In front of eight of the Supreme Court of the United States' nine sitting justices Monday, attorneys argued the finer points of why credit bidding should or should not be enforced as a right of secured creditors during a bankruptcy-related assets sale. Though a judgment could come as late as the end of June, the justices throughout the argument hearing appeared wary of arguments that would undermine the right on the part of secured creditors to use credit bid tactics.
The case in question is RadLAX Gateway Hotel LLC v. Amalgamated Bank. At stake is whether creditors will be able to use the value of money owed by the debtor selling assets at the auction table as opposed to straight cash, a process called credit bidding, as the U.S. Bankruptcy Court for the Seventh Circuit ruled in RadLAX. However, that view is competing with contrary decisions out of the U.S. Bankruptcy Courts for the Third and Fifth Districts, which preceded it and would limit credit bidding if widely adopted.
Appearning for the petitioner (RadLAX), David Neff argued that, in a case like RadLAX, the concern lies in the ability to attract other, non-secured bidders to even “show up” for an auction if they have the knowledge that a secured creditor can best the bid without offering up any new cash, just what is already owed to them. In addition, Neff said federal law notes that the use of the word “or” in one of the clauses guiding bankruptcy actions says the sale can go on without the right of a credit bid if the “indubitable equivalent” of their claim is realized.
Neffs’ argument drew critical reactions from several of the judges, who intimated that the argument against credit bidding runs counter to the essence of the Bankruptcy Code and the intentions of the U.S. Congress:
“You’re depriving secured creditors the opportunity to hold onto an asset if he believes the asset is being undervalued,” said Justice Alito.
“If a creditor loaned you $1 million, he got a secured interest in the property – that’s the deal,” said Justice Breyer. “There is still an advantage for the debtor to stretch out the payments over time. So, give him the property.”
“The greatest security is knowing what the courts will do,” said Justice Sotomayor. “The greatest security is knowing what the courts will do. What is the value in the business world of us upsetting the norm? Why should we upset the expectations?” She added that the presence of stalking horse bidders in a vast amount of U.S. bankruptcy cases already illustrates the existing “process is working.”
“It doesn’t take a genius to figure out that, if you allow people to bid cash or credit, you’re going to get more bids and higher bids than they are only allowed to bid cash.” Said Justice Scalia.
However, those arguing against credit bidding seemed to find a strong ally in Chief Justice Roberts, who took attorney Deanne Maynard, arguing on behalf of secured creditors’ rights, to task for “avoiding” the fact that language (specifically the word “or”) in federal law could be construed that one condition could potentially be used as a substitute for the other.
Maynard argued that the condition discussed by Neff/the case petitioners was intended by Congress as an “other” condition, one that is supposed to come in the process after an auction is completed not one that supersedes other conditions guaranteeing the credit bidding right of secured creditors.
“The whole code is set up to protect secured creditors from the undervaluation of their claim,” Maynard said. “If the secured creditor can’t raise enough cash, which is a real risk, you’re taking out of the marketplace one of the most knowledgeable parties of the property.”
Roberts responded by noting the key importance of “the specific over the general” during the Supreme Court review of the issues and statutory language.
Brian Shappell, CBA, NACM staff writer