Bankruptcy Law Letter
Vol. 32, No. 7
Credit Bidding and the
Secured Creditor’s Baseline
Distributional Entitlement in
Chapter 11
By Ralph Brubaker
In the December 2009 issue of Bankruptcy Law
Letter,1 I critiqued a rather startling development in the
case law in the form of the Fifth Circuit’s Pacific Lumber
decision2 and the district court opinion in the Philly
News case.3 Both of those decisions held that a secured
creditor’s collateral could be sold free and clear of the
secured creditor’s liens in a sale conducted pursuant to
the terms of a plan of reorganization, over the objection
of the secured creditor and denying the secured creditor the right to credit bid at the sale, as long as the plan
provided the secured creditor the “indubitable equivalent”4 of its “allowed secured claim”5 by fully paying the
amount thereof in cash from the sale proceeds. Shortly
after I questioned the propriety of those decisions, the
Third Circuit, by a divided panel, affirmed the district
court in Philly News.6 Judge Ambro, however, filed a
lengthy dissent that relied upon my Bankruptcy Law
Letter analysis for his contrary interpretation of the statute “supported by academic discourse.”7
Commentary critical of Philly News and Pacific
Lumber continued to accumulate,8 and last summer, the
Seventh Circuit created a clear circuit split. Expressly
noting that “the statutory analysis articulated by Judge
Ambro in his Philadelphia Newspapers dissent [is] compelling,”9 the Seventh Circuit held that a plan proposing
a free-and-clear sale of a secured creditor’s collateral
could be confirmed over the secured creditor’s objection
only if the secured creditor were permitted to credit bid
in accordance with Code § 363(k). The Supreme Court
then granted certiorari and by a unanimous 8-0 decision
(without Justice Kennedy’s participation) has now affirmed the Seventh Circuit in RadLAX Gateway Hotel,
LLC v. Amalgamated Bank.10
Justice Scalia’s RadLAX opinion is utterly dismissive
of the Third and Fifth Circuits’ decisions, calling “this…
July 2012
In This Issue
nn Credit Bidding and the Secured Creditor’s
Baseline Distributional Entitlement in Chapter 11.....1
• The RadLAX Reorganization............................... 2
• Cash-Out As Indubitable Equivalence................ 2
• Credit Bidding in a Free-and-Clear Sale............. 3
• The Unambiguous Plain Meaning of “Or”.......... 4
• “Or” Obviously Means “Or”—So What?!............ 4
• The Specific Controls the General...................... 5
• Structural Cues................................................... 6
• Other Reliable Indicators of Statutory Meaning......6
• Countering One Fallacious Plain Meaning
With Another....................................................... 6
• Adequate Protection, Indubitable Equivalence,
and Credit Bidding..................................................7
• The Alternative, Interrelated Protections of
§ 1111(b)(2) and Credit Bidding Rights............. 8
• The Code’s Presumption in Favor of Credit
Bidding Rights.................................................... 9
• A Secured Creditor’s Right to Proceeds From a Sale of Its Collateral..........................................11
• Implicit Assumptions........................................ 12
• The Ghosts of Pacific Lumber and Philly News......14
• Allocation of Reorganization Surplus............... 14
• The Chapter 11 Reorganization by Sale.......... 15
• Adequate Protection, Indubitable Equivalence,
and Restricting Credit Bidding for “Cause”.........15
an easy case.”11 In fact, his opinion is so truncated that
it entirely obscures all that was at stake in the creditbidding imbroglio. Indeed, the full significance of the
Pacific Lumber and Philly News cases seems to have
escaped even the most sophisticated observers.
The nominal fight about credit bidding has exposed
a deeper challenge to prevailing assumptions regarding
whether a secured creditor should be entitled to capture
all proceeds from a sale of its collateral up to the full
EDITOR IN CHIEF: Ralph Brubaker, Professor of Law and Guy Raymond
Jones Faculty Scholar, University of Illinois College of Law
CONTRIBUTING EDITOR: Christopher W. Frost, Frost, Brown, Todd
Professor of Law, University of Kentucky College of Law
PUBLISHER: Jean E. Maess, J.D.
MANAGING EDITOR: Mary A. Raha
41173412
© 2012 Thomson Reuters
Vol. 32, No. 7
amount of the claim secured thereby. Little noticed is
the critical assumption in both the Pacific Lumber and
Philly News decisions that a secured creditor is not necessarily entitled to receive all proceeds from a sale of
its collateral up to the full amount of the claim secured
thereby. Although the resulting interpretation of Code
§ 1129(b)(2)(A) spawned by that assumption has now
been repudiated, there is conceptual appeal to the underlying challenge to secured creditors’ baseline distributional entitlement in Chapter 11—a challenge that may
persist. Before we can pose and ponder that theoretical
question, though, we must review the statutory interpretation controversy that the Supreme Court resolved in
RadLAX.
The RadLAX Reorganization
In 2007, the RadLAX entities purchased the Radisson
Hotel at the Los Angeles International Airport. To finance the purchase, pay for renovations, and build a
parking deck, RadLAX obtained a $142 million loan
from a loan fund for which Amalgamated Bank was designated administrative agent and trustee. Cost overruns
in building the parking deck exhausted the loan funds
and forced RadLAX to halt construction in March 2009.
When negotiations with the lenders regarding additional
funding failed, the RadLAX entities filed Chapter 11 in
August 2009, owing the lenders over $120 million secured by liens on all of the debtors’ assets.
In June 2010, the RadLAX debtors submitted a proposed plan of reorganization that contemplated sale of
substantially all of the debtors’ assets and distribution of
the sale proceeds under the plan. Contemporaneously,
the debtors filed a motion to approve bidding procedures
for the public auction of the debtor’s assets contemplated by the plan, with an initial bid (to be submitted by a
“stalking horse” bidder) in the amount of $55 million,
suggesting that the lenders were vastly undersecured.
In that motion, the debtors insisted that any qualified
bidder fund its purchase offer with cash. Because the
lenders had not yet accepted the debtors’ proposed plan,
and indeed anticipating that the lenders would reject
the plan, the debtors’ bid procedures motion expressly
contemplated cramdown of the lenders in the following
provision of its bidding procedures motion:
Bankruptcy Law Letter
Credit Bid: The Plan Sale is being conducted under sections 1123(a) and (b) and 1129(b)(2)(A)
(iii) of the Bankruptcy Code, and not section 363
of the Bankruptcy Code. As such, no holder of a
lien on any assets of the Debtors shall be permitted to credit bid pursuant to section 363(k) of the
Bankruptcy Code.12
The RadLAX debtors, therefore, were contending
that their proposed plan was “fair and equitable” in its
treatment of the lenders’ secured claims, according to
the cramdown requirements of Code § 1129(b) and,
in particular, the “indubitable equivalent” provision
of § 1129(b)(2)(A)(iii) specifically referenced in their
bidding procedures motion.
Cash-Out As Indubitable Equivalence
With respect to secured claims, Code § 1129(b)(2)
provides as follows:
(2) For purposes of this subsection, the condition
that a plan be fair and equitable with respect to a
class includes the following requirements:
(A) With respect to a class of secured claims,
the plan provides—
(i)(I) that the holders of such 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 of such
class receive on account of such claim deferred cash payments totaling at least the
allowed amount of such claim, of a value,
as of the effective date of the plan, of at
least the value of such holder’s interest in
the estate’s interest in such property;
(ii) for the sale, subject to section 363(k)
of this title, of any property that is subject to
the liens securing such claims, free and clear of
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2
© 2012 Thomson Reuters
Bankruptcy Law Letter 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 paragraph; or
(iii) for the realization by such holder of the
indubitable equivalent of such claims.
Again, the RadLAX debtors were expressly relying
upon subdivision (iii) in their attempt to cramdown the
lenders’ secured claims—“realization by [the secured
lenders] of the indubitable equivalent of such [secured]
claims.” An immediate cash payment in full of a creditor’s entire “allowed secured claim” would, indeed,
seem to provide for full “realization of the indubitable
equivalent of such claim.” In fact, as originally enacted, Code § 1124(3)(A) provided that a class of claims
(including secured claims) was not impaired (and thus
was not entitled to even vote on the plan—entirely
mooting any need to consider cramdown of the class)
if the plan “provide[d] that, on the effective date of the
plan, the holder of such claim… receive[], on account
of such claim… cash equal to… the allowed amount of
such claim.” Consequently, “[t]he effect of this standard [wa]s to permit confirmation of a plan without
the active consent of a class… if the class [wa]s paid
cash in… the amount of the allowed secured claims.”13
The 1994 amendment that removed § 1124(3) from
the Code was motivated by the extremely anomalous,
infrequent situation of a solvent debtor using § 1124(3)
to deny unsecured creditors postpetition interest, with
a resulting windfall to equity holders.14 Repeal of
§ 1124(3), therefore, does not call into question the Code
drafters’ apparent belief that (in the more frequent case
of an insolvent debtor) a cash payment in full of an undersecured creditor’s entire “allowed secured claim” is
all that undersecured creditor is entitled to as regards the
secured portion of its claim. Indeed, legislative history
explaining the cryptic phrase “indubitable equivalent”
states that “present cash payments less than the secured
claim would not satisfy the standard,”15 clearly implying
that present cash payments in the full amount of the secured claim would satisfy the “indubitable equivalent”
standard.
Credit Bidding in a Free-and-Clear Sale
Thus the debtors’ argument in RadLAX was that,
credit bid or no, as long as a secured creditor receives,
in cash, the full amount of its allowed secured claim, it
is receiving the “indubitable equivalent” of its secured
claim and has no right to anything else. Of course, the
rub with respect to undersecured creditors is quantify© 2012 Thomson Reuters
Vol. 32, No. 7
ing the amount of the creditor’s “allowed secured claim,”
which is entirely a function of the value of the creditor’s
collateral. The Code drafters obviously were not content
to leave creditors’ ultimate distribution rights in Chapter
11 entirely at the mercy of inherently uncertain judicial
valuations, and cramdown protections, in particular,
provide numerous procedural checks on the vagaries of
judicial valuations. This is especially the case with respect to secured claims, and the RadLAX lenders’ counter was that this critical procedural check is provided by
subdivision (ii) in the case of free-and-clear sales of a
secured creditor’s collateral.
Subdivision (ii) of § 1129(b)(2)(A) provides that “the
condition that a plan be fair and equitable with respect
to a class [of secured claims] includes the… requirement” that “the plan provides… for the sale, subject to
section 363(k) of this title, 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.” Thus the RadLAX lenders argued that for
any plan proposing a free-and-clear sale of a secured
creditor’s collateral, the plan can be confirmed over the
secured creditor’s objection only if (i) the secured creditor is allowed to credit bid at the sale of its collateral
as prescribed in § 363(k), and (ii) the secured creditor
captures all proceeds of the sale (by virtue of its lien
attaching to the proceeds) up to the full amount of its
allowed claim.
