Cramdown on Secured Creditors in Chapter 11 Bankruptcy Case

For a bankruptcy court to confirm a chapter 11 plan, generally a debtor’s creditors must either be unharmed by that plan or have accepted it. 11 U.S.C. § 1129(a)(8). Under certain conditions, a debtor may cramdown or, have a plan confirmed over the objection of impaired creditors. 11 U.S.C. § 1129(b). Recently, the Supreme Court examined the conditions under which a debtor can sell property that secures a debt to creditor over the objection of that creditor. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065 (May 29, 2012).
In the RadLAX case, the debtor proposed to sell its property over the objection of its secured lender, without permitting that lender the right to credit-bid, or bid using its secured claim as credit instead of new money. The secured creditor argued that 11 U.S.C. § 1129(b)(2)(A)(ii) provided it with a right to credit bid at the sale of its collateral. The debtor relied upon 11 U.S.C. § 1129(b)(2)(A)(iii), claiming that the sale gave the secured creditor the “indubitable equivalent” of its claim.
The RadLAX court reasoned section 1129(b)(2)(A) provided three paths to confirm a plan over the objection of a secured party. First, the plan could provide that the secured party retain its lien and accept deferred payments. Second, the plan could provide for the sale of the collateral securing the debtor’s obligation to the secured creditor (allowing the secured party to credit-bid) and, third, it could provide the secured party the “indubitable equivalent” of its claim. Since the second cramdown method applied specifically to sales of collateral and the third related, more broadly, to “the realization of such holders of the indubitable equivalent of [their] claims,” the more specific provision had to be given effect of the general one. RadLAX Gateway Hotel LLC at 2071-72. Thus, Supreme Court affirmed the opinion of the Court of Appeals, rejecting the debtor’s proposed sale.

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