Section 1129(b)(2)(A)(iii) of the Bankruptcy Code allows a court to find that a chapter 11 “cramdown” plan is “fair and equitable” to an objecting class of secured creditors if the plan provides for the realization by such holders of the “indubitable equivalent” of their claims. Section 1129(b)(2)(A)(ii), through reference to Section 363(k), permits the sale of collateral free and clear of liens if secured creditors are allowed to “credit bid”—that is, to bid the value of their claim in an auction of the collateral. On December 12, 2011, the Supreme Court granted certiorari in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166, to decide whether secured creditors are guaranteed the right to credit bid in Chapter 11 auction sales.

The Court’s answer to this question could affect the leverage that objecting creditors have in Chapter 11 reorganizations and is of particular importance in light of debtors’ expanding use of Chapter 11 to sell assets free and clear of liens.

The debtors, petitioners in the Supreme Court, proposed to auction a Los Angeles hotel and parking garage, subject to an initial stalking-horse bid. The procedure would not have allowed the secured lenders that financed the construction of the property to credit bid their claims. The administrative agent for the lending group, respondent in the Supreme Court, objected. The Bankruptcy Court for the Northern District of Illinois sustained the objection but certified the question for immediate appeal to the Seventh Circuit, which affirmed.

The statutory-interpretation question depends on whether the use of “or” in Section 1129(b)(2)(A) means that any plan may be found “fair and equitable” if it satisfies any one of subsections (i), (ii), and (iii). Under subsection (i), a plan may provide that secured lenders will keep the full value of their liens and receive a stream of payments meeting certain requirements. Under subsection (ii), a plan may provide that the collateral will be sold free and clear of existing liens and the secured creditor given the proceeds, but the secured creditor must be given the right to credit bid. Under subsection (iii), a plan may provide that holders of secured claims will realize the “indubitable equivalent” of their claims. 

The Seventh Circuit held that a plan may not be found “fair and equitable” merely because it satisfies the “indubitable equivalent” requirement of subsection (iii). Allowing a plan to “dispose of encumbered assets in the ways discussed in Subsections (i) and (ii),” even though the plan “fail[s] to meet those Subsections’ requirements,” would create a conflict among the subsections, the court said, and allow the general “indubitable equivalent” standard to subsume the more specific provisions governing sales. 651 F.3d 642, 652. Under the Seventh Circuit’s reading of the statute, plans can qualify as “fair and equitable” under subsection (iii) only if they “propose[] disposing of assets in ways that are not described in Subsections (i) and (ii).” Ibid. The Seventh Circuit acknowledged that its decision created a conflict with decisions of the Third and Fifth Circuits. 

Absent extensions, amicus briefs in support of the petitioners will be due on February 2, 2012, and amicus briefs in support of the respondent will be due on March 5, 2012. Any questions about this case should be directed to Dan Himmelfarb (+1 202 263 3035) in our Washington, DC office.

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