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RadLAX – One Decision to Rule Them All
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RadLAX – One Decision to Rule Them All

A recent U.S. Supreme Court decision put an end to a split between federal circuit courts, holding that a debtor cannot gain court approval of a Chapter 11 reorganization plan over the objection of a secured class if the plan proposes to sell a creditor’s collateral free and clear of liens without allowing the creditor an opportunity to ‘credit-bid’[1] at the auction. 

When a class of creditors objects to the approval of a Chapter 11 reorganization plan, the debtor may seek court approval of the plan anyway.  Known as a cram-down plan, court approval is governed by section 1129(b) of Title 11 of the U.S. CodeSection 1129(b) sets out three alternative means by which a plan can be properly approved by a court, despite creditors’ objections.

The RadLAX case[2] reached the Supreme Court on what amounts to a statutory construction issue.  The debtor argued that while section 1129(b)(2)(A)(ii) requires the debtor to provide a secured creditor the opportunity to credit-bid at a sale in accordance with section 363(k), section 1129(b)(2)(A)(iii) essentially negates the requirement as long as a creditor receives the ‘indubitable equivalent’ of its secured claim.  In this case, the debtor proposed that the indubitable equivalent of the creditor’s claim would be the cash generated by the sale.

Justice Scalia, writing for the majority, found the debtor’s argument “hyperliteral and contrary to common sense,” citing a well-established canon of statutory interpretation: The specific governs the general.

In other words, where a body of law sets forth a general permission or prohibition along with a contradictory specific permission or prohibition, the specific provision is construed as the exception to the general rule. 

As it applies to this case, section 1129(b)(2)(A)(ii) is the specific rule — requiring a debtor to provide secured creditors the opportunity to credit-bid at a sale contemplated by a cram-down plan of reorganization.  Section (iii) provides the general rule that a plan may be confirmed over the objection of a class of secured claims as long as the proposed plan allows the objecting creditors to realize the ‘indubitable equivalent’ of their secured claims.

In essence, rather than agreeing with the debtor that section (iii) negates the technical requirements of section (ii), the Supreme Court reached the more logical decision that section (ii) is an exception to section (iii) that is invoked in the event the debtor proposes to sell a creditor’s collateral free and clear of liens.

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[1]  As noted by the Court, “[t]he ability to credit-bid helps to protect a creditor against the risk that its collateral will be sold at a depressed price. It enables the creditor to purchase the collateral for what it considers the fair market price (up to the amount of its security interest) without committing additional cash to protect the loan. That right is particularly important for the Federal Government, which is frequently a secured creditor in bankruptcy and which often lacks appropriations authority to throw good money after bad in a cash-only bankruptcy auction.”

[2] RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166, 2012 U.S. LEXIS 3944 (May 29, 2012).

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