Bankruptcy Judge Black agreed with the lenders, as
did the Seventh Circuit on appeal. Both the Third Circuit
in Philly News and the Fifth Circuit in Pacific Lumber,
though, had disagreed with that interpretation and authorized a free-and-clear plan sale of a secured creditor’s
collateral (followed by a cash-out of the secured creditor
with the sales proceeds) that affirmatively denied the secured creditor any credit bidding rights under § 363(k).
As Bankruptcy Judge Raslavich noted in Philly News,
until the Fifth Circuit’s decision in Pacific Lumber, “the
clear weight of authority supported the Lenders’ position
on the issue.”16 Indeed, one of the principal draftsmen of
the Code, now-Professor Kenneth Klee, contemporaneously described the import of the enactment of the secured creditor cramdown provisions in precisely the manner the secured creditors contended: “A sale of collateral
must be made under 11 U.S.C. § 363(k) which permits
the lien holders to bid for the collateral and offset their
allowed claims that are secured by the collateral against
the purchase price. 11 U.S.C. § 1129(b)(2)(A)(ii).”17
Moreover, it seems that until Pacific Lumber, there was
“no other decision wherein § 1129(b)(2)(A)(iii) and the
indubitable equivalence alternative were permitted to enable a debtor to cash out a secured creditor via the type
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Vol. 32, No. 7
of sale contemplated under § 1129(b)(2)(A)(ii).”18 Judge
Edith Jones fully acknowledged in her Pacific Lumber
opinion that “[t]he nature of this cramdown and the refusal to apply § 1129(b)(2)(A)(ii) to authorize a credit
bid are unusual, perhaps unprecedented decisions.”19 The
surprise “discovery” of this unprecedented cramdown
power, over 30 years after enactment of § 1129(b), thus
has been extremely controversial and has been subjected
to extensive scrutiny.
While none of the furor over Pacific Lumber and
Philly News is apparent from simply reading Justice
Scalia’s very short RadLAX opinion, ironically, it is
Justice Scalia himself—with his forceful and impressive, nearly wholesale conversion of the federal judiciary to nominal (if not actual) adherents to the tenets of
the textualist interpretive methodology—who is largely
responsible for creating the conditions under which
the Pacific Lumber/Philly News interpretation (which
Scalia derides as “surpassingly strange,”20 “hyperliteral
and contrary to common sense”21) could take root and
flourish. Moreover, by cavalierly (and entirely unconvincingly) characterizing the text at issue as “unambiguous,” RadLAX will do little to correct (and, indeed, will
simply reinforce) the all-too-common and troubling tendency engendered by overly aggressive textualism (see,
e.g., the majority opinion in Philly News): “by placing
so much emphasis on the distinction between clarity and
ambiguity, and… rushing to find clarity” in the text that
simply does not exist.22
Fortunately, in the RadLAX case, though, and as revealed by Judge Ambro’s thoughtful Philly News dissent, all other reliable indicators of the meaning of the
text at issue also point to the interpretation the Supreme
Court adopted.
The Unambiguous Plain Meaning of “Or”
The RadLAX debtors relied upon a purported plainmeaning interpretation § 1129(b)(2)(A) espoused by the
Philly News majority. According to the Philly News majority, the plain meaning of (b)(2)(A) is:
Section 1129(b)(2)(A) provides three circumstances
under which a plan is “fair and equitable” to secured
creditors…. § 1129(b)(2)(A) is phrased in the disjunctive. The use of the word “or” in this provision
operates to provide alternatives—a debtor may proceed under subsection (i), (ii), or (iii), and need not
satisfy more than one subsection.23
According to this interpretation, then, under the plain,
unambiguous meaning of § 1129(b)(2)(A), despite the
fact that “[t]he right to credit bid… found in § 363(k)
[is] explicitly incorporated into subsection (ii),”24 none-
4
Bankruptcy Law Letter
theless “it is apparent here that Congress’ inclusion of
the indubitable equivalence prong intentionally left open
the potential for yet other methods of conducting asset
sales.”25 Thus the debtors did not have to attempt cramdown under subdivision (ii), in which case the lenders
would clearly have credit bidding rights under § 363(k).
The debtors could, in the alternative, attempt cramdown
under subdivision (iii) by giving the secured creditor the
“indubitable equivalent” of its allowed “secured claim.”
Most significantly, of course, indubitable equivalence is
indubitably provided by cashing out the secured creditor
with an immediate cash payment in the full amount of
the secured creditor’s allowed secured claim.
According to the Philly News majority, therefore, as
long as a plan proposes a full cash-out of a secured creditor’s allowed secured claim, then that is all the secured
creditor is entitled to receive; that treatment fulfills the
cramdown requirement of subdivision (iii), and the secured creditor does not have to be given the right to credit
bid in the proposed plan sale of the secured creditor’s collateral. This purported plain meaning “approach recognizes
that Congress’ use of ‘or’ in § 1129(b)(2)(A) was not without purpose,”26 and pursuant thereto, “§ 1129(b)(2)(A) is
unambiguous and… a plain reading of its provisions permits the Debtors to proceed under subsection (iii) without
allowing the Lenders to credit bid.”27
“Or” Obviously Means “Or”—So What?!
The purported plain meaning that the Philly News
majority ascribed to § 1129(b)(2)(A) did not carry
the day. Indeed, the obvious disjunctive phrasing of
the three subdivisions of § 1129(b)(2)(A)—(i) the
Deferred Payment Requirement, (ii) the Free-andClear Sale Requirement, (iii) the Indubitable Equivalent
Requirement—does not unambiguously establish that
which the court assumed it must: that the obvious disjunctive specification of alternative requirements unambiguously permits the plan proponent to simply choose
the requirement that it wishes to satisfy (the Indubitable
Equivalent Requirement) and bypass a requirement (the
Free-and-Clear Sale Requirement) that specifically addresses, on its face, the treatment that the plan proposes.
As I stated in my earlier assessment of this “plainmeaning canard”:
Initially, it is worth noting that what those three
subdivisions are disjunctively but collectively specifying is what the statute refers to as a “requirement”
necessary to satisfy “the condition that a plan be fair
and equitable with respect to a” dissenting “class
of secured claims.” Use of the word “requirement,”
therefore, invokes the “necessity” of an “essential
© 2012 Thomson Reuters
Bankruptcy Law Letter Vol. 32, No. 7
requisite” (see dictionary on your desk) that the plan
cannot dispense with.
tation of § 1129(b)(2)(A), namely that it would render
clause (ii) entirely superfluous:
Yes, the statute delineates three disjunctive means
of satisfying this “requirement,” but use of the disjunctive does not resolve the question of which of
these disjunctive means specifies the “requirement”
in any particular case.28
[T]he [general/specific] canon has full application
as well to statutes such as the one here, in which
a general authorization and a more limited, specific
authorization exist side-by-side. There the canon
avoids… the superfluity of a specific provision that
is swallowed by the general one, “violat[ing] the cardinal rule that, if possible, effect shall be given to
every clause and part of a statute.” The terms of the
specific authorization must be complied with.…
Use of the disjunctive “or,” in and of itself, cannot and
does not resolve that question; indeed, it simply begs
that question.
As Justice Scalia put it, in tersely dismissing the
Philly News majority’s reasoning:
The debtors’ principal textual argument is that
§ 1129(b)(2)(A) “unambiguously provides three
distinct options for confirming a Chapter 11 plan
over the objection of a secured creditor.” With that
much we agree; the three clauses of § 1129(b)(2)(A)
are connected by the disjunctive “or.”… But… [t]he
question here is not whether the debtors must comply with more than one clause, but rather which one
of the three they must satisfy.29
With respect to resolving that determinative question,
Justice Scalia turned to (what else?) a “well established
canon of statutory interpretation.”30
The Specific Controls the General
Justice Scalia’s RadLAX opinion essentially begins
and ends with “[a] well established canon of statutory
interpretation [that] succinctly captures the problem:
‘[I]t is a commonplace of statutory construction that the
specific governs the general.’”31 As Scalia noted, this inference is particularly strong when the competing provisions at issue “are interrelated and closely positioned”
and “where, as in § 1129(b)(2)(A), ‘Congress has…
deliberately targeted specific problems with specific solutions.’”32 According to Scalia, this simple interpretive
canon fully resolves the entire credit-bidding brouhaha.
Initially, the general/specific canon avoids the
contradiction inherent in “the debtors’ reading of
§ 1129(b)(2)(A)—under which clause (iii) permits precisely what clause (ii) proscribes.”33 Indeed, Scalia believes that “[t]he general/specific canon is perhaps most
frequently applied to statutes in which a general permission or prohibition is contradicted by a specific prohibition or permission. To eliminate the contradiction, the
specific provision is construed as an exception to the
general one.”34
In addition, though, the general/specific canon also
avoids the other embarrassment of the debtors’ interpre© 2012 Thomson Reuters
Here, clause (ii) is a detailed provision that spells
out the requirements for selling collateral free of
liens, while clause (iii) is a broadly worded provision that says nothing about such a sale. The general/
specific canon explains that the “general language”
of clause (iii), “although broad enough to include
it, will not be held to apply to a matter specifically
dealt with” in clause (ii).35
As I noted in my earlier article, the disjunctive specification of the minimum fair-and-equitable requirement
in subdivisions (i), (ii), and (iii) seems to be structured
as two specific applications (in (i) and (ii)) of the more
general, overarching “indubitable equivalent” standard
contained in (iii). To provide a secured creditor less than
that which is specified in either (i) or (ii) would, therefore, essentially by definition fail to provide the secured
creditor the indubitable equivalent of its secured claim.
Thus, for example, if the plan proposes deferred cash
payments to the secured creditor, the Deferred Payment
Requirement of subdivision (i) requires that the secured creditor “retain the liens securing such claims.”
Consequently, and as the legislative history confirms,
“[u]nsecured notes as to the secured claim… would
not be the indubitable equivalent,”36 as that treatment
provides the secured creditor less than the indubitably
equivalent substitute already specified in subdivision
(i). If the secured creditor will not retain the liens securing its claim, the plan must provide the secured creditor
some other substitute that “would clearly satisfy indubitable equivalence,” such as (the legislative history further explains) “a lien on similar collateral.”37
This insight—that the Deferred Payment
Requirement and the Free-and-Clear Sale Requirement
are simply specific applications of the more general,
overarching Indubitable Equivalent Requirement—
fully explains and justifies the Code drafters’ assumption that a “plan may propose to sell collateral free and
clear of the lien held by members of the dissenting class
as long as the class has a chance to bid in their claims”
because the “sale of collateral must be made under 11
U.S.C. § 363(k) which permits the lien holders to bid
5
Vol. 32, No. 7
for the collateral and to offset their allowed claims that
are secured by the collateral against the purchase price.
