[4/24 Update: Part I here]
As I noted three years ago in my "What’s Bothering Ruthie?" post on Justice Ginsburg’s one-liner that stopped the Chrysler sale dead in its tracks, today’s Supreme Court oral argument in RadLAX Gateway Hotel, LLC v. Amalgamated Bank (transcript) left no doubt about what’s bothering the Supreme Court Justices in approaching the question of whether a debtor can cram a chapter 11 plan down a secured lender by selling its collateral at auction without allowing it to credit bid in its claim. And while lenders viscerally support the Seventh Circuit’s ruling below (as the protest board paraded before the Court leaves no doubt), the final result is no "roll" for them (as one seasoned advocate opined).
So what’s bothering the Justices in this case? Here are questions they asked, grouped by category:
- Indubitable Equivalence: What is indubitable equivalence? (Ginsburg at 2.) Justice Roberts said that "indubitable equivalent" means "doubtless equivalent." (Roberts at 26.) But what is it measured by? Current market conditions or some premium tacked on based on an assumed increase in value over time? (Id.) Isn’t allowing the lender to credit bid the "best way" to give it the indubitable equivalent? (Breyer at 11.) "[O]ne thing is to say that if you fit into (ii), that’s it, you don’t go to (iii). Another is to say, well you can go to (iii), but it’s most unlikely that there would be the indubitable equivalent of allowing credit bidding." (Ginsburg at 41.) But if the judge finds that the purchaser must bridge the gap to provide indubitable equivalence, "that assumes that you can just pull out a wad of cash from your back pocket, but mostly the debtors are not in that position[,] [s]o it just seems like a gigantic waste of time." (Kagan at 54.)
- Fear of Judicial Undervaluation: But more fundamentally, isn’t the real issue who is going to decide something is really the indubitable equivalent (the bankruptcy judge or the secured creditor via a credit bid)? (Alito at 6.) Isn’t the lender’s real fear that the bankruptcy judge will not "indubitably provide the indubitable equivalent." (Id.) But to avoid that risk, can’t the judge just open every sale to credit bidding and to be sure that the indubitable equivalent is provided in every instance? (Scalia at 8.) Isn’t "the heart of [the lender’s] argument … that the real value of this property is greater than the value that you think the Bankruptcy Court would assign to it if this were done under subsection (iii)? … Why do you have that fear?" (Alito at 30.) "But doesn’t clause (i) depend upon a judicial valuation? … And isn’t subsection (iii) "where it talks about substitute collateral … completely a judicial valuation.?" (Kagan at 30, 32.) "[W]hat is it about the auction process that [the lender] think[s] is likely to produce … a valuation that is too low?" (Alito at 32.) "Of course, valuing property is what bankruptcy judges do all the time, right?" (Roberts at 51.) "What you just said is so long as they come in with some appraisals that are above what the property sold at for cash, then it’s not the indubitable equivalent? Because you’ve got to have at least one appraiser who says it’s worth more. Is that all it takes?" (Scalia at 53.) "What happens if you go to the judge and the judge says: There is one higher bid, so I can’t say it’s indubitable? Then what happens?" (Scalia at 54.)
- Honoring the Secured Creditor’s Bargain: Doesn’t allowing credit bidding in all instances give the lender "what he bargained for when he insisted upon security before giving the loan" … and avoid "depriving [it] of the opportunity to hold on to the asset because he thinks it is … unreasonably devalued?" (Roberts at 7.) Doesn’t the Code just "help the debtor a little without mucking up the secured creditor’s collateral." (Breyer at 10.) People until now "didn’t think they could do [avoid credit bidding] in plan sales. So why should we upset the expectation?" "What’s the business value for upsetting the norm?" (Sotomayor at 56.)
- Maximizing Value: Doesn’t the "maximum value" in an undersecured credit "always ha[ve] to be the value of the credit. (Sotomayor at 8.) "[I]t doesn’t take a genius to figure out that if you allow people to bid for cash or for credit, you are going to get more bids and higher bids than if you allow them to bid for cash only." (Scalia at 21.) Won’t the lender allow bidders who bid more than the lender thinks it’s worth, but not allow them if it thinks it’s worth more in its own hands? (Breyer at 21.) What’s the purpose of going through the sale at all if you permit credit bidding? "Why don’t you just turn over the property under (iii)? Why do you go through the sham of a sale?" (Sotomayor at 36.)
