The U.S. Supreme Court recently held that, under the cramdown provisions of the Bankruptcy Code, a secured creditor must be permitted to "credit bid" at a sale of collateral as part of a proposed bankruptcy reorganization plan, where the plan provided for the sale of the collateral free of the creditor's lien.
A copy of the opinion is available at:
Debtors obtained a construction loan for purposes of renovating commercial property and constructing an adjacent parking structure. The lender ("Bank") secured the loan with a lien on all of the Debtors' assets. Eventually, the Debtors ran out of money and were forced to cease the construction project. The Debtors filed for reorganization under Chapter 11 of the Bankruptcy Code and submitted their proposed plan to the Bankruptcy Court for the Northern District of Illinois.
The plan proposed in part to sell substantially all of the Debtors' assets pursuant to procedures set forth in their "Sale and Bid Procedures Motion" ("Procedures"). The Procedures proposed that the Debtors' assets would be sold at auction to the highest bidder, but prohibited the Bank from "credit-bidding," that is, offsetting the amount paid for the collateral against the debt owed. Instead, the Procedures required the Bank to bid cash. The Debtors sought confirmation of the reorganization plan pursuant to the cramdown provisions of Section 1129(b)2(A) of the Bankruptcy Code.
The Bankruptcy Court denied the Debtors' proposed Procedures, ruling that the proposed Procedures failed to comply with Section 1129(b)(2)(A)'s requirements for cramdown plans. The Seventh Circuit affirmed, ruling 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.
The U.S. Supreme Court affirmed in a unanimous decision.
As you may recall, Section 1129(b)(2)(A) provides that a Chapter 11 cramdown plan must meet one of three requirements in order to be deemed "fair and equitable" with respect to non-consenting creditors' claims. Specifically, the cramdown plan must provide:
"(i)(I) that the holders of [secured] claims retain the liens securing such claims . . . to the extent of the allowed amount of such claims; and (II) that each holder of a claim . . . receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim . . . ;
(ii) for the sale, subject to section 363(k) . . . 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).
Section 363(k), in turn, provides in part that "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 property."
Summarizing Section 1129(b)(2)(A), the Supreme Court explained that: 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 3639(k)" and the creditor receives a lien on the sale proceeds; and, under clause (iii) the cramdown plan provides the secured creditor with the "indubitable equivalent" of its claim. The Court also noted that section 363(k) in clause (ii) expressly allows the creditor to credit-bid at the sale, up to the amount of its claim.
Relying on the so-called "general/specific canon" of statutory interpretation, the Court noted that where "a general authorization and a more limited, specific authorization exist side-by-side," the terms of the specific authorization must be complied with. See D. Ginsberg & Sons, Inc. v. Popkin, 285 U.S. 204, 206, 208 (1932) ("[g]eneral language of a statutory provision, although broad enough to include it, will not be held to apply to a matter specifically dealt with in another part of the same enactment").
The Court thus ruled that, because clause (ii) is a detailed provision that spells out the requirements for selling collateral free and clear of liens, while clause (iii) is a broadly worded provision that says nothing about such a sale, the "general language" of clause (iii) did not apply to a proposed sale of property under clause (ii).
Recognizing that the general/specific canon is not an absolute rule, the Court noted that the Debtors failed to point to any provision in the Bankruptcy Code that would refute the court's reading of the statute. The Court also found no validity in the Debtors' argument that the Court's reading of Section 1129(b)(2)(A) required compliance with more than one clause.
The Court also rejected the Debtors' contention that clauses (i) and (ii) were merely two "safe harbor" methods of achieving the "indubitable equivalent" in clause (iii). The Court stated, "the [existing] structure of [Section 1129(b)(2)(A)] would be a surprisingly strange manner of accomplishing that result – which would normally be achieved by setting forth the "indubitable equivalent" rule first (rather than last), and establishing the two safe harbors as provisos to that rule."
Accordingly, concluding that all of the requirements of clause (ii) must be satisfied where debtors seek to sell the property free of liens, the Court ruled that the Debtors were not permitted to sell the collateral free of any liens without allowing the Bank to credit-bid.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.
Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com
