U.S. Supreme Court Protects Secured Creditor's Right To Credit-Bid

On May 29, 2012, the United States Supreme Court issued its awaited decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. __ (2012), and held that a debtor cannot sell its property free and clear of liens under a plan of reorganization without allowing lienholders to credit-bid. The Court settled a circuit split on this issue between the Third Circuit (see In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010)) and the Seventh Circuit (see River Road Hotel Partners, LLC. v. Amalgamated Bank, 651 F.3d 642 (7th Cir. 2011)) by affirming the Seventh Circuit's decision in RadLAX. The main issue before the Court was whether "a Chapter 11 bankruptcy plan may be confirmed over the objection of a secured creditor pursuant to 11 U.S.C. § 1129(b)(2)(A), if the plan provides for the sale of collateral free and clear of the creditor's lien, but does not permit the creditor to 'credit-bid' at the sale." In a rare 8-0 decision,1 the Court plainly said, "No."

Generally, a bankruptcy court may confirm a Chapter 11 plan only if each class of creditors votes in favor of the plan. However, under section 1129(b)(1), a bankruptcy court can confirm a nonconsensual plan — referred to as a "cramdown" plan — if the impaired class of claims or interests is not discriminated against unfairly and is treated fairly and equitably. See 11 U.S.C. § 1129(b)(1). In order to cramdown a class of secured claims, a Chapter 11 plan must meet one of three requirements set forth in section 1129(b)(2) to be deemed as providing "fair and equitable" treatment to the nonconsenting creditor's claim(s). Section 1129(b)(2) requires that the plan must provide either:

(i)(I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and (II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property;

(ii) for the sale, subject to section 363(k) of this title, 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)...