- Who Benefits from Denying Credit Bids in Cram Down Auctions?: How would junior creditors receive anything in this cram down situation, anyway? (Kagan at 12.) Is the debtor here just asking for permission to use the property to pay other debts, which is precisely what a secured interest prevented. "[W]hy isn’t the secured creditor entitled to all of the proceeds from the property?" (Sotomayor at 14-15.)
- Statutory Construction Exercises: How is it a "sensible statute" to allow credit bidding in clause 1129(b)(2)(A)(ii) and then saying in clause (iii) "you can have this sale not subject to credit bidding?" (Scalia at 14.) Is Amalgamated "just kind of elid[ing] the fact that the statute says ‘or’?" (Roberts at 27.) "What’s wrong with the debtor’s reading that clause (ii) is procedural and clause (iii) is substantive?" (Roberts at 29.) "The Petitioner suggests that the usual rule that the specific governs rather than the general provision doesn’t apply in this case because the specific is not a subset of the general. What’s your view about that?" (Kagan at 42.) "It seems if they are not a subset, then they are alternatives. I don’t see how the whole doctrine makes any sense if the specific is not a subset of the general?" (Roberts at 43.) "So when we say our doctrine says the specific controls over the general, the specific is a subset of the general?" (Roberts at 44.)
- Protecting Governmental Interests: Doesn’t the debtor "feel sorry for the United States [which] is often [a] creditor [and] cannot come up with cash? (Scalia at 18.) Isn’t there a "whole cadre of U.S. trustees that presumably can look out for the interests of the poor United States." (Roberts at 46.)
- Understanding the Practicalities: If a creditor can’t credit bid but thinks the property is worth more than the amount bid at the auction, "what happens" under the debtor’s scenario? (Kagan at 19.) "How often does a buyer other than the stalking horse obtain the property?" (Alito at 23.)
- Insider Disincentives: Doesn’t the debtor’s approach encourage insiders to encourage low stalking horse bids to keep the creditor out? (Breyer at 22.)
- Significance of Bankruptcy Code Policy: Isn’t a good reason to permit cram down without credit bidding, "consistent with the policy of the Bankruptcy Code, … to look out for other creditors as well. And if the secured creditor is getting indubitably the value of this security, why don’t you weigh in the balance at least the interests of the other creditors … [especially since] we are asked to issue a ruling that is going to apply in every case?" (Roberts at 33.)
So where do all these questions leave us? With anything but a slam dunk for the lenders, to be sure. BAPCPA stripped bankruptcy judges of much discretion and the Justices here will grapple with whether Congress in 1978 also intended to likewise limit judicial discretion in cramdowns of secured creditors.
Notably, there was an empty chair in the Court, with Justice Kennedy having recused himself from the deliberations. Someone suggested that Justice Kennedy recused himself because he or a friend once stayed at the Radisson LAX and so disliked it that he could no longer be objective. As a result, however, I have some concern that we’ll witness another Marathon-ish vacuum from a 4-4 split on an opinion of critical importance to the bankruptcy world. Yet I doubt Justice Roberts–who showed the most even hand at oral argument today–will let that happen. He certainly didn’t appear to have made his mind up yet, but when he does, I expect a majority of the Court will follow suit.
I also expect the decision will follow through on (i) the Court’s reasoning in Ransom where an 8-1 majority looked to the "text, context, and purpose of the statutory provision at issue" to interpret a Bankruptcy Code provision and (ii) the Court’s reasoning in Howard Delivery which showed the "plain meaning" doctrine to have its own bankruptcy ocular.
Finally, don’t forget to sign up for the first post-RadLAX argument webinar at 12:30 eastern on April 24 to discuss the RadLAX oral argument, sponsored by Wilmer Hale and LSTA, and featuring LSTA’s Elliot Ganz and WilmerHale Partners Craig Goldblatt and Danielle Spinelli (all of whom were on an amicus brief filed with the Court for a number of leading financial industry trade associations). Here is the link to the webinar. Here’s the SCOTUS Blog page linking to all briefs filed in the case.
Thanks for reading!