Seventh Circuit Affirms Bankruptcy Court Ruling That Sale Of Assets Through Plan May Not Use 'Indubitable Equivalent' Standard To Prevent Secured Creditors From Credit Bidding

Originally published in Pratt's Journal of Bankruptcy Law

A recent Seventh Circuit opinion establishes a circuit split over the issue of whether debtors may prohibit credit bidding in connection with asset sales that are conducted through Chapter 11 plans. The authors analyze the decision and the circuit court split.

The Seventh Circuit recently issued an opinion1 in the bankruptcy case of River Road Hotel Partners, LLC disagreeing with the Third Circuit's holding in In re Philadelphia Newspapers, LLC2 regarding a free-and-clear sale of assets under a Chapter 11 plan that denied a secured creditor the right to credit bid. The Third Circuit had held that a sale of assets under a Chapter 11 plan could be confirmed under the "indubitable equivalent" test in clause (iii) of Section 1129(b)(2)(A) of the Bankruptcy Code without providing the right to credit bid preserved in clause (ii) of that same section. In River Road, the Seventh Circuit disagreed, finding that a sale free and clear of liens through a Chapter 11 plan must satisfy subsection (ii) and include the right to credit bid.

In particular, the Seventh Circuit noted that the ability to credit bid is "a crucial check against under valuation," without which a sale of assets through a Chapter 11 plan "might [or might not] provide secured lenders with the indubitable equivalent of their claims."3

The Seventh Circuit further disagreed with the Third Circuit's interpretation of clause (iii) of Section 1129(b)(2)(A) of the Bankruptcy Code because it renders clauses (i) and (ii) superfluous and such interpretation "sharply conflicts" with the Bankruptcy Code's treatment of secured creditors in other sections of the Bankruptcy Code.4

BACKGROUND AND BANKRUPTCY COURT DECISION IN RIVER ROAD

The River Road decision involved two separate jointly administered Chapter 11 cases. In each of the cases, lenders were owed over $120 million for hotel construction loans. The debtors filed separate Chapter 11 plans to sell substantially all of their assets at auctions free and clear of liens and distribute the net sale proceeds to their creditors. They also filed bidding procedures providing that the lenders would not be allowed to credit bid at the auctions. The debtors argued that, while this procedure would not satisfy the confirmation requirements of Bankruptcy Code Section 1129(b)(2)(A)(ii), which would require secured lenders to be permitted to credit bid, their plans would still be confirmable under Section 1129(b)(2)(A)(iii) because it would provide the lenders with the "indubitable equivalent" of their claims.5 The lenders' agent objected to the bidding procedures, and the bankruptcy court ruled in its favor, holding without substantive discussion that, while the debtors' attempt to circumvent credit bidding followed the majority decision in Philadelphia Newspapers, the court found the dissent from that case "more persuasive."6 The case was then certified for direct appeal to the Seventh Circuit.

PHILADELPHIA NEWSPAPERS

In Philadelphia Newspapers, the debtors filed a Chapter 11 plan providing that...