Restructuring

Contributed by Abigail Lerner
In a decision that likely will please secured lenders and make a debtor think twice before proposing a plan that prohibits credit bidding, the United States Court of Appeals for the Seventh Circuit ruled in River Road Hotel Partners, LLC v. Amalgamated Bank that the debtors’ plans could not be confirmed because they sought to sell encumbered assets free and clear of liens without allowing their lenders to credit bid at the asset auctions, in violation of section 1129(b)(2)(A)(ii)’s requirement that secured lenders be afforded credit-bidding rights.
In River Road Hotel Partners, two sets of entities – the River Road Hotel Partners, LLC and related entities (the River Road Debtors) and RadLAX Gateway Hotel, LLC and its affiliates (the RadLAX Debtors) – found themselves short of funds and unable to repay loans incurred in connection with constructing hotel and event space.  Unable to reach agreement with their respective lenders, in August 2009, the debtors filed chapter 11 petitions in the United States Bankruptcy Court for the Northern District of Illinois.
Approximately one year after commencing bankruptcy, the debtors each filed a proposed plan of reorganization in their respective bankruptcy cases seeking to sell substantially all of their assets pursuant to an auction.  The debtors procured stalking horse bidders to set the floor at the auction.  Amalgamated Bank, the administrative agent and trustee to the debtors’ lenders, filed objections to the debtors’ proposed bid procedures, which sought to deprive the lenders of their credit bid rights.  Amalgamated argued that the debtors could not satisfy section 1129(b)(2)(A) of the Bankruptcy Code because the debtors proposed to sell encumbered assets free and clear of liens without allowing the lenders to credit bid at the asset auctions.  In response, the debtors argued that although their plans did not comply with section 1129(b)(2)(A)(ii), the plans were confirmable because they provided the lenders with the indubitable equivalent of their claims and, thus, the plans satisfied section 1129(b)(2)(A)(iii)’s requirements.  On July 22, 2010, the bankruptcy court ruled that the debtors’ plans could not be confirmed under section 1129(b)(2)(A)(iii) and, on October 5, 2010, the bankruptcy court entered orders denying the debtors’ bid procedures motions.  The debtors appealed the bankruptcy court’s decision, and the bankruptcy court subsequently entered certifications granting the debtors’ requests for direct appeal to the Seventh Circuit.
Before addressing the merits of the debtors’ appeal, the Seventh Circuit addressed the lenders’ argument that the parties’ dispute was moot as a result of the expiration of certain milestone dates contained in the debtors’ asset purchase agreements.  Finding that the issue raised by the debtors’ appeal was not moot, the Seventh Circuit reasoned, among other things, that, if the appeal was dismissed for mootness, the debtors would simply re-file their plans with new asset purchase agreements, the bankruptcy court would deny confirmation on the same grounds, and the debtors would bring their appeal again.  Accordingly, the Seventh Circuit found that the appeal fit within the exception to mootness doctrine because there was a reasonable expectation that the same appealing party would be subject to the same action again.
The Seventh Circuit then turned to the issue at hand – whether the debtors could confirm their plans under section 1129(b)(2)(A)(iii) without allowing the lenders to credit bid.  Recognizing that it is not the first court to tackle this issue, the Seventh Circuit referenced the holdings of its sister circuits on the topic.  Specifically, the Fifth Circuit, in Pacific Lumber, and the Third Circuit, in Philadelphia Newspapers, held that a plan that contemplates a sale of assets free and clear of liens may be deemed “fair and equitable” under section 1129(b)(2)(A) of the Bankruptcy Code even in the absence of a provision that allows for credit bidding.  Here, the Seventh Circuit disagreed.
First, the Seventh Circuit began by looking to the plain language of section 1129(b)(2)(A).  Concluding that there are two plausible interpretations of the statute – one that reads subsection (iii) to allow a debtor to confirm any type of plan, and one that reads subsection (iii) to only allow a debtor to confirm a plan that disposes of assets in ways that can be distinguished by those covered by subsections (i) and (ii) – the Seventh Circuit reasoned that it must look beyond the text of section 1129(b)(2)(A) to determine which of these interpretations is correct.  To do so, the Seventh Circuit concluded that it was required interpret the statute in a way that makes every part of it meaningful.
The Seventh Circuit explained that subsections (i) and (ii) of section 1129(b)(2)(A) set forth specific requirements that plans must meet when a debtor seeks to retain possession of or sell an encumbered asset with the liens attached or sell an encumbered asset free and clear of liens, respectively.  If one were to read subsection (iii) in the manner the debtors proposed – that is, as stating that any plan that satisfies a general “indubitable equivalent” requirement should be granted “fair and equitable status” – then plans could qualify for treatment under subsection (iii) even if they sought to dispose of encumbered assets in a manner described in either subsection (i) or (ii) but failed to meet those subsections’ requirements.  This understanding of subsection (iii), the Seventh Circuit reasoned, would render subsections (i) and (ii) superfluous.  The court further remarked that if subsection (iii) permitted a debtor to sell its assets free and clear of liens without permitting credit bidding, the position advanced by the debtors, then subsection (ii) would lack any significance.  The more plausible interpretation of section 1129(b)(2)(A), the court held, is one where plans would only qualify as “fair and equitable” under subsection (iii) if they proposed disposing of assets in ways not covered by subsections (i) and (ii).
Second, the Seventh Circuit considered the ways in which other sections of the Bankruptcy Code treat secured creditors’ interests.  Relying on arguments made by Judge Ambro in his dissenting opinion in Philadelphia Newspapers, the court remarked that a review of other sections of the Bankruptcy Code reveal a Congressional interest in ensuring that secured creditors are properly compensated and, further, that the Bankruptcy Code does not appear to contain any provisions that recognize an auction sale where credit bidding is unavailable as a way to dispose of encumbered assets.  Finding that the debtors’ interpretation of subsection (iii) of section 1129(b)(2)(A) renders subsections (i) and (ii) superfluous and ignores the protections provided to secured lenders by the Bankruptcy Code, the Seventh Circuit rejected the debtors’ reading of the statute and ruled that cramdown plans that contemplate selling encumbered assets free and clear of liens at an auction must satisfy the requirements of subsection (ii) of section 1129(b)(2)(A). 
It remains to be seen whether other circuits will follow the Seventh Circuit’s decision in River Road Hotel Partners.  With the Seventh Circuit’s decision in River Road Hotel Partners, LLC, however, the situation for secured creditors may be looking up.