RadLAX Gateway Hotel, LLC v. Amalgamated Bank: The Supreme Court Holds That Debtors Must Permit Credit-Bidding When Selling An Asset Free And Clear Of A Secured Creditor's Lien Under A Chapter 11 Plan

On May 29, 2012, the Supreme Court issued its decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank,1 resolving a controversial issue that had divided the courts of appeals: whether a chapter 11 debtor may bar a secured creditor from credit-bidding its claim when its collateral is sold under a plan of reorganization.2 The Court held unanimously (8-0; Justice Kennedy did not participate) that the Bankruptcy Code does not permit a debtor to bar credit-bidding at such a sale.

RadLAX ensures that secured creditors will retain one of the central protections afforded them in a chapter 11 cram-down: the right, when their collateral is sold, to bid up to the full amount they are owed and obtain the collateral, if they value it more highly than other bidders, without being required to put up additional cash. That right to credit-bid helps preserve the benefit of the bargain the secured creditor made outside bankruptcy—either to be paid what it is owed, or to take its collateral.

RadLAX is thus important for its holding alone. As discussed below, however, the Supreme Court's reasoning and the general approach it took to the case are also instructive, particularly in light of the route the credit-bidding issue took to the Court.

The Credit-Bidding Issue In A Nutshell

Section 1129(b)(2)(A) of the Bankruptcy Code provides three alternative routes through which a debtor can confirm a chapter 11 plan that crams down the claims of secured creditors.3 Under clause (i), the plan may provide that each secured creditor will keep its lien and receive a stream of payments with a face value of the full amount of the creditor's claim and a net present value equal to the present value of the creditor's security interest.4 Under clause (ii), the plan may provide for the sale of collateral free and clear of a secured creditor's lien, with the lien attaching to the proceeds of the sale, subject to the requirement that the creditor is entitled to credit-bid its entire claim.5 Or, under clause (iii), the plan may provide that the secured creditor will receive "the indubitable equivalent" of its claim.6

The question confronting the Supreme Court in RadLAX was whether a chapter 11 cram-down plan could be confirmed if it provided for the sale of collateral free and clear of a secured creditor's lien without permitting credit bidding, as clause (ii) would require, but also purported to provide that the secured creditor would receive the indubitable equivalent of its claim under clause (iii). The debtor contended that it was required to satisfy only one of the three alternatives, and that so long as its plan gave the secured creditor the indubitable equivalent of its claim, the debtor was not required to allow credit-bidding. The creditor countered that, under the debtor's interpretation of the statute, clause (ii)'s credit-bidding requirement would be rendered essentially meaningless, and that a free-and-clear sale of collateral that barred credit-bidding was inconsistent with the overall structure of protections the Bankruptcy Code provides for secured creditors.

The Split Among The Courts Of Appeals

The question presented in RadLAX had divided the courts of appeals...