In a “cramdown” reorganization involving the sale of the debtor’s assets, does a secured creditor have an absolute right to use its outstanding claim against a debtor to purchase its own collateral? The Supreme Court will answer this question in April. The contested use of credit bidding under 1129(b) of the Bankruptcy Code turns on the interpretation of a single “or” and the meaning of “indubitable equivalent.”
In December of 2011, the Supreme Court granted certiorari in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166 (cert. granted Dec. 12, 2011), a Seventh Circuit case that denied the approval of a Chapter 11 plan where the objecting secured creditor was deprived of its right to credit bid its claims.
The dispute centers around the auction of the InterContinental Chicago O’Hare and the Radisson Hotel at Los Angeles Airport, both owned by RadLAX, River Road Hotel Partners LLC. The debtors attempted to exclude the lender, Amalgamated Bank, from participating in the sale of the assets under section 1129(b)(2)(A)(iii) of the Code.
At the crux of the issue is whether secured creditors should have the absolute right to credit bid, or use the amount of their debt to bid on secured collateral, at a bankruptcy auction. The Circuit split derives from disagreement over whether the language in section 1129(b) “could be subject to multiple reasonable interpretations.” The Seventh Circuit found that the statute was indeed ambiguous and could be interpreted in one of two ways. However, the court noted that, ambiguity aside, it would be impossible for creditors to receive the “indubitable equivalent” of their claims without the opportunity of credit bidding, given the risk of undervaluation of collateral. Thus, the Seventh Circuit concluded that credit bidding must be permitted. By contrast, the Third and Fifth Circuits in In re Philadelphia Newspapers and Pacific Lumber, found that the “or” between subparagraph (ii) and (iii) provided a sale option that precludes credit bidding as long as the lender received the “indubitable equivalent” of its secured claim from the sale.
Credit bidding is allowed under 363(k) and, prior to the emergence of the Circuit split, constituted an unquestioned practice of ensuring the best price for auctioned assets. Credit bidding implicates two sections of the Code: 1129(b) and 363(k). 1129(b) addresses permissible sales over the objections of secured creditors (a/k/a “cramdown”). 363(k) addresses the conditions necessary for credit bidding. 1129(b)(2)(A) permits a plan to be confirmed over the objection of a secured creditor if the plan is Fair and Equitable. A plan is fair and equitable, with respect to secured creditors, under the Code if: (i) the secured creditor’s retain their liens and receive deferred cash payments equaling the present value of at least the allowed amount of their claim, as of the effective date of the plan; (ii) there is a sale of the assets free and clear of liens subject to the procedures set forth in Section 363(k) of the Bankruptcy Code (providing for credit bidding); or (iii) the secured creditor receives the “indubitable equivalent” of its claims.
The “indubitable equivalent” term was introduced by Judge Hand and has been interpreted as describing the unquestionable value of a lender’s secured interest in the collateral. Those in favor of credit bidding argue that credit bidding protects against the undervaluation of the assets and establishes a base market price, thus increasing the likelihood that creditors will be made whole. Opponents criticize credit bidding for allowing creditors to bid up the price without paying out any cash. Lenders and debtors alike are looking for a quick resolution and clarity on the issue of credit bidding to ensure continued confidence in the courts and business predictability.