Supreme Court Alert: High Court Upholds Right to Credit Bid

May 30, 2012

As noted in our last bulletin, the issue of whether a secured creditor’s right to credit bid in a non-consensual or “cramdown” plan context had been argued before the U.S. Supreme Court and it appeared that the Court was leaning toward a decision in favor of the creditor.  On May 29, 2012 the Supreme Court issued its ruling, holding that debtors could not confirm a plan of reorganization that sought to sell a creditor’s collateral free and clear of the secured creditor’s lien without affording the creditor the right to credit bid the amount of its lien.  In doing so, the court resolved the split amongst the Seventh and Third Circuits in the Radlax and Philadelphia Newspapers decisions respectively, where the Seventh found denying the creditor this right unacceptable and the Third approving it.

The Supreme Court’s decision turned upon the interpretation of Bankruptcy Code section 1129(b)(2)(A), which provides the criteria for confirming a plan on a non-consensual basis.  The debtor argued that under 1129(b)(2)(A)(iii), it was acceptable to confirm a plan that did not provide the creditor the right to credit bid because under the section, the creditor was being given the “indubitable equivalent” of what it would receive on account of its claim-the proceeds of the sale of the property pursuant to the plan.  The secured creditor countered that 1129(b)(2)(A)(ii) addressed such a plan and required that a creditor be given the right to credit bid, consistent with section 363(k) of the Bankruptcy Code which ensures this right in a sale and is specifically cited in section 1129(b)(2)(A)(ii).

The High Court agreed with the creditor relying on the general/specific canon of statutory interpretation in which “the specific governs the general.”  Since 1129(b)(2)(A)(ii) was specific as to the preservation of the right to credit bid when a plan proposes to sell the property securing a lien, the debtor could not rely on the general provision contained in section 1129(b)(2)(A)(iii) by giving the creditor the sale proceeds as the “indubitable equivalent” under the proposed plan.  The Court found the debtor’s reading of the statute, which would allow clause (iii) to permit exactly what clause (ii) specifically addresses, to be “hyperliteral and contrary to common sense.”   Thus, the debtor could not apply the general language of clause (iii) even though it was broad enough to include a sale under the plan to a matter specifically dealt with under clause (ii).

The Supreme Court noted that its decision was based on the interpretation of an unambiguous statute and not upon the purposes or merits of credit bidding, which it determined “are for the consideration of Congress, not the courts.”   The ruling nevertheless reinforces the statutory intent of 1129(b)(2)(A)(ii) and the accepted practice of credit bidding in bankruptcy sales.