[JURIST] The US Supreme Court [official website] heard oral arguments [day call, PDF] Monday in RadLAX Gateway Hotel, LLC v. Amalgamated Bank [transcript; JURIST report]. The issue is whether a debtor may propose a Chapter 11 bankruptcy plan that sells unencumbered assets without allowing secured creditors to “credit bid,” if they can provide the creditor with an indubitable equivalent of to the claim per § 1129(b)(2)(A)(iii) [text] of the Bankruptcy Code. A “credit bid” is when a creditor will bid on collateral in the bankruptcy case’s auction by promising to give up a portion of his claim rather than bidding with money. It has been routinely used as a way for secured creditors to recoup collateral. However, § 1129(b)(2)(A)(iii) allows for a plan to be confirmed regardless of procedure if the debtor can provide an “indubitable equivalent” to a secured creditor’s claim. This typically requires the collateral be returned, repaid, or its fair market value to be given over to the secured creditor. The Seventh Circuit denied an attempt by RadLAX Gateway Hotel to forbid the practice of credit bidding in its estate’s auction, although RadLAX argued that they were allowed to affect the auction’s procedure because they would still be providing an indubitable equivalent to creditor Amalgamated Bank. The attorney for RadLAX argued to the court that disallowing the debtor to set the standards for auction is impractical:

The problem with allowing a creditor the right to credit bid under all circumstances is, in a case like ours, we don’t believe we will ever get to an auction because no one else will show up. … In this particular instance, I would suggest that the—the creditor simply does not want the asset sold. It would rather take the asset back and hold it for some time period. … [W]hat they bargained for was that the asset be liquidated and all of the proceeds applied to their loan. And that’s exactly what we propose to do under our sale procedure.

The attorney for Amalgamated Bank argued that under 1129(b)(2)(A) creditors have the right to bargain for how their collateral will be treated in the bankruptcy, including forcing a “credit bid”: “When a chapter 11 bankruptcy plan is going to cram down a plan over the objection of a secured creditor, section 1129(b)(2)(A) gives the secured creditor the ability to protect those rights regardless of the proposed treatment of its collateral. Specifically, when the plan proposes, as here, to sell the collateral free and clear of the secured creditor’s liens and give the secured creditor nothing but the proceeds from that sale, clause (ii) entitles the secured creditor to bid what it is owed in the absence of cause to preclude it.”

The Solicitor General also filed an amicus brief [text, PDF] in support of the bank and the right to credit bid. In arguments, they contended that the government requires the right to credit bid. “[T]he government is in the position of—that actually many secured creditors are in these days, which is that we have constraints on our ability to cash bid at the sale of our collateral through a bankruptcy, and the detailed cramdown provisions of chapter 11 are designed to protect the rights of secured creditors. The essence of being a secured creditor, of course, as the Court has suggested, is that the secured creditor has bargained for the right either to get its money back or to get the thing that secures its loan, to get its collateral.”