11 U.S.C. § 1129(b)(2)(A)(ii).”38 Once one recognizes
that the Free-and-Clear Sale Requirement is simply
a specific application of the Indubitable Equivalent
Requirement, “[o]ne can come to this conclusion quite
naturally by simply employing common-sense canons
of statutory construction.”39
Justice Scalia employed similar (albeit entirely sterile
and acontextual) reasoning to rebuff the debtors’ valiant
attempts to resist the compelling logic of the general/
specific and anti-superfluousness canons:
The debtors make several arguments against applying the general/specific canon. They contend that
clause (ii) is no more specific than clause (iii), because the former provides a procedural protection
to secured creditors (credit-bidding) while the latter
provides a substantive protection (indubitable equivalence). As a result, they say, clause (ii) is not “a
limiting subset” of clause (iii), which (according to
their view) application of the general/specific canon
requires. To begin with, we know of no authority for
the proposition that the canon is confined to situations in which the entirety of the specific provision
is a “subset” of the general one. When the conduct
at issue falls within the scope of both provisions,
the specific presumptively governs, whether or not
the specific provision also applies to some conduct
that falls outside the general. In any case, we think
clause (ii) is entirely a subset. Clause (iii) applies to
all cramdown plans, which include all of the plans
within the more narrow category described in clause
(ii). That its requirements are “substantive” whereas clause (ii)’s are “procedural” is quite beside the
point. What counts for application of the general/
specific canon is not the nature of the provisions’
prescriptions but their scope.40
Essentially, then, “this is a determination that there is no
indubitably equivalent substitute for the secured creditor’s
right to credit bid at the sale” free and clear of its liens.41
“As a matter of law, no bid procedures like the ones proposed here [denying § 363(k) credit-bidding rights] could
satisfy the requirements of § 1129(b)(2)(A).”42
Structural Cues
Again, the critical interpretive question posed
in RadLAX is which of the three subdivisions of
§ 1129(b)(2)(A) the plan proponent must satisfy in any
given case. In answering that question, in addition to the
general/specific canon, Justice Scalia permitted himself
one structural observation, which I posited in my earlier
article as follows:
6
Bankruptcy Law Letter
Both the Fifth Circuit in Pacific Lumber and the
Philadelphia News [majority] assumed that the plan
proponent can simply choose which of the three disjunctive specifications of the requirement it wishes
to try to satisfy. A perfectly (and perhaps even more)
plausible alternative reading of the disjunctive specification of three means of satisfying the requirement, though, is that the plan’s proposed treatment
of the secured claim determines which of the three
alternative specifications of the requirement must
be satisfied: (i) if the plan proposes deferred cash
payments, then the Deferred Payment Requirement
must be satisfied; (ii) if the plan proposes a free-andclear sale of the secured creditor’s collateral, then
the Sale Requirement must be satisfied; or (iii) if the
plan proposes some other treatment of the secured
claim, then the Indubitable Equivalent Requirement
must be satisfied.43
Justice Scalia found that structural inference more
persuasive than a competing “safe harbor” inference
proffered by the debtors:
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. 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).44
Other Reliable Indicators of Statutory Meaning
Countering One Fallacious Plain Meaning With
Another
As I discussed in my earlier article, and as Judge
Ambro pointed out in his Philly News dissent, there are
other persuasive indicators supporting the Court’s inter© 2012 Thomson Reuters
Bankruptcy Law Letter pretation of 1129(b)(2)(A), including “the structure and
context of the statute as a whole and the relationship
between interconnected statutory provisions,” particularly § 1111(b)(2), as well as “relevant legislative history directly speaking to the meaning of the provisions
at issue.”45 Scalia’s opinion, though, dismissed all consideration of these matters with the abrupt conclusion
that “they can be relevant to the interpretation of an ambiguous text, but we find no textual ambiguity here.”46
To be sure, none of these other interpretive aids
contradict the Court’s common-sense interpretation in
RadLAX; indeed, they all buttress that interpretation as
eminently correct. To characterize that interpretation as
the unambiguous plain meaning of the statutory text,
however, is no more convincing than the Philly News
majority’s assertion that its contrary interpretation is
the unambiguous plain meaning of the statutory text.
Moreover, Scalia’s heavy reliance on a canon of interpretation to determine the meaning of § 1129(b)(2)(A)
is a telling, tacit indication that the linguistic meaning of
the statutory text itself was ambiguous on the critical interpretive question at issue: which of the three disjunctive specifications of the secured-creditor cramdown
requirement did debtors’ plan have to satisfy?
The Court has said that “[w]e respect these canons,
and they are quite often useful… when statutory language
is ambiguous,”47 but “[c]anons of statutory construction
are no more than rules of thumb that help courts determine the meaning of legislation, and in interpreting a
statute a court should always turn to one, cardinal canon
before all others.”48 And, of course, Justice Scalia is the
primary champion of that preeminent command: “We
have stated time and again that courts must presume that
a legislature says in a statute what it means and means in
a statute what it says there. When the words of a statute
are unambiguous, then, this first canon is also the last:
judicial inquiry is complete.”49
If the plain meaning of the statutory text, in and of
itself, unambiguously resolved the critical interpretive
question at issue in RadLAX, then there would be no
need (nor authority, according to Scalia) to resort to
the general/specific canon. As Scalia himself acknowledged in RadLAX, “the general/specific canon is not an
absolute rule, but is merely a strong indication of statutory meaning that can be overcome by textual indications that point in the other direction.”50 While Scalia
ultimately concluded that the “safe harbor” reading was
not the better one, it was nonetheless consistent with
the literal meaning of the statutory text. Indeed, Scalia
acknowledged as much in characterizing “the debtors’
reading of § 1129(b)(2)(A)” as “hyperliteral.”51
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This bit of unconvincing “unambiguous” ipse dixit,
though, while unfortunate, was largely harmless error.
As I argued at length in my previous article, the RadLAX
interpretation of § 1129(b)(2)(A) is eminently correct.
Understanding how credit bidding fits into the Code’s
larger design, however, helps explain why the Code
drafters would indeed presumptively require credit bidding in any free-and-clear sale of a secured creditor’s
collateral, as the Supreme Court has now held that they
did.
Adequate Protection, Indubitable Equivalence,
and Credit Bidding
In any § 363 sale of a secured creditor’s collateral,
§ 363(e) guarantees a secured creditor that its lien rights
are entitled to “adequate protection,” a concept that the
statute defines generally in § 361(3) as “realization by
such entity of the indubitable equivalent of such entity’s
interest in such property.” This “indubitable equivalent”
formulation of the concept of “adequate protection,”
after incorporating § 506(a)’s definition of a secured
creditor’s “allowed secured claim”52 is, of course, virtually identical to the Indubitable Equivalent cramdown
requirement of § 1129(b)(2)(A)(iii): “realization by
such [secured creditors] of the indubitable equivalent of
[their allowed secured] claims.”
“This somewhat stilted and inscrutable phrase [‘indubitable equivalent’] is taken from Judge Learned
Hand’s opinion in the Murel Holding case,”53 in which
he stated that “[i]t is plain that ‘adequate protection’
must be completely compensatory” for “the full value
of [secured creditors’] liens.”54 Likewise, legislative history makes clear that the ultimate objective of this concept is giving the secured creditor the full value of its
lien rights:
The… concept of adequate protection… [is that]
[s]ecured creditors should not be deprived of the
benefit of their bargain. There may be situations
in bankruptcy where giving a secured creditor an
absolute right to his bargain may be impossible or
seriously detrimental to the bankruptcy laws. Thus,
this section recognizes the availability of alternative means of protecting a secured creditor’s interest. Though the creditor might not receive his bargain in kind, the purpose of the section is to insure
that the secured creditor receives in value essentially what he bargained for.55
As Judge Hand noted in Murel Holding, when a secured creditor’s collateral is sold free and clear of the
secured creditor’s lien, the traditional, most basic aspect
of adequately protecting the secured creditor’s lien rights
is for the secured creditor to capture all proceeds of the
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sale up to the full amount of its allowed claim by virtue
of its lien attaching to the proceeds of the sale.56 In addition, though, the legislative record indicates that the Code
drafters also considered the credit bidding rights separately codified in § 363(k) to be an integral component
of adequately protecting the secured creditor’s lien rights.
Code § 363(k) provides that in any 363(b) sale of a
secured creditor’s collateral, the secured creditor can bid
at the sale, and if the secured creditor is the successful
purchaser, the secured creditor “may offset [its allowed]
claim against the purchase price of such property,” up to
the full amount of the creditor’s allowed claim without
any cash outlay by the secured creditor. That is the essence of credit bidding. Moreover, “since the [successful] bid at the sale would be determinative of value”57
of the collateral (and thus the amount of the creditor’s
secured claim), the secured creditor has at its disposal,
for credit-bidding purposes, the full amount of the debt
owed (including post-petition interest), such that if the
sale fetches less than the amount of the debt, the secured creditor can, if it so desires, acquire the collateral
with no cash outlay whatsoever, by just bidding an offset
against its claim.
As Judge Ambro explained:
The practical rationale for credit bidding is that
a secured lender would “not outbid [a] [b]idder
unless [the] [l]ender believe[d] it could generate a
greater return on [the collateral] than the return for
[the] [l]ender represented by [the] [b]idder’s offer.”
