Court to consider rules for bankruptcy auctions
In the second week of the Term’s final sitting, the Court will take up what well might be the most important business bankruptcy case since its 1999 decision in Bank of America National Trust & Savings Ass’n v. 203 North LaSalle Street Partnership. RadLAX Gateway Hotel, LLC v. Amalgamated Bank presents a question that seems so common that the answer should be obvious: when a bankruptcy court auctions the collateral of a secured creditor, does the secured creditor have to bid with cash or can it instead offset whatever it bids with a credit against its debt. Those kinds of auctions have been routine in reorganizations in Chapter 11 (the bankruptcy code provisions that govern large business cases) since the decision in 203 North LaSalle emphasized the importance of using open-market procedures to test the value of collateral.
As a matter of Court decision making, the case presents a pattern the Court has seen many times in its bankruptcy cases: language that with little effort could be read in either direction, situated against a basic conflict between the desires of the managers of bankrupt businesses to remain afloat against the wishes of unpaid secured creditors that wish to take their collateral and shut down the debtor. The debtor could call on a broad concern for bankruptcy policy and mitigating the broader dislocations associated with financial distress; the bank can emphasize the importance of protecting secured creditors to maintain stable and liquid lending markets.
If you took the Court at its word in these cases, you would look long and hard at the plain language. On that point, I am inclined to think that the borrower RadLAX has the better of it. (The name reflects the borrower’s business, operating a Radisson Hotel at LAX Airport.) Bankruptcy Code § 1129(b)(2) specifies three alternative procedures under which a court can force a secured creditor to accept a plan of reorganization (a “cramdown” plan in the common parlance). The first alternative is to let the secured creditor’s lien remain on the collateral. The second alternative is to sell the property and give the proceeds to the secured creditor. The third alternative is a catchall for procedures that give the secured creditor the “indubitable equivalent” of the value of its interest in the collateral – the phrase taken by Congress from a tour de force Learned Hand opinion on the fundamental importance of protecting the rights of secured creditors in bankruptcy.
The parties join issue on the relationship between the second and third alternatives. The borrower argues that the two provisions are just that, alternatives (relying heavily on the “or” between the two), and contends that any plan which satisfies either alternative, separately, is confirmable. The lender argues that the first two provisions establish the requirements for specific types of transactions, and that the catchall establishes the requirements for other types of transactions. Under this reading, the third alternative cannot properly be expanded to permit a sale of the collateral on terms that fail to satisfy the second alternative (even if the provisions satisfy the “indubitable equivalent” requirement of the third subparagraph).
From the Court’s perspective, the lender’s argument has several problems. The first is that the whole case is supposed to be about the centrality of credit bidding to the operation of lending markets, and there isn’t even a reference to credit bidding in Section 1129. It turns out that requirement of credit bidding is incorporated into Section 1129 sub silentio by a cross-reference to Section 363(k) (which does have an explicit credit bid requirement). But the lender is so intent on arguing that the plain language indisputably supports it that the lender’s explanation of this all-important cross-reference is buried deep past the midpoint of a dense brief.
Another problem is that it is quite difficult in reading the lender’s brief to understand why it matters so much that creditors be able to credit bid instead of bidding with cash. The problem here is, I think, an “inside-baseball” issue. To the lawyers representing the bank, the answer is obvious: when the lender has to bid cash, it is forced to pour new money after bad, making an additional infusion into the bankruptcy case, which will be returned to it, if ever, years later. But the lender’s brief never comes right out and explains why this is practically important.
Having said that, I will be surprised if the borrower prevails. Although it may not be the emphasis of the opinion, I think the presence of the Solicitor General as an amicus on the lender’s side is powerfully important. As is common in bankruptcy cases since the mid-1980s, the Solicitor General almost always appears, and in the cases that involve disputes with creditors the government almost always appears on the side of the creditor, relying on the frequent appearance of various government entities as creditors in bankruptcy proceedings (the FDIC, SBA, FHA, etc.). And it is the government’s brief that provides the killer point about the difference between credit bids and cash bid. Most of the government creditor entities would be barred by federal law from making fresh cash infusions into a bankruptcy proceeding. As a result, a cash bid requirement effectively deprives the government creditor from bidding to ensure its collateral receives a fair sales price in the bankruptcy court’s auction.
The argument in this case should be an interesting one. My strong guess is that the Justices will frustrate the lawyers by asking a long series of simplistic practical questions about the realities of bankruptcy court auctions and how they work. The lender’s chances, I suggest, depend almost entirely on getting the Court to understand the real and substantial practical importance of credit bidding. If the Court actually understands that (as I expect they will), I expect it will read Section 1129 to bar cramdown auctions that don’t permit credit bidding.