Credit Bidding Goes to Washington: Supreme Court Justices Weighing RadLAX Case

Article excerpt

[ILLUSTRATION OMITTED]

The U.S. Supreme Court takes on a limited number of cases per year, and those relating directly to the credit profession and bankruptcy activity make up only a minute portion of those annually slated. This year, a key case regarding protocol in a bankruptcy asset auction conducted as part of a plan of reorganization, RadLAX Gateway Hotel LLC v. Amalgamated Bank, found its way onto the schedule for April 23 arguments with a decision to follow by the summer. At stake is whether secured creditors have an absolute right to bid the value of debt owed to them by a debtor selling assets at auction, when the sale is part of a plan of reorganization, a process called credit bidding, as the U.S. Court of Appeals for the Seventh Circuit ruled. However, that view is at odds with contrary decisions by the U.S. Courts of Appeal for the Third and Fifth Circuits, which preceded it. Those held that the right to credit bid may not be available to secured creditors under certain circumstances if the assets are sold as part of a plan of reorganization.

"In the bankruptcy world, this case is very important because the Supreme Court takes so few bankruptcy cases in a year," said Eric Brunstad, law professor at Yale University and partner at Dechert LLR "What it writes about bankruptcy law and how it works is very important because it impacts how things are administered generally, particularly in a Chapter 11 case. A case like this is very important. Having the case in question clear up a gray area makes it that much more critical. It's always good to know what the rules of the game are. If we get clarity on the rules, it helps the bankruptcy process work more efficiently."

It's not surprising the high court's justices have to officiate contrary opinions out of the Seventh, Third and Fifth circuits--NACM's go-to legal experts don't even necessarily agree on the topic. One camp believes that credit bidding within an auction process helps facilitate other bidding, thus driving up the price and providing for a bigger pot for creditors-unsecured and secured alike--to draw from at plan confirmation time. Wanda Borges, Esq. of Borges and Associates LLP has recounted instances where, without a credit bid, the assets would have sold for a fraction of what became the final price, leaving unsecured suppliers and vendors literally with nothing. However, there's the flip side that believes if too much is owed to a secured creator, it essentially freezes out outside bidders and those with lower standing. Bruce Nathan, Esq. of Lowenstein Sandier PC holds that not forcing secured creditors to put up cash in such scenarios can discourage competitive bids and prevent a "robust" auction process.

RadLAX Gateway Hotel LLC v. Amalgamated Bank

In RadLax, the Seventh Circuit allowed a secured creditor the right to bid its claim, in other words, the amount of debt owed, in lieu of a cash bid as part of a plan confirmation process. The practice of credit bidding has been in play for quite some time in the bankruptcy process, generally, and was rarely challenged when made as part of the plan process. On the surface, the decision may not have generated much debate or discussion. However, because RadLAX followed two other cases that denied secured creditors the right to credit bid on assets sold as part of the plan process, the high court found it necessary to clear up the conflict.

The Third Circuit decision in Delaware came in the bankruptcy case of Philadelphia Newspapers LLC. In that case, a three-judge panel denied a creditor group's attempt to credit bid in the sale of the company as part of the plan process. The debtor was the operator of the Philadelphia Inquirer and Philadelphia Daily News, and owed the bidders a significant amount of money. The Third Circuit's ruling resulted in a new auction. However, the circuit ruled the tactic would not be allowed and forced a auction. The group in question eventually did gain control of the assets, but only after it pledged its own cash during the new auction set by the judge. …