Supreme Court Watch Justices to decide 'cramdown' rights of secured lender

By Pat Murphy

The Daily Record Newswire

BOSTON -- The U.S. Supreme Court will decide whether a Chapter 11 debtor may pursue a reorganization plan that proposes to sell encumbered assets at auction free and clear of liens without allowing a secured lender to bid its credit.

The Court will review a decision by the 7th Circuit that a so-called "cramdown" plan could not be confirmed over the objections of secured creditors because it did not qualify for "fair and equitable" status under 11 U.S.C. §1129(b)(2)(A).

The 7th Circuit's decision addressed creditor claims that a lender had in two multi-million-dollar hotel construction projects. The owners of both projects filed for Chapter 11 bankruptcy. In their plans for reorganization, the debtors proposed to sell assets at auction to the highest bidder.

Because the debtors' plans would impair the lender's interests and the lender objected, the plans could not be confirmed unless they qualified for "fair and equitable" status under 11 U.S.C. §1129(b)(2)(A). The statute provides three standards for determining whether a Chapter 11 plan is fair and equitable, two of which are at issue in this case.

The lender here argued that plan confirmation was precluded because §1129(b)(2)(A)(ii) requires that secured lenders be given credit-bidding rights.

The debtors contended that, under §1129(b)(2)(A)(iii), their plans could be confirmed without allowing credit-bidding rights. Section 1129(b)(2)(A)(iii) provides that a plan qualifies for "fair and equitable" status when it allows for the realization of the "indubitable equivalent" of a secured creditor's claim.

The 7th Circuit held that §1129(b)(2)(A) does not authorize debtors to use Subsection (iii) to confirm a reorganization plan contrary to a secured creditor's right to credit bid.

"Because the debtors' suggested reading of Subsection (iii) would nullify its neighboring subsections and ignore the protections for secured creditors recognized in other Code provisions, we reject their interpretation of the statute. Instead, we find that the Code requires that cramdown plans that contemplate selling encumbered assets free and clear of liens at an auction satisfy the requirements set forth in Subsection (ii) of the statute," the court said.

It noted contrary decisions from the 3rd and 5th Circuits.

A decision from the Supreme Court is expected later this term.

Published: Fri, Dec 16, 2011


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