Conversely, if a bidder believed that a secured lender
was attempting to swoop in and take the collateral
below market value and keep the upside for itself,
that bidder presumably would make a bid exceeding the credit bid. In this manner, credit bidding is a
method of ensuring to a secured lender proper valuation of its collateral at sale.58
In the House bill preceding enactment of the Code,
there was no express provision for credit bidding.59
Nonetheless, the House Report accompanying that bill
commented that (as with a secured creditor’s lien attaching to sale proceeds) “[a]dequate protection might
also, in some circumstances, be provided by permitting
a secured creditor to bid in his claim at the sale of the
property and to offset the claim against the price bid
in.”60 The Senate bill, however, added express provision for credit bidding in proposed Code § 363(e)—the
provision addressing secured creditors’ adequate protection rights.61 In the reconciliation producing the enacted Code, the credit-bidding provision was moved to
§ 363(k), but this provision was clearly “derived from…
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section 363(e) [the adequate protection provision] of the
Senate” bill.62
In addition to adding express provision for credit bidding in § 363 sales, the Senate also added the express
cramdown protection that was ultimately enacted as
Code § 1129(b)(2)(A)(ii)-(iii).63 That provision clearly
indicated that which RadLAX seems to also acknowledge as implicit in the structure of § 1129(b)(2)(A):
“assur[ing] the realization by [a dissenting] class [of secured creditors] of the indubitable equivalent of the allowed amount of its secured claims”64—i.e., “realization
by such class of the value of their secured claims”65—
requires, in the case of a proposed sale free and clear of
the secured creditors’ liens, both (1) that the dissenting
secured class will capture all proceeds of the sale up to
the full amount of its allowed claims by virtue of “the
transfer of its claims to the proceeds of such sale,”66 and
(2) that the dissenting secured class “may bid at the sale
of such property and set off against the purchase price
thereof up to the allowed amount of its claims.”67
By holding that a dissenting secured creditor must be
afforded credit-bidding rights under § 363(k) in any freeand-clear sale of its collateral under a plan of reorganization, RadLAX ensures that secured creditors have the same
credit-bidding rights in plan sales that they have in § 363
sales. The legislative evolution of the provisions ultimately
enacted as Code §§ 361, 363, and 1129(b)(2)(A) indicates
that such consistency in treatment was indeed purposeful
and is part-and-parcel of the continuity in the concepts of
“adequate protection” of a secured creditor’s lien rights
under § 363 and “realization by [secured creditors] of the
indubitable equivalent of [their allowed secured] claims” in
a § 1129(b) cramdown.68 As is expressly codified in Code
§ 1129(b)(2)(A)(ii), in the case of a free-and-clear sale of
a secured creditor’s collateral, completely compensatory
“adequate protection” that assures realization of the “indubitable equivalent” of the full value of a secured creditor’s
lien rights requires (1) that the secured creditor will capture
all proceeds of the sale (by virtue of its lien attaching to
the proceeds) up to the full amount of its allowed claim, or
alternatively (2) that the secured creditor will acquire the
collateral itself through credit bidding up to the full amount
of its allowed claim. As Judge Hand himself stated, the secured creditor “wishes to get his money or at least the property,” and there is “no reason to suppose that the statute was
intended to deprive him of that.”69
The Alternative, Interrelated Protections of
§ 1111(b)(2) and Credit Bidding Rights
One important procedural protection the Code provides
undersecured creditors is the ability to elect treatment under Code § 1111(b)(2), which provides that “[i]f such an
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Bankruptcy Law Letter Vol. 32, No. 7
election is made, then notwithstanding section 506(a)…,
such claim [secured by a lien on property of the estate]
is a secured claim to the extent that such claim is allowed.” Therefore, “[u]nder § 1111(b)(2), an undersecured creditor may elect to have its entire claim treated
as an allowed secured claim,” with the “quid pro quo for
making the election [being] that the undersecured creditor must give up its unsecured [deficiency] claim.”70
Thus in the RadLAX case, had the lenders been able
to elect § 1111(b)(2) treatment, their “allowed secured
claim” subject to “fair and equitable” cramdown treatment would have been a $120 million secured claim
that could only be cashed out under the Indubitable
Equivalent Requirement of § 1129(b)(2)(A)(iii) by paying the lenders $120 million. Consequently, “[t]he real
importance of the § 1111(b)(2) election is to protect a
secured creditor against the risk that a debtor will…
cram down the secured claim at a low value determined
by the bankruptcy court.”71 The lenders in RadLAX,
however, were not eligible to elect § 1111(b)(2) treatment, and the reason is because the Code purposefully
substitutes § 363(k) credit-bidding rights as the secured
creditors’ undervaluation protection when the secured
creditors’ collateral “is sold under section 363… or is to
be sold under the plan.”72
lishes the value of the collateral, and an undersecured
creditor, e.g., will capture all of the proceeds of the sale
as the “indubitable equivalent” of its secured claim.76
Moreover, “any concern that the lienholder might have
that the sale might not bring a fair price for the collateral
is redressed by the privilege of the lienholder to bid at
the sale itself, and to offset its claim against the purchase price.”77 An undersecured creditor, for example,
can simply acquire the collateral by credit bidding its
debt, if it thinks the cash bids are too low, and resell the
collateral later. Indeed, Justice Scalia acknowledged this
as the principal function of credit bidding in RadLAX,
noting that “[t]he ability to credit bid helps to protect a
creditor against the risk that its collateral will be sold at
a depressed price. It enables the creditor to purchase the
collateral for what it considers the fair market price (up
to the amount of its security interest) without committing additional cash to protect the loan.”78
A secured creditor is expressly denied the ability to
elect § 1111(b)(2) treatment, and have its entire allowed
claim treated as secured, if the secured creditor’s collateral “is to be sold under the plan.”73 To understand why
the § 1111(b)(2) election is denied the secured creditor in this instance, consider, for example, the case of a
secured creditor with a claim of $100, whose collateral
sells for $75. If that creditor could elect § 1111(b)(2)
treatment of its secured claim, such that the creditor had
an allowed secured claim of $100, upon sale of the creditor’s collateral, the only way to cash-out the secured
creditor and provide the secured creditor the “indubitable equivalent” of its “allowed secured claim”74 would
be to pay the secured creditor $100 in cash—$25 more
than sale of the collateral itself produced. The most that
secured creditor should be able to insist on, though, is
the full value of its collateral, whatever that value is; and
in the case of an actual sale of the collateral, as legislative history put it, “the bid at the sale would be determinative of value.”75
Section 1111(b)(2) provides that an allowed claim
is a secured claim to the full extent the claim is allowed rather [than] to the extent of the collateral as
under 506(a). A class may elect application of paragraph (2) only if… the collateral is not… to be sold
under the plan. Sale of property… under the plan is
excluded from treatment under section 1111(b) because of the secured party’s right to bid in the full
amount of his allowed claim at any sale of collateral
under section 363(k)….79
The assumption embedded in the structure of the
§ 1111(b)(2) election, therefore, seems to be that in the
case of an actual sale of the secured creditor’s collateral, there is no need for the § 1111(b)(2) check on judicial undervaluation of the collateral. Indeed, there is
no need for a judicial valuation of the collateral at all in
the case of an actual sale because the sale itself estab© 2012 Thomson Reuters
Thus the protection against being cashed out at an unfairly low valuation that the § 1111(b)(2) election provides is, in the event of a sale of the collateral, provided
instead by the right to credit bid at the sale. Indeed, this
is exactly how the Code’s legislative history explains the
interrelated operation of the § 1111(b)(2) election and
the secured creditor cramdown provisions:
Once again, then, the Code drafters assumed a fixed
right for a dissenting secured creditor to credit bid at
any plan sale of its collateral, which right was fixed by
enactment of Code § 1129(b)(2)(A)(ii): “[A] class of
[secured] claims is ineligible to make the election if…
the collateral is sold. The [secured] creditor will be able
to bid in its claim when the collateral is sold” because if
the “collateral will be sold… under the plan… the [secured] lender has a right to bid at the sale and to offset
his full allowed claim against the purchase price. See 11
U.S.C. § 1129(b)(2)(A)(ii).”80
The Code’s Presumption in Favor of Credit
Bidding Rights
The holding in Philly News seemed designed to indulge the argument of the debtors that structuring an
auction without credit bidding would spur competitive
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bidding. Thus the Philly News majority essentially left
it to “the process” to determine whether the absence of
credit bidding did, indeed, spur competitive bidding:
This rule [permitting a plan sale without § 363(k)
credit-bidding rights] is not akin to guaranteeing plan
confirmation. We are asked here not to determine
whether the “indubitable equivalent” would necessarily be satisfied by the sale; rather, we are asked
to interpret the requirements of § 1129(b)(2)(A) as a
matter of law. This distinction is critical. The auction
of the Debtors’ assets has not yet occurred. Other
public bidders may choose to submit a cash bid for
the assets.… And the secured claim itself has not yet
been judicially valued under § 506(a). We are simply
not in a position at this stage to conclude, as a matter of law, that this auction cannot generate the indubitable equivalent of the Lenders’ secured interest
in the Debtors’ assets. We approve the proposed bid
procedures with full confidence that such analysis
will be carefully and thoroughly conducted by the
Bankruptcy Court during plan confirmation, when
the appropriate information is available.81
The “loan to own” phenomenon has caused some to
question the advisability of credit bidding. The basic
concern seems to be that a “loan to own” lender’s primary incentive is, unlike a traditional lender, acquiring
the debtor’s assets as cheaply as possible, rather than
maximizing the recovery on its secured loan. A traditional lender has every incentive to maximize the sale
price of its collateral through vigorous competitive bidding, sincerely hoping that bid prices will exceed the
amount it could credit bid with its existing secured loan,
as this would mean a full recovery on that loan. A “loan
to own” lender, though, has every incentive to inhibit
competitive bidding in order to ensure that bid prices
will not exceed the amount it can credit bid with its existing secured loan, as this would mean that the “loan
to own” lender can acquire the debtor’s assets solely
through a credit bid of its existing secured loan and with
no additional investment.
While the “loan to own” phenomenon should cause
us to closely scrutinize all aspects of the sale process,
to ensure that sale procedures are designed to elicit the
highest sale price possible, it is unclear that credit bidding, even by “loan to own” lenders, inhibits competitive bidding in any nefarious way.82 Rather, credit bidding is simply economic reality. If the secured lender is
entitled to capture all proceeds from the sale up to the
full amount of its allowed claim (more on that in a bit),
any amount the secured lender bids, up to and including
the full amount of its allowed claim, is money that will
simply immediately flow back into the pocket of the se-
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cured lender. What legitimate reason is there to require
the lender to essentially write a check to itself?
That question points up, of course, that there may
be illegitimate reasons, such as seizing upon coordination difficulties inherent in the administration of a large
syndicated loan that might actually prevent the multiple
secured lenders from writing a check to themselves.
Moreover, the secured creditor is not actually writing a
check to itself; if it is the successful bidder in a cash-only sale, the secured lender must actually pay the money
to the estate to be administered and paid out under a
plan of reorganization. That, of course, means actually
being without the cash for some period of time, even
if the secured creditor will get it all back (an assumption we will re-examine in a bit). The secured creditor
(or particular lenders in a large syndicated loan) may
or may not have ready access to the necessary capital,
which (needless to say) is not without cost. Those are all
reasons the debtor might want to exclude credit bidding,
e.g., if they want someone else to acquire the debtor’s
assets on the cheap (by increasing the secured lenders’
bidding costs). Moreover, if making the secured creditor pay cash to buy, as a practical matter, will entirely
exclude the secured creditor from bidding, fewer viable
bidders makes it easier to get the assets to the debtor’s
favored bidder at a lower price.
