United States Supreme Court Affirms Secured Lender's Right To Credit Bid Pursuant To Plan Of Reorganization

1. Introduction

   Today, the United States Supreme Court in RadLAX Gateway Hotel, LLC, et al. v. Amalgamated Bank unanimously1 affirmed the decision of the Seventh Circuit in In re River Road Hotel Partners, LLC2 that a secured creditor has the right to credit bid at a foreclosure sale of its collateral, even if such sale is conducted pursuant to a plan of reorganization. Specifically, the Supreme Court held that the debtors could not confirm a plan under the so-called cramdown provisions of the Bankruptcy Code where the debtors were seeking to sell the bank's collateral free and clear without allowing the bank to credit bid its secured claim at the sale.

   The Supreme Court's decision resolved a circuit split between the Third and Fifth Circuits, on the one hand, and the Seventh Circuit, on the other hand. Both the Third Circuit in Citizens Bank of Penn. v. Phila. Newspapers, LLC (In re Philadelphia Newspaper, LLC)3 and the Fifth Circuit in Bank of N.Y. Trust Co., NA v. Official Unsecured Creditors' Comm. (In re Pacific Lumber Co.)4 had ruled that a debtor may, pursuant to a bankruptcy plan, sell the secured creditor's collateral free and clear of liens, and need not provide the secured creditor with a right to credit bid in the sale process, so long as the plan provides the secured creditor with the "indubitable equivalent" of its secured claim. The Seventh Circuit in River Road concluded that a secured creditor must be provided with the right to credit bid.

   In affirming the Seventh Circuit's decision in River Road, the Supreme Court removed a cloud of uncertainty surrounding the ability of secured lenders to utilize credit bidding in the context of chapter 11 plans. Secured lenders may breathe a sigh of relief.

2. Background

   The decisions in RadLAX, Philadelphia Newspapers, and Pacific Lumber Co., each arise under the "cramdown" provisions of Bankruptcy Code section 1129(b). That section permits a debtor (or other plan proponent) to confirm a chapter 11 plan over the objection of a class of creditors (such as secured creditors), so long as the plan (i) does not discriminate unfairly among classes of claims or interests and (ii) is fair and equitable with respect to those classes of claims or interests that have not accepted the plan.

   Section 1129(b)(2)(A) provides that a plan is "fair and equitable" with respect to a class of secured claims if the plan provides that: (i) the secured creditors retain their liens and receive deferred cash...