Supreme Court Confirms Secured Creditor’s Right to Credit Bid
The U.S. Supreme Court ruled that a secured creditor can force a bankrupt company to hold an auction where the lender may bid its secured debt rather than cash, in a process known as credit bidding.
The 8-0 opinion, written by Justice Antonin Scalia, described credit bidding as protecting “a creditor against the risk that its collateral will be sold at a depressed price.” Scalia said the answer to the question presented by the case is found in rules known as canons of statutory construction governing how courts interpret statutes.
The opinion strengthens the hand of secured creditors, especially in so-called single-asset real estate bankruptcies where the lender wishes to take ownership following default on a mortgage.
The case turned on Section 1129(b)(2)(A) of the Bankruptcy Code, which allows a court to approve a reorganization plan over opposition from a secured creditor in three specified situations. Two were relevant to the Chapter 11 case involving the InterContinental Chicago O’Hare hotel near Chicago’s largest airport.
Scalia said that the bankruptcy judge could use the so-called cramdown process to approve the plan if the property were sold and the secured creditor was allowed to credit bid.
Or, the statute permitted approval of the plan if the secured creditor were given the “indubitable equivalent” of the value of its collateral.
The hotel’s owner planned to hold an auction where the lender could bid only with cash. The bankruptcy judge refused to approve the plan without credit bidding and authorized an appeal directly to the U.S. Court of Appeals in Chicago.
To uphold the appeals court, Scalia referred to a rule of statutory construction where the specific controls over the general. As a result, specific provisions allowing credit bidding preclude using the general provision on indubitable equivalentThe appeals court ruled that credit bidding is required.
To rely only on indubitable equivalent, Scalia said, would be “hyperliteral and contrary to common sense.” He also said that using the general rather than a specific statutory provision is permissible “by textual indications that point in the other direction.” Near the end of the opinion, Scalia said courts could rely on practices before the Bankruptcy Code was adopted in 1978 only if the statute were “ambiguous.” He found “no textual ambiguity” in Section 1129.
The result is “unsurprising,” according to Madlyn Primoff, a bankruptcy specialist at Kaye Scholer LLP in New York.
She said that the basic principle of statutory construction “is known by every first-year law student.” Yesterday’s opinion could be seen as a case where rules of statutory construction take precedence over what two appeals courts thought was the plain meaning of the statute.
There may be questions in future cases about whether the right to credit bid also applies with full force in situations not involving single-asset real estate cases.
The decision resolved a split among the circuit courts deciding the same issue. The U.S. appeals courts in New Orleans and Philadelphia reached the opposite result, ruling in 2009 and 2010, respectively, that the plain meaning of the statute leads to the conclusion that there is no absolute right to credit bid when a Chapter 11 plan provides other protections for the secured lender
The credit bidding case in the Supreme Court is RadLAX Gateway Hotel LLC v. Amalgamated Bank, 11-166, U.S. Supreme Court. The opinion by the Court of Appeals is River Road Hotel Partners LLC v. Amalgamated Bank (In re River Road Hotel Partners), 10-3597, U.S. Court of Appeals for the Seventh Circuit (Chicago). The Chapter 11 case in bankruptcy court is In re River Road Hotel Partners LLC, 09-30029, U.S
Bankruptcy Court, Northern District of Illinois (Chicago).