River Road Partners court went too far by holding that there are never circumstances where the debtor can propose the “indubitable equivalent” of 1129(a)(2)(i) & (ii). That court could have limited its holding and found that the plan proposed by the debtor did not satisfy the standard for “indubitable equivalent”, leaving open the possibility that perhaps a different plan might work.
My guess is that SCOTUS will affirm the 7th Circuit on the facts presented, but will go further to explain that the statute is not ambiguous and there might be circumstances where the “indubitable equivalent” does not require credit bidding.
My guess is based upon my understanding of the function and value of the 1111(b) election and the corresponding function and value of the secured creditor’s 363(k) right to credit bid. Further, that the right to credit bid under 363(k) can be limited by the court, for cause.
A secured creditor evaluates its 1111(b) election, in part, by assessing the present value proposed by the plan toward the unsecured potion of the claim resulting from 506(a) valuation of the collateral.
The choice is to either have value equal to the 506(a) collateral value plus the plan’s offer toward the unsecured portion of the claim, or forgo the plan’s offer on the unsecured part and make the 1111(b) election to retain the lien securing the total claim.
When the plan offers an insignificant value to the creditor toward the unsecured portion of the claim, and controlling plan confirmation by dominating the only impaired class of claims isn’t an issue, the credit will likely elect under 1111(b) to retain its lien securing its total claim, for the chance that collateral appreciation ultimately results in a more claim recovery than what the plan offered.
The right of credit bidding protects the secured creditor’s right to decide to hold its entire claim against the collateral for possible collateral appreciation, regardless of whether the 1111(b) election has been made.
Removing the secured creditor’s right to credit bid, while eliminating the possibility of an 1111(b) election, through selling the collateral pre-confirmation, arguably requires that a debtor compensate the creditor by replacing the potential for appreciation in value of the collateral with something of “indubitably equivalent” value.
Perhaps SCOTUS will find that it is possible for debtors to satisfy 1129(a)(2)(A)(iii) through a certain level of pre-confirmation evidence that the plan will offers something of value to compensate the secured creditor for losing its hope of a more significant ultimate claim recovery through collateral appreciation, such that pre-confirmation collateral sales without credit bidding are permitted. Perhaps “cause” under 363(k) will be found, if necessary, in the policy favoring reorganization or through debtor’s new value contributions.