US Supreme Court: Bank can credit-bid at bankruptcy auction

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Chapter 11 cramdown plans that provide for the sale of debtor’s collateral free and clear of a bank’s lien must allow the bank to credit-bid at the sale, the U.S. Supreme Court has ruled.

The case involved a Chapter 11 bankruptcy filing by the owners of a failed hotel construction project. A creditor bank objected to the owners’ proposed bankruptcy plan, which provided for the sale of the hotel’s assets in an open auction. The bank argued that it had the right under §1129(b)(2)(A) of the Bankruptcy Code to bid on the items using its credit in the property.

The debtors claimed that the Code does not require a debtor to give a secured creditor the right to credit-bid at an auction. Instead, they argued, there are three options open to debtors: §1129(b)(2)(A)(i) allows the debtor to pay off the creditor’s lien over time; §1129(b)(2)(A)(ii) allows creditors to credit bid on secured assets that are being sold free of the lien; and §1129(b)(2)(A)(iii) provides that a plan can be deemed “fair and equitable” when it gives creditors the “indubitable equivalent” of a secured creditor’s claim.

Since the debtors in this case chose the third option, the creditor was not entitled to credit-bidding rights, the debtors claimed.

The 7th Circuit ruled in favor of the bank, holding that §1129(b)(2)(A) does not authorize debtors to use subsection (iii) to confirm a reorganization plan contrary to a secured creditor’s right to credit bid.

The Supreme Court granted certiorari and heard oral arguments in April.

In a unanimous ruling (Justice Anthony M. Kennedy did not participate in the case’s consideration), the court ruled that the language of the statute, which expressly allows for credit bidding, does not, as the debtors claim, give them the right to prohibit it.

“We find the debtors’ reading of §1129(b)(2)(A) – under which clause (iii) permits precisely what clause (ii) proscribes – to be hyperliteral and contrary to common sense,” Justice Antonin Scalia wrote in the opinion.

The court rejected the debtors’ argument that (iii) allowed for special exceptions to the rule allowing for credit bids.

“The Bankruptcy Code standardizes an expansive (and sometimes unruly) area of law, and it is our obligation to interpret the Code clearly and predictably using well established principles of statutory construction,” Scalia wrote.

U.S. Supreme Court. RadLAX Gateway Hotel v. Amalgamated Bank, No. 11-166.