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Supreme Court of the United States, 2012 566 U.S. 639, 132 S.Ct. 2065, 182 L.Ed.2d 967

Facts

In 2007, RadLAX Gateway Hotel, LLC and RadLAX Gateway Deck, LLC (debtors) purchased the Radisson Hotel at Los Angeles International Airport, together with an adjacent lot on which the debtors planned to build a parking structure. To finance the purchase, the renovation of the hotel, and construction of the parking structure, the debtors obtained a $142 million loan from Longview Ultra Construction Loan Investment Fund, for which Amalgamated Bank (creditor or Bank) served as trustee. The lenders obtained a blanket lien on all of the debtors assets to secure the loan.

Within two years, the debtors had run out of funds and were forced to stop construction. By August 2009, they owed more than $120 million on the loan, with over $1 million in interest accruing every month and no prospect for obtaining additional funds to complete the project. Both debtors filed voluntary petitions under Chapter 11 of the Bankruptcy Code.

Pursuant to Section 1129(b)(2)(A) of the Bankruptcy Code, the debtors sought to confirm a cramdown bankruptcy plan over the Banks objection. That plan proposed selling substantially all of the debtors property at an auction and using the sale proceeds to repay the Bank. Under the debtors proposed auction procedures, however, the Bank would not be permitted to bid for the property using the debt it was owed to offset the purchase price, a practice known as credit-bidding. Instead, the Bank would be forced to bid cash. The Bankruptcy Court denied the debtors request, concluding that the auction procedures did not comply with the Bankruptcy Codes requirements for cramdown plans. The Seventh Circuit affirmed, holding that Section 1129(b)(2)(A) does not permit debtors to sell an encumbered asset free and clear of a lien without permitting the lienholder to credit-bid.

Decision

Judgment of the Court of Appeals affirmed.

Opinion

Scalia, J. A Chapter 11 bankruptcy is implemented according to a plan, typically proposed by the debtor, which divides claims against the debtor into separate classes and specifies the treatment each class will receive. Generally, a bankruptcy court may confirm a Chapter 11 plan only if each class of creditors affected by the plan consents. Section 1129(b) creates an exception to that general rule, permitting confirmation of nonconsensual planscommonly known as cramdown plansif the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan. Section 1129(b)(2)(A) *** establishes criteria for determining whether a cramdown plan is fair and equitable with respect to secured claims like the Banks.

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A Chapter 11 plan confirmed over the objection of a class of secured claims must meet one of three requirements in order to be deemed fair and equitable with respect to the nonconsenting creditors claim. The plan must provide:

(i) (I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and (II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holders interest in the estates interest in such property;

(ii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or

(iii) for the realization by such holders of the indubitable equivalent of such claims. 11 U.S.C. 1129(b)(2)(A).

Under clause (i), the secured creditor retains its lien on the property and receives deferred cash payments. Under clause (ii), the property is sold free and clear of the lien, subject to section 363(k), and the creditor receives a lien on the proceeds of the sale. Section 363(k), in turn, provides that unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such propertyi.e., the creditor may credit-bid at the sale, up to the amount of its claim. Finally, under clause (iii), the plan provides the secured creditor with the indubitable equivalent of its claim.

The debtors in this case have proposed to sell their property free and clear of the Banks liens, and to repay the Bank using the sale proceedsprecisely, it would seem, the disposition contemplated by clause (ii). Yet since the debtors proposed auction procedures do not permit the Bank to credit-bid, the proposed sale cannot satisfy the requirements of clause (ii). Recognizing this problem, the debtors instead seek plan confirmation pursuant to clause (iii), whichunlike clause (ii)does not expressly foreclose the possibility of a sale without credit-bidding. According to the debtors, their plan can satisfy clause (iii) by ultimately providing the Bank with the indubitable equivalent of its secured claim, in the form of cash generated by the auction.

We find the debtors reading of 1129(b)(2)(A)under which clause (iii) permits precisely what clause (ii) proscribesto be hyperliteral and contrary to common sense. ***

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*** The structure here suggests *** that (i) is the rule for plans under which the creditors lien remains on the property, (ii) is the rule for plans under which the property is sold free and clear of the creditors lien, and (iii) is a residual provision covering dispositions under all other plansfor example, one under which the creditor receives the property itself, the indubitable equivalent of its secured claim. Thus, debtors may not sell their property free of liens under 1129(b)(2)(A) without allowing lienholders to credit-bid, as required by clause (ii).

Interpretation

A Chapter 11 bankruptcy plan may not be confirmed over the objection of a secured creditor if the plan provides for the sale of collateral free and clear of the creditors lien but does not permit the creditor to credit-bid at the sale.

In the case of Radlax Gateway Hotel, LLC v. Amalgamated Bank:

a. the Bankruptcy Court approved the debtors' request, concluding that the cramdown plan complied with the Bankruptcy Code.

b. the judgment of the Court of Appeals was overturned.

c. the Bankruptcy Code permits a debtor to sell an encumbered asset free and clear of a lien without permitting the lienholder to credit-bid.

d. the debtors sought to confirm a "cramdown" bankruptcy plan over the Bank's objection.