SCOTUS Ruling Contrary to 3rd Cir. Credit Bidding Decision

The U.S. Supreme Court weighed in last week on a bankruptcy issue that had come up in a 2010 Third Circuit Court of Appeals Chapter 11 ruling, and the justices didn't see eye to eye with the Third Circuit.

The Supreme Court ruled, in a unanimous decision, that when setting out a Chapter 11 reorganization plan, debtors may not sell their property free and clear of liens without providing lienholders the opportunity to credit bid.

The main issue in the case was whether a debtor could include in a Chapter 11 plan that which the debtor could not do in a 363 sale.

In a standard 363 sale, the debtor sells a secured creditor's collateral. In that sale, the debtor must allow the creditor to "credit bid," which essentially means that the lender can forgive part of the owing debt in lieu of paying cash at the auction.

As many attorneys know, a Chapter 11 bankruptcy allows the debtor to come up with a plan for reorganization. The plan, however, needs to be approved by creditors. There's also the "cram down" option, which allows the court to force the plan on creditors under certain circumstances.

The cram down could allow approval of a plan that sold a dissenting creditor's collateral without providing the creditor the opportunity to credit bid.

The Third Circuit Court of Appeals addressed this issue in Philadelphia Newspapers. In that case, the Third Circuit held that the debtor could, in theory, confirm a Chapter 11 plan that provided for the sale of assets over the dissent of a secured lender, if the lender was paid the proceeds of the sale and otherwise satisfying the standards established in Section 1129(b)(2)(A)(iii) of the Bankruptcy Code.

In last week's Supreme Court decision, RadLAX Gateway Hotel, LLC v. Amalgamated Bank, the Supreme Court interpreted the Bankruptcy Code "clearly and predictably using well established principals of statutory construction."

Though it may have been clear and predictable, the Supreme Court's conclusion was essentially the opposite of the Third Circuit's decision in Philadelphia Newspapers.

Related Resources:

• Credit Bids and Cramdown Provisions: Court Rules in RadLAX (Supreme Court Blog)
• RadLAX Gateway Hotel v Amalgamated Bank (FindLaw Cases)
• Decisions in a Civil Rights Case and a Newspaper Corporation's Chapter 11 Proceeding (Third Circuit Court of Appeals Blog)