June 14, 2012

In a Bloomberg Brief: Bankruptcy & Restructuring article titled “Supreme Court’s Affirmation of Credit Bidding Supports Lenders Amid Property Price Drop,” Partner Patrick J. Trostle analyzes the Supreme Court’s recent decision in RadLAX Gateway LLC, et al. v. Amalgamated Bank.  Mr. Trostle observes that the high court’s ruling protects the value of a secured creditor’s claim from being reduced to the value another party is willing to pay for the property and “will protect lenders who advanced funds before the Great Recession only to find themselves vastly undersecured after the real estate crash of 2008.”  The decision affirmed a Seventh Circuit Court of Appeals ruling that a secured creditor must be allowed to credit bid its debt when a debtor seeks nonconsensual confirmation of a Chapter 11 plan under Bankruptcy Code Section 1129(b)(2)(A).  The Section, which authorizes a bankruptcy court to confirm a Chapter 11 plan over the objection of a secured creditor if the plan is “fair and equitable” with respect to the claim, provides three ways to meet this standard: (i) the secured creditor’s lien remains on the property and the creditor receives deferred cash payments; (ii) the property is sold free and clear of the creditor’s lien, subject to Section 363(k) of the Bankruptcy Code, which allows the creditor to credit bid at the sale, up to the amount of its claim, and receive a lien on the sale proceeds; or (iii) the plan provides the creditor with the “indubitable equivalent” of its claim.  The RadLAX debtors argued that their proposal to sell the collateral free and clear of the lender’s lien, without providing the creditor the right to credit bid, was confirmable under the “indubitable equivalent” test.  In rejecting that theory, Mr. Trostle notes, the Court relied on the canon of statutory construction that “the specific governs the general,” and refused to apply the general language of clause (iii) to a matter specifically dealt with in clause (ii).  In addition, Mr. Trostle writes, the decision “shows the limits of the plain meaning rule” of statutory construction “in cases where the word ‘or’ does not necessarily mean that all statutory options are equivalent…As a result, the impact of the RadLAX decision could be felt in many other areas of the Bankruptcy Code, and perhaps other federal statutory schemes as well.”