Supreme Court Affirms Bank’s Right to Credit Bid in RadLAX Hotel

RadLAX Gateway Hotel, LLC v. Amalgamated Bank, — U.S. —, — S.Ct. — (May, 2012)

Issue:  Where a debtor proposes to sell property of the estate as part of a chapter 11 plan, must the secured creditors be entitled to credit bid?

Holding:  Yes.

Justice Antonin Scalia for 8-0 court, Kennedy did not take part

This chapter 11 debtor owned a hotel valued at roughly $50 million.  Amalgamated Bank was the first priority lienholder and was owed approximately $120 million.  The debtor submitted a chapter 11 which proposed to sell the hotel for $55 million, subject to overbids.  The sale was to be free and clear of liens.  The plan provided that the bank would not be permitted to “credit bid” at the sale.  The debtor filed a Motion to Approve Sale at the same time.  The bank objected to both on the basis that it had the right to credit bid pursuant to section 1129(b)(2)(A)(ii).  The debtor argued that if the bank had no right to credit bid, it was more likely that there would actually be bidders which was good for everyone.   The debtor argued that it was required by section 1129(b)(2)(A)(iii) only to give the bank the indubitable equivalent of its claim and since the bank was to receive all of the net proceeds of the sale, that was the indubitable equivalent of its secured claim.  The bankruptcy court denied the motion.  The Seventh Circuit Court of Appeals affirmed.

The Supreme Court also affirmed.  Focusing on the plan, the court said, “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.”  Clause (ii) requires compliance with section 363(k) which in turns requires rights to credit bid in a sale.  Clause (iii) simply requires that the bank receive the indubitable equivalent.  The discussion by the court is primarily statutory interpretation.  “Here, 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).”  “Debtors seeking to sell their property free of liens under §1129(b)(2)(A) must satisfy the requirements of clause (ii), not the requirements of both clauses (ii) and (iii).”  “[N]othing in the generalized statutory purpose of protecting secured creditors can overcome the specific manner of that protection which the text of §1129(b)(2)(A) contains. As for pre-Code practices, they can be relevant to the interpretation of an ambiguous text, but we find no textual ambiguity here.  And the pros and cons of credit-bidding are for the consideration of Congress, not the courts.”

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