(CN) – A bankruptcy court properly handled reorganization plans for the creators of the Radisson Hotel at Los Angeles International Airport, the Supreme Court ruled Tuesday.
To build the LAX hotel in 2007, RadLAX Gateway Hotel and RadLAX Gateway Deck borrowed $142 million, designating Amalgamated Bank as the trustee.
But construction ground to a halt when the funds ran out in March 2009 and the companies failed to secure more funding.
RadLAX filed for Chapter 11 in August 2009, owing $120 million for the LAX hotel with an additional million dollars in interest accruing every month.
After RadLAX submitted a proposed procedure for conducting asset sales, Amalgamated Bank objected and the bankruptcy court ruled that the plans could not be confirmed.
The 7th Circuit upheld that last year, saying RadLAX could satisfy statutory requirements only by allowing Amalgamated to bid its claim in lieu of cash at the sale.
Noting that the decision conflicted with precedent set by the 3rd and 5th Circuits, the Supreme Court took up the case in December.
It sided with the 7th Circuit Tuesday, relying on Section 1129(b )(2) (A)(iii) of the Bankruptcy Code, which sets forth alternative standards to determine if a chapter 11 plan is “fair and equitable” with respect to an objecting class of secured creditors.
The 10-page decision describes the three alternatives.
“Under clause (i), the secured creditor retains its lien on the property and receives deferred cash payments,” Justice Antonin Scalia wrote for the court. “Under clause (ii), the property is sold free and clear of the lien, ‘subject to section 363(k),’ and the creditor receives a lien on the proceeds of the sale. Section 363(k), in turn, provides that ‘unless the court for cause orders otherwise 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’ – i.e., the creditor may credit-bid at the sale, up to the amount of its claim. Finally, under clause (iii), the plan provides the secured creditor with the ‘indubitable equivalent’ of its claim.”
RadLAX claimed that its plan could “satisfy clause (iii) by ultimately providing the bank with the ‘indubitable equivalent’ of its secured claim, in the form of cash generated by the auction,” according to the court.
“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,” Scalia wrote.
“One can conceive of a statutory scheme in which the specific provision embraced within a general one is not superfluous, because it creates a so-called safe harbor,” he added. “The debtors effectively contend that that is the case here – clause (iii) (‘indubitable equivalent’) being the general rule, and clauses (i) and (ii) setting forth procedures that will always, ipso facto, establish an ‘indubitable equivalent,’ with no need for judicial evaluation. But the structure here would be a surpassingly 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. The structure here suggests, to the contrary, that (i) is the rule for plans under which the creditor’s lien remains on the property, (ii) is the rule for plans under which the property is sold free and clear of the creditor’s lien, and (iii) is a residual provision covering dispositions under all other plans – for example, one under which the creditor receives the property itself, the ‘indubitable equivalent’ of its secured claim. Thus, debtors may not sell their property free of liens under §1129(b)(2)(A) without allowing lienholders to credit-bid, as required by clause (ii).”
Justice Anthony Kennedy did not take part in the court’s decision of the case.
Morrison & Foerster attorney Deanne Maynard who argued for Amalgamated Bank at oral arguments applauded the outcome.
“Today’s decision protects the benefits of a secured creditor’s bargain,” Maynard said in a statement. “A secured creditor bargains for the right to be repaid in full or, if not, to foreclose and take possession of its collateral. The court’s decision will ensure that secured creditors have the ability to protect that bargain in bankruptcy. If the price for which its collateral is being sold in a bankruptcy auction is too low, the secured creditor can bid what it is owed and take possession of its collateral.”
Amalgamated’s lead bankruptcy attorney, Morrison & Foerster partner Adam Lewis, also welcomed the decision.
“We are also gratified that the court, in finding that a secured creditor must be given the right to credit bid in a plan sale free and clear of liens, has preserved the historic right of a secured creditor in bankruptcy cases as elsewhere to its money or its collateral,” Lewis said in a statement. “Debtors will not be able to use such a plan sale to shift value from the secured creditor to other interests, such as the debtor’s preferred bidder or insiders.”