Larkin Hoffman Daly & Lindgren Ltd.

The United States Supreme Court accepted the petition for certiorari on the Seventh Circuit decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank on December 12, 2011 and arguments will likely be heard by the Court in April 2012. This case presents the Supreme Court with the important issue of whether secured lenders are entitled to submit a credit bid, a bid not requiring actual transfer of payment, at the sale of their collateral in the Bankruptcy Court. A decision on this issue that is currently split amongst the circuits will require the Supreme Court to engage in a highly technical review of the Bankruptcy Code’s requirements for Chapter 11 plans of reorganization and the rights of secured creditors. 

 

The case is actually a jointly administered appeal by debtors that proposed to sell substantially all of their assets as part of their respective plans of reorganization. Each of the debtors were operating hotels and event spaces that were located closely to the Chicago O’Hare and Los Angeles International Airports. Debtors’ hotels were new and in the process of additional construction that was not completed as a result of the defaults on their respective indebtedness that exceeded $100,000,000. The reorganization plans filed by each of the debtors was for liquidation of the assets and distribution of the sale proceeds to the creditors. The proposed asset sales each identified a stalking horse bidder procured by the debtors for an amount substantially lower than the secured lenders claims. Neither plan permitted the lenders to engage in credit bidding at the proposed auction.

 

Lenders filed objection to the proposed bidding procedures primarily for its prohibition on credit bidding and that the plans were unconfirmable under the Bankruptcy Code. The bankruptcy court orally ruled in favor of the lenders and held that the debtors’ plans could not be confirmed under 11 USC § 1129(b)(2)(A)(iii). The bankruptcy court subsequently entered orders denying the debtors’ bid procedure motions and these were appealed by debtors directly to the Seventh Circuit. The Seventh Circuit entered an order authorizing and consolidating the River Road and RadLAX appeals. 

 

Two issues were decided on appeal by the Seventh Circuit. First, the lender claimed that the debtors’ appeal of the bid procedures motion denial were moot. The Seventh Circuit quickly rejected this argument as the plans, as amended, did not contain expired dates. The Seventh Circuit explained that even if the alleged defects existed, the issue meets the test for the exception to mootness as it would otherwise evade review due to the short timeframes of such asset sales and bid procedures. Moreover, the Seventh Circuit also noted that a dismissal for mootness on the alleged grounds would merely result in the return of the appeal because debtors could simply re-file the plans, receive the same decisions from the bankruptcy court, and commence another appeal on the same issues. 

 

Second, the Seventh Circuit considered the more notable issue of whether the Bankruptcy Code required debtors to permit secured lenders to credit bid at sales of their collateral. In deciding this issue, the Seventh Circuit engaged in highly technical analysis of the bankruptcy code and rules governing statutory construction. The Seventh Circuit sifted through this dense statutory analysis and concluded that prohibition of credit bidding at sales of their collateral precluded the secured creditor from receiving the required “indubitable equivalent.” In so holding, the Seventh Circuit expressly recognized the ambiguity of the statutory provisions including the nebulous term “indubitable equivalent.” The Seventh Circuit also listed the numerous risks to the creditors’ collateral in the absence of recognizing its right to credit bid on its collateral at asset sales in Chapter 11.

 

Accordingly, the Seventh Circuit held that the only way to harmonize all of the protections of secured lenders and the requirements of the Bankruptcy Code was to recognize their right to submit credit bids. As such, the Seventh Circuit concluded that section 1129(b)(2)(A) was not disjunctive and that a plan of reorganization must meet the test under 11 USC § 1129(a)(2)(A)(ii) in order to be confirmed. In so holding, the unanimous Seventh Circuit expressly rejected the Third Circuit’s decision in Philadelphia Newspapers summarized below and adopted Judge Ambro’s dissenting opinion.

 

 

The Third Circuit previously held in Philadelphia Newspapers that plans of reorganization may be confirmed even if secured creditors were not entitled to submit credit bids at sales of their collateral in bankruptcy. The majority opinion held that it was possible for a sale “free and clear” to prohibit credit bidding and to meet the indubitable equivalent requirement of 11 USC § 1129. In so holding, the majority in the Third Circuit concluded that the plain meaning of the use of “or” in the statute demonstrated that 11 USC § 1129(b)(2)(A)(ii) was not the exclusive means to sell collateral free and clear under a reorganization plan, provided, that the proponent could demonstrate that the plan otherwise satisfied the indubitable equivalent requirement. 

 

Judge Ambro wrote the dissent in the Philadelphia Newspapers case. In his opinion, he engaged in a technical analysis of the statute and found that credit bidding was a necessary protection for secured lenders. Judge Ambro’s dissent was a scathing review of the majority’s decision and failure to properly analyze the statue. Specifically, Judge Ambro pointed to the majority’s failure to recognize the long-standing recognition of applicable non-bankruptcy law that dictated property rights in bankruptcy and that such governing laws have always permitted the secured creditor to look to its collateral in payment defaults.

 

The Supreme Court’s decision on this issue could have a wide-spread effect on asset sales in Chapter 11 bankruptcy. Currently, the law on the issue of whether the secured creditor is entitled to submit a bid for its collateral without actually making a payment is unclear and undecided in many circuits. The requirement to make such payment or not could have a direct effect upon the assets available for distribution to other creditors within the case and debtor’s ability to reorganize. Such decision could also directly affect the future nature of bankruptcy asset sales and dramatically shift the bargaining power of the respective parties. These changes could result in the emergence of different types of sales, different terms, alter the prospective pool of purchasers, and have long-term implications as to whether a sale in bankruptcy remains an economically prudent option. 

 

This issue is important not only to entities contemplating bankruptcy but also to those who provide financing or otherwise hold security interest in real or personal property of any business that may be cyclical or encountering financial difficulties. Navigating the minutia of asset sales, viability of reorganization, bankruptcy jurisdiction, and the particular economic considerations of each proposed sale is complex in this evolving technical field. Moreover, in the context of today’s complex business and economic market, there are increasing circumstances where there are priority disputes amongst creditors, security interests subject to scrutiny, and complex determinations of collateral valuation. 

 

Larkin Hoffman will continue to monitor this case to watch for the Supreme Court’s decision on this important issue that is currently undecided. The attorneys in Larkin Hoffman’s Bankruptcy Practice Group have substantial experience in complex bankruptcy issues such as this one. Please feel free to contact any of the attorneys in this practice area with any questions about this case or any other bankruptcy or insolvency questions that you may be encountering.