RadLAX & Credit Bidding Rights: “One of the Most Important Business Bankruptcy Cases in a Decade”

On May 29, 2012, the Supreme Court ruled that debtors must allow lenders to “credit bid” when auctioning off assets as part of the bankruptcy reorganization process.

Law firm Morrison & Foerster:

“In a unanimous opinion in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, the Court held that a Chapter 11 plan of reorganization that provides for a sale of a secured creditor’s collateral free and clear of liens must afford that secured creditor the right to credit bid. The decision is significant because it allows a secured creditor to protect the benefit of its bargain to either be repaid in full or take possession of its collateral, by preventing the debtor from stripping the creditor’s lien for an amount at less than the creditor thinks the property is worth.”

The ruling guarantees that secured creditors in Chapter 11 plans, like those in 363 sales, can “credit-bid” (offer credit against a debt instead of cash) on the collateral securing their claims.

Law firm Duane Morris calls RadLAX “arguably one of the more important business bankruptcy cases in over a decade:”

“At the heart of the matter is an issue of enormous consequence to business and the economy: the access by secured lenders to the collateral securing their loans, which collateral formed the basis of the creditor’s original loan extension. A lender extends a secured loan in reliance upon the expectation that it will be able to foreclose on the attached collateral in the event of the borrower’s loan default or bankruptcy. Thus, limiting the lender’s access to the collateral in these circumstances undermines the lender’s expectations, injecting an element of uncertainty that fundamentally alters the negotiation—and thereby the practice of secured lending in general.”

In 2007, RadLAX Gateway Hotel and RadLAX Gateway Deck borrowed $142 million to acquire and renovate the Radisson Hotel at Los Angeles International Airport. To secure the loan, they granted Amalgamated Bank a blanket lien on all of their assets. The RadLAX investors subsequently filed Chapter 11, writes McDermott Will & Emery:

“Thereafter, the Debtors sought to confirm a plan of reorganization, over the Lender’s objection, pursuant to section 1129(b)(2)(A) of the Bankruptcy Code. The plan proposed to sell substantially all of the Debtors’ assets at auction and repay the Lender by using the proceeds of the sale. Notably, the Debtors’ proposed bidding procedures, which would govern the auction, denied the Lender the right to “credit bid” (i.e., the right to bid for the collateral securing its loan using the debt it is owed to offset the purchase price).”

While the Bankruptcy Code does allow a debtor to “cram down” a reorganization plan over the objections of creditors, the question in front of the Court was whether the RadLAX reorganization satisfied the requirements of the Bankruptcy Code. From law firm Ropes & Gray:

“The Bankruptcy Code permits a debtor to confirm a plan of reorganization over a dissenting class of claims only if the plan is ‘fair and equitable” with respect to such class. A plan of reorganization is ‘fair and equitable’ to a dissenting secured creditor class only if it satisfies one of three requirements set forth in section 1129(b)(2)(A): (i) the secured claim holders retain a lien on the collateral securing their claims and receive deferred cash payments equal to the value of their secured claims; (ii) the collateral is sold free and clear (with the holders’ liens attaching to the proceeds of the sale), subject to the right of the holders to credit bid for the property under section 363(k) of the Bankruptcy Code; or (iii) the holders realize the ‘indubitable equivalent’ of their secured claims.”

The RadLAX plan failed to meet those requirements, ruled the Court. Law firm Dechert explains:

“The concise, 12-page opinion penned by Justice Scalia … concludes that the debtor’s proposed auction procedures – which prevented the secure creditors from being able to credit-bid – could not satisfy the Code’s requirement that a cramdown be ‘fair and equitable’ to non-consenting secured creditors.”

Equally important, the SCOTUS decision resolves a circuit court split over the credit bidding requirement. From Bracewell & Giuliani:

“… the Court settled a circuit split on the issue between the Third Circuit (see In re Philadelphia Newspapers (holding that secured lenders do not have an absolute right to credit bid in an auction process carried out under a chapter 11 plan)) and the Seventh Circuit (see River Road Hotel Partners, LLC v. Amalgamated Bank (declining to follow Philadelphia Newspapers and upholding secured lender’s right to credit bid in a sale under a chapter 11 plan))… Secured creditors are now guaranteed the same rights to credit bid, whether the sale of a debtor’s assets is through a plan of reorganization or under section 363 of the Bankruptcy Code.”

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