Restructuring

Contributed by Abigail Lerner
On April 23, 2012, the United States Supreme Court heard oral argument on the RadLAX Gateway Hotel, LLC v. Amalgamated Bank case.  On April 24, 2012, we provided a brief summary of the competing arguments made by the debtors and Amalgamated Bank to the Supreme Court.  With the transcript of oral argument now available, we have decided to revisit our discussion of the RadLAX case to see what we can glean from the questions interposed by the justices and the arguments made before the Supreme Court.
As a reminder, the issue presented to the Court was whether to overturn the Seventh Circuit’s affirmation of the bankruptcy court’s decision to deny confirmation of the debtors’ plans on the basis that they were flawed because the plans sought to sell encumbered assets free and clear of liens without allowing the secured lender to credit bid.  Because the RadLAX ruling ran contrary to the decisions of the Third and Fifth Circuits, it seems as though the entire legal community tuned in to oral argument to gain any insight on how the Supreme Court would resolve the circuit split.
David M. Neff, counsel for the debtors, the petitioners in the case, opened oral argument.  Mr. Neff wasted no time and began with the punch line of his clients’ case – that although the debtors’ plans, which provided for a sale of assets, did not permit credit bidding, the plans provided the secured creditor with the indubitable equivalent and, therefore, the plans were fair and equitable under section 1129(b)(2)(A) of the Bankruptcy Code.  The justices, too, wasted no time getting to the heart of the matter.  Immediately following Mr. Neff’s statement, Justice Ginsburg interjected with a question likely asked, or at least wondered, by many attorneys, including bankruptcy practitioners alike:  “[b]ut how does one determine what is the indubitable equivalent of the creditor’s claim?”  Mr. Neff’s response, that the indubitable equivalent must be an amount that is at least equal to the amount of the secured claim, not surprisingly, did not put an end to the justices’ quest to understand what Congress meant in its reference to the “indubitable equivalent.”
In parsing through the meaning of the statute, likely much to Mr. Neff’s chagrin, Justice Breyer plainly remarked that “the best way to [give the creditor the indubitable equivalent] would be let[ting] the creditor credit bid.”  The situation seemed to worsen for debtors’ counsel as Justice Scalia agreed with Justice Breyer, indicating that an interpretation of the statute according to the debtors’ theory would lead to “not a very sensible statute.”  Moving away from a general dialogue about the meaning of the statute, Justice Scalia guided the conversation towards a practical application of the statute through the use of a specific example involving the United States.  In doing so, Justice Scalia asked Mr. Neff whether he felt “sorry” for the United States who, reminded Justice Scalia, is often in the position of a creditor.  The government, remarked Justice Scalia, may not be able to come up with cash to bid on its asset and, under Mr. Neff’s reading of the statute, may be precluded from credit bidding.  What, then, of the rights of the United States as a creditor?  How can it protect its assets?  In response, Mr. Neff stated that in instances where a secured creditor is unable to bid cash, the creditor could ensure its rights were protected by obtaining relief from the Bankruptcy Court authorizing the creditor to play a greater role in marketing and selling its assets.  Thus, concluded Mr. Neff, with this enhanced role, the United States could ensure that it would receive “top dollar” on its claim.  Reserving the remainder of his time for rebuttal, Mr. Neff turned the podium over to Deanne E. Maynard, counsel to Amalgamated Bank, the secured creditor and respondent in the case.
While Ms. Maynard’s approach to beginning her argument was similar to that of Mr. Neff’s – starting with an interpretation of section 1129(b)(2)(A) of the Bankruptcy Code – the substance was, of course, very different.  According to the respondent, when a plan proposes to sell collateral free and clear of a secured creditor’s liens, clause (ii) of section 1129(b)(2)(A) entitles the secured creditor to credit bid in the absence of a finding of cause precluding it from doing so.  Following this opening statement, Chief Justice Roberts, examining the exact wording of the statute, raised an issue that was a linchpin to the petitioners’ case.  The statute, recognized the Chief Justice, uses the phrase “or” with respect to a debtor’s options under section 1129(b)(2)(A).  Therefore, Chief Justice Roberts posited, could not there be a choice – to allow a creditor to credit bid or to provide the indubitable equivalent of the creditor’s claims?  Ms. Maynard plainly stated that she does not dispute that the statute provides three alternatives to cram down a plan.  The question, continued Ms. Maynard, is the scope of the alternatives and in what circumstances they apply.  Relying on the words of the statute as the Chief Justice had, Ms. Maynard noted that section 1129(b)(2)(A) references section 363(k) of the Bankruptcy Code.  This section, explained Ms. Maynard, requires that the holder of a claim be afforded an opportunity to credit bid unless the court, for cause, orders otherwise.  Accordingly, concluded Ms. Maynard, a creditor must be permitted to credit bid unless cause is shown.
Following a discussion designed to address Justice Sotomayor’s questions regarding what would constitute good cause not to permit credit bidding, Chief Justice Roberts changed the direction of the argument in asking about the other creditors in a bankruptcy case and whether the bankruptcy court should consider their interests in determining whether to require that a secured creditor be afforded the right to credit bid.  Ms. Maynard remarked that the RadLAX debtors’ property was “well under water” and that there was no equity in it so there would be no cash for junior creditors.  Chief Justice Roberts reminded Ms. Maynard that the Court must issue a ruling that is going to apply in every case, and, therefore, whether or not the property in RadLAX was under water was irrelevant.
The United States, as amicus curiae, also argued in support of the respondent’s position.  Agreeing with Justice Scalia’s statement that the case was “a big case for the government,” Sarah E. Harrington, arguing for the United States repeated Justice Scalia’s earlier observation that the government is often in the same position as secured creditors and may be constrained in its ability to submit a cash bid for its collateral.  In support of the argument that a secured creditor should have the right to credit bid, Ms. Harrington explained that the type of sale contemplated in clause (ii) of section 1129(b)(2)(A) of the Bankruptcy Code was designed to guarantee that a creditor will get the benefit of its bargain and that the Bankruptcy Code should prevent a debtor from cashing out its creditors at a low value.
On rebuttal, Mr. Neff reiterated that by conducting an auction and satisfying the indubitable equivalent standard, a debtor undertakes the market valuation demanded by the respondent.  Bringing to light the circuit split, Justice Sotomayor reminded Mr. Neff that, although the decisions of the Third and Fifth Circuits on the issue supported his position, those decisions were “contrary to what the majority of courts have done for the longest time.”  Justice Sotomayer then posited what the value was for upsetting the norm.  In response, Mr. Neff stated that the “norm” – where courts have required that a creditor be permitted to credit bid – occurred in the context of a 363 sale as opposed to the type of sale contemplated here – a plan sale.  With that explanation, oral argument concluded.
As clearly demonstrated in RadLAX, there are arguments for and against requiring that a secured creditor be permitted to credit bid under a plan that contemplates a sale of the creditor’s assets free and clear of liens.  Of course, we will report back when the Supreme Court rules on this issue.  A copy of the transcript from the oral argument can be found here.