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Supreme Court sides with bank on right to credit-bid at auction

Secured lenders must be allowed to credit-bid at an auction that would extinguish their interest in the collateral as part of a debtor’s Chapter 11 cramdown plan, the Supreme Court has ruled.

The case involved a Chapter 11 bankruptcy filing by the owners of a failed hotel construction project. A creditor bank objected to the owners’ proposed bankruptcy plan, which provided for the sale of the hotel’s assets in an open auction. The bank argued that it had the right under §1129(b)(2)(A) of the Bankruptcy Code to bid on the items using its credit in the property.

The debtors claimed that the Code allows, but does not require, a debtor to give a secured creditor the right to credit-bid at an auction. Instead, they argued, the debtor has three options: §1129(b)(2)(A)(i) allows the debtor to pay off the creditor’s lien over time; §1129(b)(2)(A)(ii) allows creditors to credit bid on secured assets that are being sold free of the lien; and §1129(b)(2)(A)(iii) provides that a plan can be deemed “fair and equitable” when it gives creditors the “indubitable equivalent” of a secured creditor’s claim.

Since the debtors in this case chose the third option, the creditor was not entitled to credit-bidding rights, the debtors claimed.

The 7th Circuit ruled in favor of the bank, holding that §1129(b)(2)(A) does not authorize debtors to use subsection (iii) to confirm a reorganization plan contrary to a secured creditor’s right to credit bid.

That created a split in the federal circuits, since the 5th and 3rd Circuits had ruled in 2009 and 2010, respectively, that the statute plainly gives no absolute right to credit bid when a Chapter 11 plan provides other protections for the secured lender.

The Supreme Court granted certiorari and heard oral arguments in April.

In a unanimous ruling last week (Justice Anthony M. Kennedy did not participate in the consideration), the court ruled that the language of the statute, which expressly allows for credit bidding, does not, as the debtors claim, give them the right to prohibit it.

“We find the debtors’ reading of §1129(b)(2)(A) — under which clause (iii) permits precisely what clause (ii) proscribes — to be hyperliteral and contrary to common sense,” Justice Antonin G. Scalia wrote for the court.

The court also rejected the debtors’ argument that (iii) allowed for special exceptions to the rule allowing for credit bids.

“The Bankruptcy Code standardizes an expansive (and sometimes unruly) area of law, and it is our obligation to interpret the Code clearly and predictably using well established principles of statutory construction,” Scalia wrote.

The case is RadLAX Gateway Hotel v. Amalgamated Bank, Supreme Court No. 11-166, decided May 29, 2012.

Lawyers USA is a sister publication of The Daily Record.