If a secured lender is owed an amount that vastly exceeds the fair value of the collateral, competitive bidding may well be inhibited by credit bidding, particularly in a “loan to own” scenario, but only by virtue of the
economic reality that the sale price is extremely unlikely
to exceed the amount owed the secured lender (i.e., the
secured lender is, indeed, entitled to the full value of
the collateral). If the secured lender primarily desires
ownership of the collateral, then the secured lender will
be prepared to readily bid up to the full amount of its
claim, which may well inhibit competitive bidding, but
only because potential bidders believe that the fair value
of the assets does not exceed the amount owed the secured lender (i.e., the secured lender is, indeed, entitled
to the full value of the assets). Even if the secured lender
would rather have cash (which, of course, will not scare
away competitive bidding), the secured lender may still
bid if it believes the other bid prices do not reflect fair
value and, thus, the lender can resell the collateral at a
higher price. In either case, though, the secured lender
acquires the assets simply by virtue of the economic reality of its first-priority claim against all proceeds of the
sale up to the full amount of its allowed claim. Unless
we are prepared to take away that first-priority claim to
any and all sale proceeds up to the full amount of its
allowed claim (more on this later), credit bidding is not
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Bankruptcy Law Letter Vol. 32, No. 7
nefarious, but rather is simply recognition of the reality
of that first-priority claim to the proceeds.
outcome of one isolated sale at which credit bidding was
not permitted.
Even if one could construct a convincing argument
that credit bidding is nefarious and should be restricted,
the Code already fully and explicitly accommodates this
possibility in the credit bidding provision of § 363(k)
itself, which is fully incorporated by reference into the
Free-and-Clear Sale Requirement of § 1129(b)(2)(A)(ii).
Section 363(k) provides:
What sort of showing Philly News would require secured creditors to make, after the fact, is entirely unclear, but one suspects (consistent with the entire function of presumptions) that the secured creditor typically
would not be able to make the requisite showing for
lack of specific evidence that the particular sale at issue was irregular. Of course, presuming that there will
be credit bidding and putting debtors to the burden of
demonstrating cause to deny credit bidding before any
sale, as required by § 363(k), will produce the opposite result. Thus in the RadLAX case, Bankruptcy Judge
Black concluded that the debtors’ assertion “that credit
bidding generally chills the bidding process… without
any evidence that credit bidding will chill the process in
this case, does not satisfy the Debtors’ burden.”86
(k) At a sale… of property that is subject to a lien
that secures an allowed claim, 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.83
The problem with the holding in Philly News, therefore, was not so much that it indulged the possibility that
credit bidding might be inappropriate in certain cases;
the problem is that it reversed the Code’s presumptions and allocation of burdens for overcoming those
presumptions. First, as the RadLAX holding confirms,
the Code presumes that credit bidding rights should accompany any sale of a secured creditor’s collateral and
places the burden on a sale proponent to demonstrate
cause to restrict credit bidding. Philly News, though,
quite explicitly turned that presumption on its head by
putting the secured lenders in that case to the burden of
establishing “that the restriction on credit bidding failed
to generate fair market value at the Auction.”84
Second, the burden of demonstrating compliance
with all requisites to confirmation of a plan of reorganization lies with the plan proponent, and particularly
in a cramdown context, the plan proponent has the burden of proving that the plan is “fair and equitable” to a
dissenting secured creditor class. Philly News, though,
improperly placed the burden on the secured lenders to
show “at confirmation that the restriction on credit bidding failed to generate fair market value at the Auction,
thereby preventing them from receiving the indubitable
equivalent of their claim.”85
Lastly, the Code not only adopts the presumption that
credit bidding will be a feature of any sale of a secured
creditor’s collateral, but also that any cause for restriction of credit bidding must be established before the sale
is conducted. The Philly News majority, however, was
content to let a sale without credit bidding go forward,
without any advance demonstration of cause to restrict
credit bidding, and then try to somehow discern the impact of potential credit bidding simply by observing the
© 2012 Thomson Reuters
The process contemplated by Philly News—permitting an auction sale without credit bidding to go forward
and then somehow unscrambling the egg after the fact
at a subsequent plan confirmation hearing—also seems
entirely self-defeating. If the sale would not garner finality at the auction itself and must await subsequent plan
confirmation proceedings, this feature would run counter to the desire to spur competitive bidding. If the sale
would garner finality at the auction itself,87 then immediate closing of the sale would likely moot any ability to
try to unscramble the egg after the fact. Only a moment’s
thought, therefore, is necessary to recognize the wisdom
and superiority of the process codified in Code § 363(k),
incorporated by reference in § 1129(b)(2)(A)(ii).
A Secured Creditor’s Right to Proceeds From a
Sale of Its Collateral
While the nominal issue at stake in Pacific Lumber,
Phillly News, and RadLAX was the credit-bidding rights
of secured creditors, lurking not far beneath the surface
of the credit-bidding issue is an arguably even more important (and telling) controversy that RadLAX did not
resolve (or even address) and that has entirely escaped
the attention of most observers—the extent of a secured
creditor’s right to proceeds from a sale of its collateral.
As discussed above, the secured creditors’ right to proceeds is expressly embedded within the Free-and-Clear
Sale Requirement of § 1129(b)(2)(A)(ii) by virtue of the
provision for dissenting secured creditors’ “liens to attach to the proceeds of such sale, and the treatment of
such liens on proceeds under clause (i) or (iii).”
In Pacific Lumber, Phillly News, and RadLAX, the
plan proponents were proposing a clause (iii) cash-out
with sale proceeds—providing the dissenting secured
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creditors the “indubitable equivalent” of their secured
claims by paying them the full value of their allowed
secured claims. The revealing aspect of those proposed
cash-outs, though, is that in none of those cases did the
plan proponent seem to propose paying to the vastlyundersecured creditors all of the proceeds of the sale of
their collateral.
As I noted in my earlier article, then, plan proponents’
desire to avoid application of the Free-and-Clear Sale
Requirement of § 1129(b)(2)(A)(ii) was about more
than simply denying secured creditors the right to credit
bid at the sale; it was also about denying undersecured
creditors the ability to fully capture all proceeds from
the sale of their collateral.88 Moreover, because RadLAX
neither addressed nor resolved that issue (and neither
does the text of the Code itself), the spirit of Pacific
Lumber and Philly News may linger. Indeed, the Pacific
Lumber and Philly News restrictions on secured creditors’ credit-bidding rights may be partially resurrected
via § 363(k) “cause.” The “cause” at issue, though, has
nothing to do with the specious contention that credit
bidding “chills the bidding process.”89 Rather, “cause”
to limit credit bidding could be attributable to a conviction that even a vastly undersecured creditor simply is
not entitled to all proceeds from a sale of its collateral
because the secured creditor is only entitled to receive
the nonbankruptcy liquidation value of its collateral and
is not entitled to capture all of the reorganization surplus
from its collateral.
Implicit Assumptions
The arguments for and against presumptive credit
bidding in Pacific Lumber, Philly News, and RadLAX
were based upon implicit and contradictory assumptions regarding a secured creditor’s baseline distributional entitlement in Chapter 11. One way to illustrate
these conflicting assumptions is to analyze the “indubitable equivalence” indubitably implicated by a straightforward cash sale free-and-clear of an undersecured
creditor’s collateral under Code § 1129(b)(2)(A)(ii),
which requires the secured creditor’s “liens to attach
to the proceeds of such sale, and the treatment of such
liens on proceeds under clause (i) or (iii).” If the plan
proposes to cash-out the undersecured creditor with the
sale proceeds, clause (iii) requires “realization by such
[undersecured creditor] of the indubitable equivalent of
such [undersecured creditor’s allowed secured] claim.”
Under Code § 506(a)(1), an undersecured creditor’s
“allowed claim” is a “secured claim” only “to the extent
of the value of such [undersecured] creditor’s” collateral. “[R]ecognition of the eely character of the word
‘value’” and its inherent lack of “a constant and precise
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meaning,”90 though, indicates that requiring the undersecured creditor to realize the indubitable equivalent of
the value of that undersecured creditor’s collateral, as
§ 1129(b)(2)(A)(iii) does, simply begs the question of
how the value of that collateral is to be determined.
The undersecured lenders’ implicit assumption in
Pacific Lumber, Philly News, and RadLAX was, as stated
in the legislative history,91 that the sale price itself establishes the collateral’s value, and thus the undersecured
creditor must receive all of the proceeds of the sale in
order to realize the indubitable equivalent of the value
of its collateral. What is most striking about the Philly
News majority and Pacific Lumber opinions, though, is
that they clearly rejected this assumption. Those decisions were premised on the assumption that all the dissenting undersecured creditor is entitled to receive in all
events (including a cash-out sale free-and-clear of the
undersecured creditor’s liens) is a judicially determined
value under § 506(a)(1), which value may well be (and
the plan proponents were counting on it being) less than
the sale price of the collateral.
Pacific Lumber. Although the plan structure in Pacific
Lumber was complex, and not nominally structured as
a free-and-clear sale of the secured lenders’ collateral,
the Fifth Circuit concluded that the plan, nonetheless, in
substance effectuated a free-and-clear sale of the undersecured lenders’ collateral.92 The same analysis by which
the Fifth Circuit teased out the “sale” of the undersecured lenders’ collateral under the plan also indicates
that the “sale price” of those assets (net of senior liens)
was over $540 million. Yet the confirmed plan was cashing out the dissenting undersecured lenders (owed $790
million) for only $513.6 million, the value placed on the
secured lenders’ collateral by the bankruptcy court after
receiving extensive valuation evidence.93 There was thus
substantial leakage of the sale proceeds that never found
their way into the undersecured lenders’ pockets, $10.6
million of which was evidently used to fund payments to
general unsecured creditors. The undersecured lenders,
therefore, objected that the plan was not “fair and equitable” because it was “directing some of the [purchase
price for their collateral] to pay claims junior to [their]
secured claim.”94
The Fifth Circuit’s response to this objection was:
“Whatever uncertainties exist about indubitable equivalent, paying off secured creditors in cash can hardly be
improper if the plan accurately reflected the value of the
[undersecured len]ders’ collateral.”95 The Fifth Circuit
sanguinely reviewed the bankruptcy court’s § 506(a) valuation findings, in light of the evidence presented, and
concluded that the bankruptcy court’s valuation of the
collateral at $513.6 million was (surprise, surprise) not
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Bankruptcy Law Letter clearly erroneous. Thus, according to the Fifth Circuit,
cash-out of the undersecured lenders at this judicially
determined § 506(a) value gave them all they were entitled to receive with respect to their secured claims.
