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Justices tackle credit-bidding issue

The Supreme Court took up a complicated bankruptcy case last week, parsing the language of the Bankruptcy Code to determine if a Chapter 11 debtor must give a secured creditor the right to credit bid items being sold at auction.

The case, RadLAX Gateway Hotel v. Amalgamated Bank, stems from a Chapter 11 bankruptcy filing by the owners of a failed hotel construction project. In their “cramdown” bankruptcy plan, the debtors proposed selling the hotel’s assets in an open auction.

The creditor objected to the plan, arguing that under the Bankruptcy Code it had the right to bid on the items using its credit in the property.

The 7th Circuit agreed with the creditor, creating a split in the federal circuits. The Supreme Court granted certiorari and heard the case April 23.

David M. Neff, a partner in the Chicago office of Perkins Coie, argued on the debtors’ behalf that debtors have a choice of how to satisfy a secured creditor’s claims under the plain language of the statute.

If creditors are given the unrestricted right to credit bid, Neff said, “in a case like ours, we don’t believe we will ever get to an auction because no one else will show up.”

“But you’re depriving the secured creditor of the opportunity to hold on to the asset,” said Chief Justice John G. Roberts, Jr.

Deanne E. Maynard, a partner in the Washington office of Morrison Foerster, argued that the statute clearly spells out creditors’ rights.

“Secured creditors bargain for the right to be repaid in full or, if not, to foreclose and take the collateral that secures their loan,” Maynard said.

“You really do just kind of elide the fact that the statute says ‘or,’” Roberts said.

“No, we give full meaning to the ‘or,’” Maynard replied. “We don’t dispute that these are three alternative ways to cram down a plan. The question here is [over] the scope of the alternatives and in which circumstances in they apply.”

Sarah E. Harrington, assistant to the solicitor general, argued as amicus in support of the creditors. But before she could utter a word after approaching the podium, Justice Antonin Scalia jumped in.

“It is a big case for the government,” he said.

“It is a big case for the government,” Harrington agreed. “As you suggest, the government [has] constraints on our ability to cash bid at the sale of our collateral through a bankruptcy, and the detailed cramdown provisions of Chapter 11 are designed to protect the rights of secured creditors.”

A decision is expected before the end of the current term.

Lawyers USA is a sister publication of The Daily Record.