of value. Allowing a sale to be
consummated through a crammed
down plan on a showing of “indubitable
equivalent” value given would have
provided an opportunity for a judge to
disregard a secured creditor’s bargained-for second remedy (foreclosure on
collateral) and potentially undervalue the
secured creditor’s collateral.
9 The court’s
ruling allowed bargained-for state court
remedies (foreclosure) to trump judicial
valuation discretion, allowing market
factors to determine value (assuming that
a credit bidder is acting in its economic
best interest), as opposed to a court.
Michael Parker is a partner with Fulbright &
Jaworski L.L.P. in the firm’s San Antonio office and
is certified in business and consumer bankruptcy
by the Texas Board of Legal Specialization. He was
a co-founder of and is a past president of TMA’s
Central Texas Chapter. Parker can be reached at
firstname.lastname@example.org and (210) 270-7162.
In the end, Scalia tightly crafted an
opinion that relied heavily on statutory
construction rules and common sense
rather than on broad policy statements
about debtor or creditor rights. Allowing
a debtor to circumvent a secured
creditor’s ability to credit bid its secured
debt at a sale of its collateral would have
had broad implications for turnaround
professionals—as was admitted at oral
argument. Only a few cases in which
a debtor attempted to confirm plans
without allowing secured creditors to
credit bid existed. RadLAX has closed
the door on any future such cases. J
8 If the secured creditor wins the auction,
it can reduce or forgive the amount that
the debtor owes it; in exchange, it gets the
collateral. Even if the creditor doesn’t win,
participating in the bidding can help to drive
up the price paid for the assets, potentially
benefitting the bankruptcy estate.
9 During oral argument in Radlax, the justices
appeared to shoot down one of the most
common practical arguments that had been
used against allowing credit bidding by a
secured creditor. The debtors argued that
allowing credit bidding at a sale chills bidding
by discouraging other bidders who might have
other bidding opportunities and who know that
the credit bidder can, if it chooses, come to the
sale, bid all its debt, and take away the collateral
opportunities. Transcript at 9-11, 38 and 46.
The Supreme Court, like the Bankruptcy Court
before it, identified the misplaced subject of that
argument. The argument applies with equal
force if other bidders know that one bidder plans
to come to an auction with cash equal to the
credit bid amount. Credit bidding doesn’t chill
the bidding, but a bidder with the capacity—cash
or credit—to outbid other bidders might. The
argument is not one against credit bidding, so
much as a concern that a stronger bidder might
discourage weaker bidders. But that will always
be the case in a proper auction. Moreover, the
receipt of credit rather than cash for the collateral
is of equal value economically to the bankruptcy
estate, as the secured lender will always have first
rights to any cash bid for the collateral anyway.
1 RadLAX Gateway Hotel, LLC v.
Amalgamated Bank, No. 11-166, ___
U.S. ___ (May 29, 2012) (RadLAX).
2 All section references are to Title 11 of the
United States Code unless otherwise noted.
3 Justice Kennedy recused himself
from consideration of the case.
4 In re Philadelphia Newspapers, LLC, 599
F.3d 298 (3d Cir. 2010); In re Pacific Lumber
Co., 584 F.3d 229 (5th Cir. 2009).
5 Subsection (b)( 2)(A) states that a plan is
“fair and equitable” if it provides:
(i) [only applies in reorganization,
not liquidation plans]
(ii) for the sale, subject to section 363(k) of
this title[credit bid right], of any property
that is subject to the liens securing
such claims, free and clear of such
liens, with such liens to attach to the
proceeds of such sale, and the treatment
of such liens on proceeds under clause
(i) or (iii) of this subparagraph; or
(iii) for the realization by such holders of the
indubitable equivalent of such claims.
11 U.S.C. § 1129(b)( 2)(A).
6 As opposed to the more general
11 U.S.C. § 1129(b)( 2)(A)(iii).
7 This amount was subsequently increased to $55
million. RadLAX at 2 n. 1. It was also alleged in
the underlying proceedings that members of
the debtors’ existing management team were
also investors in the stalking horse bidder, but
the Supreme Court did not address this point.
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