Here, then, we see the clash of the irreconcilable assumptions regarding how collateral value is determined
in the case of an actual sale of the collateral. The undersecured lenders’ assumption was that the sale price itself established the value of the collateral and thus there was no
need for a § 506(a) judicial valuation, and since they were
vastly undersecured, they were entitled to receive all of
the proceeds of the sale (i.e., the value) of their collateral.
Philly News and RadLAX. This phenomenon of using
the proceeds from the sale of an undersecured creditor’s
collateral to fund plan distributions to junior unsecured
creditors is most evident in cases such as Philly News and
RadLAX, in which a vastly undersecured lender has liens
on all of the debtor’s assets, and the plan proposes a freeand-clear going-concern sale of the debtor’s business and
assets. In such a case, since all of the debtor’s assets are
encumbered by the undersecured lender’s liens, the only
source for any distribution to unsecured creditors is from
either the undersecured lender’s collateral or proceeds
from sale of the undersecured lender’s collateral.
Thus in Philly News, the plan ultimately confirmed
required the successful purchaser of the debtor’s assets
to contribute approximately $1 million and 2.5% of its
common equity for distribution to unsecured creditors.
Similarly in RadLAX, the debtors’ proposed plan would
have required the successful purchaser of the debtors’
assets to fund distributions to unsecured creditors out of
the future operating profits of the hotel.
All such funds and other property from which a purchaser is willing to part in order to acquire the debtor’s
assets (i.e., the vastly undersecured lender’s collateral)
are obviously “proceeds” of the free-and-clear sale.
Such leakage of sale proceeds to fund distributions to
unsecured creditors, though, is not prohibited if the sale
price does not establish the value of the collateral, and
the Philly News majority explicitly opined that the sale
price is not determinative of the collateral value; rather,
a § 506(a) judicial valuation determines the undersecured creditor’s baseline distributional entitlement:
Section 506(a) bifurcates claims into secured and unsecured claims based on judicial valuation of the collateral securing the claim. The statute directs that “[s]
uch value shall be determined in light of the purpose
of the valuation and of the proposed disposition or use
of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting
© 2012 Thomson Reuters
Vol. 32, No. 7
such creditor’s interest.” 11 U.S.C. § 506(a)(1). Prior
to plan confirmation the [undersecured] Lenders’
present loan value will be bifurcated into a secured
claim—based on valuation of collateral—and an
unsecured claim for the deficiency. The “indubitable equivalent” standard is tied only to the value
of the secured claim. Thus, any present comparison
between the $295 million loan and the value of the
[purchaser’s] Bid is irrelevant; the [undersecured]
Lenders are only entitled to recover the portion of
the loan that is presently secured by the value of the
collateral.96
If undersecured lenders must be allowed to credit bid
at any free-and-clear sale of their collateral, though, they
can block any leakage of the sales proceeds by simply
bidding in their debt to acquire the collateral. Moreover,
the text of § 363(k) is plain that the secured creditor has
its entire “allowed claim” at its disposal for credit bidding
and thus must be “allowed to bid up to the full amount of
their debt owed despite Bankruptcy Code § 506(a).”97 The
differing assumptions about how the value of a secured
creditor’s collateral is determined, therefore, help explain
the ancillary credit-bidding controversy.
For secured creditors, operating on the assumption that
in a free-and-clear sale of its collateral the sale price itself establishes the value of the collateral, credit bidding
serves two protective functions—both as an undervaluation protection and a proceeds protection. Not only can the
undersecured creditor bid in its claim to acquire the assets
when it believes the otherwise prevailing sale price is too
low, the undersecured creditor can also bid in its claim to
acquire the assets when it believes that the proposed plan
would not return to the undersecured creditor the full value of the proceeds generated by sale (i.e., the value) of its
collateral. The two components of the Free-and-Clear Sale
Requirement of § 1129(b)(2)(A)(ii)—credit bidding and
proceeds capture—are, therefore, mutually reinforcing assurances that secured creditors will receive the indubitable
equivalent of their secured claim in any plan sale of the
undersecured creditor’s collateral.
Because the Pacific Lumber court and the Philly
News majority rejected that critical assumption, though,
they were (understandably) entirely unconcerned about
denying the undersecured creditor any ability to credit
bid at the sale. To their minds, the sale price is not determinative of the value the undersecured creditor is
ultimately entitled to receive. To their minds, the only
baseline value protection an undersecured creditor is
guaranteed is established via a § 506(a) judicial valuation of the undersecured creditor’s collateral. Moreover,
the RadLAX debtors explicitly argued in the Supreme
Court that denying the undersecured lenders any right to
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credit bid was necessary in order to facilitate distributions to junior unsecured creditors.
The Ghosts of Pacific Lumber and Philly News
The Supreme Court’s holding in RadLAX that presumptive credit bidding rights attend any free-and-clear
sale of a secured creditor’s collateral, when considered
holistically in the context of the entire structure and
purposes of the Code’s provisions for the protection of
secured creditors’ lien rights, seems more consistent
with secured creditors’ implicit assumption—that in an
actual sale of the secured creditor’s collateral, the successful “bid at the sale” (whether by cash or credit) is
“determinative of value” of the collateral98 and thus entitles an undersecured creditor to capture all of the proceeds of the sale (i.e., the value) of its collateral. This
assumption also seems more consistent with the Court’s
express preference in 203 North LaSalle that securedcreditor cramdown valuations be subjected to a “market
test” whenever possible.99
Secured creditors’ implicit assumption, though, is
just that; nowhere is it expressly provided in the text of
the Code. Moreover, the contrary implicit assumption of
Pacific Lumber and Philly News finds credible support
in other foundational aspects of the Chapter 11 distribution scheme (as we will explore shortly). Thus we discover a potential adverse side effect of Justice Scalia’s
unconvincing “rush[] to find clarity and thereby excluding consideration of statutory purposes”100—the everpresent risk that the narrowness of the ratio decendi
produces an ineffective precedent that does not actually
resolve the interpretive controversy.101
How, you may ask, could Pacific Lumber and Philly
News be resurrected in the wake of RadLAX? And what
is the conceptual appeal of the Pacific Lumber and Philly
News premise that an undersecured creditor’s baseline
distributional entitlement is limited to the amount set by a
§ 506(a) judicial valuation of that secured creditor’s collateral, even in the face of a bankruptcy sale of that collateral that fetches a different (presumably higher) amount?
Allocation of Reorganization Surplus
Beginning with the latter question, we must step
back and remind ourselves of the distribution design the
Code drafters sought to implement with the plan confirmation requirements of Code § 1129. The “best interests” test of § 1129(a)(7), by assuring that a plan of
reorganization must provide each individual creditor at
least as much as that creditor would receive in a Chapter
7 liquidation, recognizes that the value in reorganization (in lieu of liquidation) is in the “reorganization surplus”—value in excess of that which creditors would re-
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Bankruptcy Law Letter
ceive in a Chapter 7 liquidation. The cramdown rules of
§ 1129(b), because they are invoked only if a particular
class rejects a proposed plan, are designed to permit and
foster bargaining over and a consensual allocation (by
class vote) of the debtor’s reorganization surplus among
creditor classes. “Correlatively, the cram-down rules
also provide the ground rules for negotiations regarding distribution of the reorganization surplus. Creditors’
ability to block, by class vote, distributions that depart
from their baseline priority rights provide a fundamental
protection against what they regard as an improper apportionment of the debtor’s reorganization surplus.”102
As regards undersecured creditors, as we’ve seen,
their baseline distributional entitlement embedded in
the cramdown rules of § 1129(b)(2)(A) is to receive the
value of their collateral. The Code drafters were fully
cognizant of the ambiguity inherent in the eely concept
of “value” and the consequent uncertainty that would
foster regarding secured creditors’ baseline cramdown
distribution entitlement. Nonetheless, they purposefully
refused to provide more precise directions regarding
determinations of collateral value, thereby providing a
sage inducement to bargained consensual allocations of
reorganization surplus.103 As the House Report put it, in
discussing the contiguous concept of “adequate protection” of the value of a secured creditor’s lien rights:
[P]roviding adequate protection [relies] on the value
of the protected entity’s interest in the property involved. The section does not specify how value is to
be determined, nor does it specify when it is to be
determined. These matters are left to case-by-case
interpretation and development. It is expected that
the courts will apply the concept in light of facts
of each case and general equitable principles. It is
not intended that the courts will develop a hard and
fast rule that will apply in every case. The time and
method of valuation is not specified precisely, in order to avoid that result. There are an infinite number
of variations possible in dealings between debtors
and creditors, the law is continually developing,
and new ideas are continually being implemented in
this field. The flexibility is important to permit the
courts to adapt to varying circumstances and changing modes of financing.
Neither is it expected that the courts will construe
value to mean, in every case, forced liquidation value or full going concern value. There is wide latitude
between those two extremes. In any particular case,
especially a reorganization case, the determination
of which entity should be entitled to the difference
between the going concern value and the liquidation value must be based on equitable considerations
© 2012 Thomson Reuters
Bankruptcy Law Letter based on the facts of the case. It will frequently be
based on negotiation between the parties. Only if
they cannot agree will the court become involved.104
Indeed, that is the conceptual foundation for the recent (refreshing) repudiation of so-called “gift plans”:
The Code’s design for distribution of reorganization
surplus reveals [that] reorganization surplus… is not
surplus that in any sense “belongs” to senior [secured] creditors, and senior [secured] creditors have
no unfettered “right” to this surplus…. Each and every creditor does have an inviolable “right” to their
share of the debtor’s liquidation value (a right enshrined in the “best interests” test of § 1129(a)(7)),
but creditors have no intrinsic “rights” in a debtor’s
reorganization surplus (preserved and in a very real
sense created by the reorganization process itself).105
The Chapter 11 Reorganization by Sale
Two monumental developments in Chapter 11 that
the Code drafters likely did not anticipate, though, have
skewed negotiations over allocation of reorganization
surplus decisively in favor of senior secured creditors,
in a manner that the Code drafters also likely did not
anticipate. The first is the ascendancy of secured credit
in Chapter 11 debtors’ capital structures,106 such that
it is now common that a dominant secured lender has
blanket liens on substantially all of the debtor’s assets
securing debts vastly exceeding the value of the debtor’s
business and assets. The second, related phenomenon is
the rise of “relatively expeditious going-concern sales
of the debtor’s business and assets to a third-party purchaser” as a prominent means of realizing the debtor’s
going-concern value in Chapter 11.107
“A secured creditor’s right to credit bid on any sale
of its collateral is a particularly powerful protection for
an undersecured creditor with first-priority liens on substantially all of the debtor’s assets…. Indeed, the right
to credit bid protects such an undersecured creditor’s
interest in both the liquidation value and any reorganization surplus implicit in its collateral.”108 When the
undersecured creditor’s collateral is the entirety of the
debtor’s assets, therefore, credit-bidding rights in any
going-concern sale of the debtor’s business and assets
gives that senior secured creditor the leverage to always
insist upon capturing all of the debtor’s reorganization
surplus, to the detriment of unsecured creditors and other junior classes.
