On April 23, 2012, the United States Supreme Court is scheduled to hear oral argument in RadLAX Gateway Hotel v. Amalgamated Bank, Case No. 11-166. At issue is the interpretation of 11 U.S.C. § 1129(b)(2)(A) and whether a debtor can prevent a secured creditor from credit bidding in connection with a chapter 11 plan that proposed to sell the secured creditor’s collateral free and clear of any liens.
The case will seek to settle a split among the Third Circuit’s decision in In re Philadelphia Newspapers, 599 F.3d 298 (3rd Cir. 2010) and the Fifth Circuit’s decision in In re Pacific Lumber Co., 584 F.3d 229 (5th Cir. 2009), where both the Third and Fifth Circuits approved such a plan, and the Seventh Circuit’s decision in RadLAX, 651 F.3d 642 (7th Cir. 2011), where the Seventh Circuit rejected the interpretation.
In addition to the briefs filed by the parties, an amicus brief has been filed in support of the secured creditor’s position by the Loan Syndications and Trading Association, the American Bankers Association, the Clearing House Association, the Commercial Finance Association, the Commercial Real Estate Finance Council, the Equipment Leasing and Finance Association, the Financial Services Roundtable, the Managed Funds Association, the Mortgage Bankers Association, and the Securities Industry and Financial Markets Association.
A group of law professors and the United States also filed amicus briefs in support of the secured lender.
To confirm a plan over the dissenting vote of a secured creditor, under Section 1129(b)(2)(A), a debtor must demonstrate the secured creditor (i) will retain its lien on the property, (ii) may credit bid during any sale of its collateral free and clear of liens with the secured creditor’s liens to attach to the sale proceeds, or (iii) the secured creditor must be provided the “indubitable equivalent” of its claim.
In RadLAX, the debtors sought to sell, through a chapter 11 plan, nearly all of its assets free and clear of the secured creditor’s liens. The debtors sought to invoke §1129(b)(2)(A)(iii) and disallow the secured lender’s credit bid. The plan would instead give the secured creditor its “indubitable equivalent” in the form of the cash proceeds, less certain sale related costs. The bankruptcy court denied confirmation of the plan and the Seventh Circuit affirmed the ruling.
“Indubitable equivalent” is not defined by the Bankruptcy Code, but the phrase has been interpreted to mean property of value equal to the original collateral. It is a difficult standard and not well defined by case law. Accordingly, allowing a debtor to substitute a secured creditor’s original collateral with the “indubitable equivalent” may inject substantial uncertainty and litigation into cases as parties fight over the value and suitability of the proposed “indubitable equivalent.”
This case may have substantial impact on the ability of a secured creditor to credit bid under a chapter 11 plan. If the Supreme Court accepts the debtors’ argument, future debtors will be able to eliminate a secured creditor’s right to credit bid so long as it provides the creditor with the “indubitable equivalent” of its claim, which in this case was the net cash. This would be a substantial change for what most, if not all, secured creditors have come to expect from a sale of their collateral. Secured creditors would no longer be able to control the disposition of the collateral by credit bidding at the sale and may be forced to take collateral in its place that is not as valuable to the secured creditor.
Cathy L. Reece
Anthony W. Austin
Fennemore Craig, P.C.