Supreme Court Upholds Credit-Bidding Rights

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In a quicker-than-expected turnaround, the Supreme Court ruled unanimously to uphold the rights of secured creditors in Chapter 11 bankruptcy-related assets sales.

The high court noted that a Chapter 11 "cramdown" plan could not be confirmed if a secured lender, often a bank, is denied the right to use debt owed to them at an assets auction in lieu of cash. The timing comes as a surprise, as a decision was not expected for several weeks, as does the unanimous vote (with Justice Kennedy not taking part in the decision) since Chief Justice Roberts expressed the importance of "the specific over the general" when analyzing the debtors' point of view in a late April hearing of arguments regarding differing credit bidding decisions in the lower courts.

The court opinion, delivered by Justice Scalia and made public Tuesday, May 29, threw out verbiage technicalities on which the petitioner was basing its argument and on which the Third Circuit based a previous decision that cut at credit bidding rights.

"The general/specific canon is not an absolute rule, but is merely a strong indication of statutory meaning that can be overcome by textural indications that point in the other direction," Scalia wrote. "The debtors point to no such indication here." Scalia's take on the petitioner's argument included characterizations such as "surpassingly strange" and "irrelevant" as well as one that hung its argument on procedural technicalities more so than "substantive" requirements of federal bankruptcy law.

The case in question was RadLAX Gateway Hotel LLC v. Amalgamated Bank. At stake was whether creditors would be able to use the value of their secured debt as opposed to straight cash, a process called credit bidding, as the U.S. Bankruptcy Court for the Seventh Circuit ruled in RadLAX. However, that view is competing with contrary decisions out of the U.S. Bankruptcy Courts for the Third and Fifth Districts, which preceded it and limited credit bidding, in some instances.

The petitioner argued that, in a case like RadLAX, the concern lies in the ability of getting other non-secured bidders to even show up for an auction if they have knowledge that a secured creditor can best the bid without offering up any new cash, instead of just what is already owed to them. In addition, the petitioner said federal law notes that the use of the word "or" in one of the clauses guiding bankruptcy actions says the sale can go on without the right of a credit bid if the "indubitable equivalent" of their claim is realized.

Such arguments drew critical reactions from a majority of the justices, who intimated that the argument against credit bidding runs contrary to the essence of the Bankruptcy Code and the intentions of the U.S. Congress. More on what the judges said can be found here.

- Brian Shappell, CBA, NACM staff writer

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