That result seems fundamentally at odds with the
Code’s design for allocation of reorganization surplus in
Chapter 11, and that is the intellectual foundation for the
Pacific Lumber and Philly News premise that the price
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Vol. 32, No. 7
realized in a sale of an undersecured creditor’s collateral
(which may well include all of the debtor’s going-concern
value) should not necessarily be determinative of the
“value” of that undersecured creditor’s collateral for purposes of that undersecured creditor’s baseline cramdown
distributional entitlement (which, in all equity, should be
forced-sale nonbankruptcy foreclosure value).
Adequate Protection, Indubitable Equivalence,
and Restricting Credit Bidding for “Cause”
If one accepts that premise as consistent with the purposes of the Code, by what means can it be implemented
consistent with the text of the Code and the RadLAX decision? That opinion, as we’ve seen, simply decided that
a secured creditor must be afforded presumptive creditbidding rights under § 363(k) in any free-and-clear sale
of the secured creditor’s collateral, whether that sale is
effectuated under § 363(b) or under a cramdown plan
of reorganization. So let us analyze each of those alternative sale vehicles, in turn, in the context of our new
paradigm of the Chapter 11 reorganization by sale: a
going-concern sale of the entirety of the debtor’s business and assets, which are also the collateral of a vastly
undersecured creditor.
Take, first, the case of a § 363 sale. Note, that nowhere does the statute expressly provide that the secured
creditor’s liens must be transferred to the proceeds of
the sale; that is merely implicit in § 363(e) “adequate
protection” of the secured creditor’s liens and providing
the secured creditor the “indubitable equivalent” of the
value of those liens. As the legislative history (quoted
above) makes clear, though, that value need not include
going concern value and the means of providing adequate protection of that value is purposefully flexible in
order to adapt to changing circumstances (such as those
that now prevail in our new paradigm of the Chapter 11
reorganization by sale). Limiting the amount of a secured creditor’s proceeds recovery to a judicially determined § 506(a) foreclosure valuation, therefore, seems
to be fully consistent with both the text and contemplated purposes of the Code.
Moreover, if we conclude that our new paradigm of
the Chapter 11 reorganization by sale is not the norm on
which the Code itself is premised, then this would seem
to be a sufficient basis on which to invoke the “cause”
exception in § 363(k) to limit our undersecured creditor’s credit-bidding right to (and protect the integrity of)
the § 506(a) adequate protection amount determined by
the court. Perhaps a new feature of § 363(b) sale motions should, therefore, be: (1) a request for a § 506(a)
adequate protection foreclosure-sale valuation of a secured creditor’s collateral, and (2) a request to limit the
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secured creditor’s credit-bidding right under § 363(k) to
the court’s foreclosure-sale valuation amount. Indeed,
Justice Scalia’s description of the credit-bidding right in
RadLAX as enabling a secured creditor to credit bid “up
to the amount of its security interest,”109 rather than the
full amount of its allowed claim, seems to acknowledge
the possibility that the “amount of [the] security interest” is not necessarily established by (and may be set
independent of) the sale itself.
If the sale is proposed as a § 1129(b)(2)(A)(ii) plan
sale, the logic is similar. The undersecured creditor’s lien
must attach to the proceeds of the sale under subdivision
(ii), but the statute expressly provides that the secured
creditor’s lien on proceeds merely entitles it to receive
the “indubitable equivalent” of the value of the secured
creditor’s collateral under subdivision (iii). Again, then,
any proposed plan sale could also be accompanied by
(1) a request for a § 506(a) “indubitable equivalent”
foreclosure-sale valuation of the secured creditor’s collateral, and (2) a request to limit the secured creditor’s
credit-bidding right under § 363(k) to the court’s foreclosure-sale valuation amount.
The ultimate legitimacy and continuing viability of
Pacific Lumber and Philly News turn on the validity of
their assumption that the sale price of a secured creditor’s collateral is not necessarily determinative of the
secured creditor’s baseline distributional entitlement.
RadLAX did not address that issue and thus left the ultimate legitimacy and continuing viability of Pacific
Lumber and Philly News unresolved.
1.
Ralph Brubaker, Cramdown of an Undersecured Creditor
Through Sale of the Creditor’s Collateral: Herein of
Indubitable Equivalence, the § 1111(b)(2) Election, Sub Rosa
Sales, Credit Bidding, and Disposition of Sale Proceeds, 29
Bankr. L. Letter No. 12, at 1-16 (Dec. 2009).
2.
In re Pacific Lumber Co., 584 F.3d 229, 52 Bankr. Ct. Dec.
(CRR) 46, Bankr. L. Rep. (CCH) P 81642 (5th Cir. 2009).
Bankruptcy Law Letter
Through Misinterpretation of Section 1129(b)(2)(A) of the
Bankruptcy Code, 85 Am. Bankr. L.J. 127 (2011); Vincent
S.J. Buccola & Ashley C. Keller, Credit Bidding and the
Design of Bankruptcy Auctions, 18 Geo. Mason L. Rev. 99
(2010); Hollace T. Cohen, Is the Philadelphia Newspapers,
LLC Decision the Death Knell to Credit Bidding in a Sale
Under a Plan?, 20 Norton J. Bankr. L. & Prac. 3 (2011);
Merriam Mikhail, Extra! Extra!: Philadelphia Newspapers
Jeopardizes Credit Bidding, 28 Emory Bankr. Dev. J. 135
(2011); Alan N. Resnick, Denying Secured Creditors the
Right to Credit Bid in Chapter 11 Cases and the Risk of
Undervaluation, 63 Hastings L.J. 323 (2012).
9. River Road Hotel Partners, LLC v. Amalgamated Bank,
651 F.3d 642, 649, 55 Bankr. Ct. Dec. (CRR) 13, 65 Collier
Bankr. Cas. 2d (MB) 1900, Bankr. L. Rep. (CCH) P 82031
(7th Cir. 2011), cert. granted, 132 S. Ct. 845, 181 L. Ed. 2d
547 (2011) and aff’d, 132 S. Ct. 2065 (2012).
10. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S.
Ct. 2065 (2012).
11. RadLAX, 132 S.Ct. at 2073.
12. In re River Road Hotel Partners, LLC, 2010 WL 6634603
(Bankr. N.D. Ill. 2010), aff’d, 651 F.3d 642, 55 Bankr. Ct.
Dec. (CRR) 13, 65 Collier Bankr. Cas. 2d (MB) 1900, Bankr.
L. Rep. (CCH) P 82031 (7th Cir. 2011), cert. granted, 132 S.
Ct. 845, 181 L. Ed. 2d 547 (2011) and aff’d, 132 S. Ct. 2065
(2012).
13. Kenneth N. Klee, All You Ever Wanted to Know About Cram
Down Under the New Bankruptcy Code, 53 Am. Bankr. L.J.
133, 140 & n.61 (1979).
14. See H.R. Rep. 103-835, at 47-48 (1994).
15. 124 Cong. Rec. S17,421 (daily ed. Oct. 6, 1978) (remarks of
Sen. DeConcini); 124 Cong. Rec. H11,104 (daily ed. Sept.
28, 1978) (remarks of Rep. Edwards).
16. In re Philadelphia Newspapers, LLC, 52 Bankr. Ct. Dec.
(CRR) 60, 62 Collier Bankr. Cas. 2d (MB) 1689, 2009 WL
3242292, at *6 (Bankr. E.D. Pa. 2009), rev’d in part, 418 B.R.
548, 52 Bankr. Ct. Dec. (CRR) 102 (E.D. Pa. 2009), aff’d,
599 F.3d 298, 52 Bankr. Ct. Dec. (CRR) 255, Bankr. L. Rep.
(CCH) P 81719 (3d Cir. 2010), as amended, (May 7, 2010).
17. Klee, Cram Down, 53 Am. Bankr. L.J. at 155 n.143.
3.
In re Philadelphia Newspapers, LLC, 418 B.R. 548, 52
Bankr. Ct. Dec. (CRR) 102 (E.D. Pa. 2009), aff ’d, 599 F.3d
298, 52 Bankr. Ct. Dec. (CRR) 255, Bankr. L. Rep. (CCH) P
81719 (3d Cir. 2010), as amended, (May 7, 2010).
4.
11 U.S.C.A. § 1129(b)(2)(A)(iii).
5.
11 U.S.C.A. § 506(a)(1).
6.
In re Philadelphia Newspapers, LLC, 599 F.3d 298, 52 Bankr.
Ct. Dec. (CRR) 255, Bankr. L. Rep. (CCH) P 81719 (3d Cir.
2010), as amended, (May 7, 2010).
18. Philadelphia Newspapers, 2009 WL 3242292 at *6. One case
had held that a plan sale of collateral that denied the secured
creditor the right to credit bid at the sale was not unconfirmable as a matter of law, and the debtor could attempt to demonstrate that the plan nonetheless provided the secured creditor the “indubitable equivalent” of its secured claim. The
court, though, emphasized that to do so, the debtor “faces a
formidable task,” as “[s]omething is ‘dubitable’ if it is ‘open
to doubt or question’” and therefore can only be “‘indubitable’ if it is without question, or doubt.” In re CRIIMI MAE,
Inc., 251 B.R. 796, 808 n.12, 36 Bankr. Ct. Dec. (CRR) 120,
44 Collier Bankr. Cas. 2d (MB) 958 (Bankr. D. Md. 2000).
7.
Philly News, 599 F.3d at 327 (Ambro, J., dissenting).
19. Pacific Lumber, 584 F.3d at 243.
8.
See, e.g., Jonathan Azoff, Indubitable Equivalence: A
Standard Designed to Protect the Secured Creditor’s
Bargain, 21 Norton J. Bankr. L. & Prac. 127 (2012); Jason
S. Brookner, Pacific Lumber and Philadelphia Newspapers:
The Eradication of a Carefully Constructed Statutory Regime
20. RadLAX, 132 S.Ct. at 2072.
16
21. RadLAX, 132 S.Ct. at 2070.
22. Jonathan T. Molot, The Rise and Fall of Textualism, 106
Colum. L. Rev. 1, 50 (2006).
© 2012 Thomson Reuters
Bankruptcy Law Letter 23. Philly News, 599 F.3d at 305.
24. Philly News, 599 F.3d at 305 n.6.
25. Philly News, 599 F.3d at 308.
26. Philly News, 599 F.3d at 309.
Vol. 32, No. 7
class, ‘of the full value of their interest, claims, or liens.’” 75
F.2d at 942.
55. H.R. Rep. No. 95-595, at 339 (1977). Accord S. Rep. No.
95-989, at 53 (1978).
32. RadLAX, 132 S.Ct. at 2071 (citations omitted).
56. Murel Holding, 75 F.2d at 942 (stating that one way to provide “adequate protection for the realization… of the full
value of their interest, claims, or liens” under the statute is
that “[t]he property may be sold free and clear and the liens
attach to the proceeds”). The 1973 Commission’s bill also
expressly provided that “the lien or interest shall attach to the
proceeds” of a free-and-clear sale. Report of the Commission
on the Bankruptcy Laws of the United States, H.R. Doc. No.
93-137, pt. II, at 191 (1973) (proposed § 5-203(b)).
33. RadLAX, 132 S.Ct. at 2070.
57. S. Rep. No. 95-989, at 56.
27. Philly News, 599 F.3d at 318.
28. Brubaker, 29 Bankr. L. Letter No. 12, at 7.
29. RadLAX, 132 S.Ct. at 2072 (citation omitted).
30. RadLAX, 132 S.Ct. at 2070.
31. RadLAX, 132 S.Ct. at 2070-71 (citation omitted).
34. RadLAX, 132 S.Ct. at 2071.
35. RadLAX, 132 S.Ct. at 2071-72 (citations omitted).
36. 124 Cong. Rec. S17,421 (daily ed. Oct. 6, 1978) (remarks of
Sen. DeConcini); 124 Cong. Rec. H11,104 (daily ed. Sept.
28, 1978) (remarks of Rep. Edwards).
37. 124 Cong. Rec. S17,421 (daily ed. Oct. 6, 1978) (remarks of
Sen. DeConcini); 124 Cong. Rec. H11,104 (daily ed. Sept.
28, 1978) (remarks of Rep. Edwards).
38. Klee, 53 Am. Bankr. L.J. at 155 & n.143.
39. Brubaker, 29 Bankr. L. Letter No. 12, at 11.
40. RadLAX, 132 S.Ct. at 2072-73 (citations and footnote omitted).
58. Philly News, 599 F.3d at 321 (Ambro, J., dissenting)
(citation omitted).
59. See H.R. 8200, 95th Cong. § 101 (1977) (proposing a new 11
U.S.C. § 363). See Charles J. Tabb, Credit Bidding, Security,
and the Obsolescence of Chapter 11, 2013 U. Ill. L. Rev.
(forthcoming).
60. H.R. Rep. No. 95-595, at 340.
61. S. 2266, 95th Cong. § 101 (1978) (proposing a new 11 U.S.C.
§ 363(e)).
62. 124 Cong. Rec. S17,409 (daily ed. Oct. 6, 1978) (remarks of
Sen. DeConcini); 124 Cong. Rec. H11,093 (daily ed. Sept.
28, 1978) (remarks of Rep. Edwards).
41. Brubaker, 29 Bankr. L. Letter No. 12, at 11.
63. See S. 2266, 95th Cong. § 101 (1978) (proposing a new 11
U.S.C. § 1130(a)(9)(A)(ii)-(iii)).
42. RadLAX, 132 S.Ct. at 2073.
64. S. 2266 (proposing new § 1130(a)(9)(A)(iii)).
43. Brubaker, 29 Bankr. L. Letter No. 12, at 7-8.
65. S. 2266 (proposing new § 1130(a)(9)(A)).
44. RadLAX, 132 S.Ct. at 2072.
66. S. 2266 (proposing new § 1130(a)(9)(A)(ii)).
45. Brubaker, 29 Bankr. L. Letter No. 12, at 7.
67. S. 2266 (proposing new § 1130(a)(9)(A)(ii)).
46. RadLAX, 132 S.Ct. at 2073.
68. 11 U.S.C.A. § 1129(b)(2)(A)(iii).
47. U.S. v. Monsanto, 491 U.S. 600, 611, 109 S. Ct. 2657, 105 L.
Ed. 2d 512 (1989).
69. Murel Holding, 75 F.2d at 942. The statutory provision under
consideration by Judge Hand was a secured-creditor cramdown requirement under 1898 Act § 77B providing that “the
plan must ‘provide adequate protection for the realization by
them,’ the dissenting class, ‘of the full value of their interest,
claims, or liens.’” 75 F.2d at 942.
48. Connecticut Nat. Bank v. Germain, 503 U.S. 249, 253, 112 S.
Ct. 1146, 117 L. Ed. 2d 391, 22 Bankr. Ct. Dec. (CRR) 1130,
26 Collier Bankr. Cas. 2d (MB) 175, Bankr. L. Rep. (CCH) P
74457A (1992).
70. Tabb, The Law of Bankruptcy, § 11.32, at 1162.
49. Carr v. U.S., 130 S. Ct. 2229, 2242, 176 L. Ed. 2d 1152
(2010) (Scalia, J., concurring).
71. Tabb, The Law of Bankruptcy § 11.32, at 1163.
50. RadLAX, 132 S.Ct. at 2072.
72. 11 U.S.C.A. § 1111(b)(1)(A)(ii) & (b)(1)(B)(ii).
51. RadLAX, 132 S.Ct. at 2070.
73. 11 U.S.C.A. § 1111(b)(1)(A)(ii) & (b)(1)(B)(ii).
52. “An allowed claim of a creditor secured by a lien on property
in which the estate has an interest… is a secured claim to the
extent of the value of such creditor’s interest in… such property….” 11 U.S.C.A. § 506(a)(1).
74. Code § 1129(b)(2)(A)(ii) expressly requires not only that secured creditors’ liens must attach to the sale proceeds, it also
requires “treatment of such liens on proceeds under clause (i)
or (iii).”
53. Charles Jordan Tabb, The Law of Bankruptcy § 11.32, at
1160 (2d ed. 2009).
75. S. Rep. No. 95-989, at 55 (1978).
54. In re Murel Holding Corp., 75 F.2d 941, 942 (2d Cir. 1935).
The “adequate protection” under consideration by Judge
Hand was a secured-creditor cramdown requirement under
1898 Act § 77B providing that “the plan must ‘provide adequate protection for the realization by them,’ the dissenting
© 2012 Thomson Reuters
76. Again, Code § 1129(b)(2)(A)(ii) expressly requires not only
that secured creditors’ liens must attach to the sale proceeds,
it also requires “treatment of such liens on proceeds under
clause (i) or (iii).”
77. Tabb, The Law of Bankrupty § 11.32, at 1161.
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Bankruptcy Law Letter
78. RadLAX, 132 S. Ct. at 2070 n.2.
98. S. Rep. No. 95-989, at 56.
79. 124 Cong. Rec. S17,420 (daily ed. Oct. 6, 1978) (remarks of
Sen. DeConcini); 124 Cong. Rec. H11,103 (daily ed. Sept.
28, 1978) (remarks of Rep. Edwards).
99. See Bank of America Nat. Trust and Sav. Ass’n v. 203 North
LaSalle Street Partnership, 526 U.S. 434, 119 S. Ct. 1411, 143
L. Ed. 2d 607, 34 Bankr. Ct. Dec. (CRR) 329, 41 Collier Bankr.
Cas. 2d (MB) 526, Bankr. L. Rep. (CCH) P 77924 (1999).
80. Klee, 53 Am. Bankr. L.J. at 153 & n.127. See also Klee, 53
Am. Bankr. L.J. at 159, 161, 163.
81. Philly News, 599 F.3d at 313 (footnote omitted).
82. See generally Buccola & Keller, 18 Geo. Mason L. Rev. at
117-24.
83. 11 U.S.C.A. § 363(k) (emphasis added).
84. Philly News, 599 F.3d at 312.
85. Philly News, 599 F.3d at 312.
86. River Road, 2010 WL 6634603 at *2.
87. If that were the case, though, it would not seem to be a “plan”
sale at all. It would, more properly, be characterized as a
§ 363(b) sale that would clearly be subject to § 363(k) presumptive credit-bidding rights and the process contemplated
thereby.
88. See Brubaker, 29 Bankr. L. Letter No. 12, at 13-15.
100.Molot, 106 Colum. L. Rev. at 50.
101.See Ralph Brubaker, The Great Pretenders: A Tale of the
Rehnquist Court, Textualism, and Code § 330(a)(1), 24
Bankr. L. Letter No. 3, at 1, 11-12 (Mar. 2004).
102.Ralph Brubaker, Taking Chapter 11’s Distribution Rules
Seriously: “Inter-Class Gifting Is Dead! Long Live InterClass Gifting!”, 31 Bankr. L. Letter No. 4, at 1, 11 (Apr.
2011).
103.Cf. Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing
a Legal Entitlement to Facilitate Coasean Trade, 104 Yale L.J.
1027 (1995) (discussing how legal uncertainty can promote
more efficient negotiation).
89. River Road, 2010 WL 6634603 at *2.
104.H.R Rep. No. 95-595, at 339. See also S. Rep. No. 95-989, at
54.
90. Commissioner v. Marshall, 125 F.2d 943, 946 (2d Cir. 1942)
(Frank, J.).
105.Brubaker, 31 Bankr. L. Letter No. 4, at
91. See S. Rep. No. 95-989, at 56 (“the bid at the sale would be
determinative of value”).
92. See Brubaker, 29 Bankr. L. Letter No. 12, at 2-5.
93. See Brubaker, 29 Bankr. L. Letter No. 12, at 14.
94. Pacific Lumber, 584 F.3d at 244.
95. Pacific Lumber, 584 F.3d at 247 (emphasis added).
96. Philly News, 599 F.3d at 313 n.10.
97. Philly News, 599 F.3d at 320 (Ambro, J., dissenting). See
In re SubMicron Systems Corp., 432 F.3d 448, 461 (3d Cir.
2006).
106.See Kenneth Ayotte & Edward R. Morrison, Creditor
Control and Conflict in Chapter 11, 1 J. Legal Analysis 511
(2009); David A. Skeel, Jr., Creditor’s Ball: The “New” New
Corporate Governance in Chapter 11, 152 U. Pa. L. Rev. 917
(2003).
107.Ralph Brubaker & Charles Jordan Tabb, Bankruptcy
Reorganizations and the Troubling Legacy of Chrysler and
GM, 2010 U. Ill. L. Rev. 1375, 1375.
108.Brubaker & Tabb, 2010 U. Ill. L. Rev. at 1393.
109.RadLAX, 132 S.Ct. at 2070 n.2.
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