UPDATED 14 May 2012 2:50 p.m. Eastern Standard Time
Oral arguments were heard in the credit-bidding case on 23 April 2012. A ruling is expected in June.
REPORT FROM THE U.S.—The debate over credit bidding for bankrupt assets has the hotel sector in the U.S. Supreme Court spotlight.
The case of Radlax Gateway Hotel LLC and Radlax Gateway Deck LLC v. Amalgamated Bank is expected to be heard by the Supreme Court in April with a ruling expected sometime over the summer. At issue is whether lenders should have the right to purchase their own collateral at bankruptcy auction by using debt, a process known as credit bidding.
The dispute surrounds the proposed auctions of a pair of hotels owned by Radlax, an entity of River Road Hotel Partners LLC that declared bankruptcy in August 2009: the InterContinental Chicago O’Hare and the Radisson Hotel at Los Angeles Airport. Court filings show River Road had secured stalking horse bids totaling US$89.5 million for the properties.
But Amalgamated, the principal secured lender for the hotels that court documents show is owed in excess of US$161 million, objected to the bid procedures on 8 July 2010, stating the bank was not given the opportunity to credit bid, a tactic that courts are split on allowing.
On 28 June 2011, the U.S. Seventh District Court of Appeals ruled that, absent consent, secured creditors cannot be denied the right to credit bid when a reorganization plan proposes a sale of encumbered assets free and clear of liens and security interests. That decision went against an earlier ruling by the Third and Fifth Circuit Courts of Appeals.
“This case is important to the hotel industry because it seeks a determination that lenders can be prevented from bidding with just their debt at a bankruptcy auction of the hotel that secures their debt and seeks to force them to have to bid with cash just like any other bidder,” David Neff, an attorney at Perkins Coie who will represent the debtor before the Supreme Court, wrote in an email.
Neff explained the credit bidding process this way: Assuming a hotel is worth US$5 million and the lender is owed US$10 million, a public sale is held. Various parties bid US$7 million, but before the auction can close, the lender submits a US$7.1-million credit bid.
Hotel Assets Ad Will Appear Here
If no further bids are made, the lender gets the hotel and its claim is reduced by US$7.1 million. The lender can bid up to the full amount of its debt without regard to what the property might actually be worth, said Neff, who will be making his first appearance before the Supreme Court.
“Our main argument is that the relevant provision of the Bankruptcy Code plainly allows a debtor to propose a plan auction that precludes the lender from credit bidding as long as the debtor provides the lender with the indubitable equivalent of its secured claim under the plan,” he added.
In an emailed statement, James T. Freel, senior VP of Amalgamated, said: “The right of a senior secured lender to credit bid at a bankruptcy sale is of significant importance to the commercial real estate finance industry, and we are optimistic that the Supreme Court will affirm the Seventh Circuit’s previous favorable ruling in this case.”
The attorneys representing Amalgamated did not return requests for comment prior to deadline.
Fallout from the decision
If credit bidding is upheld, the bankruptcy process could be hastened, Neff said.
“If the Supreme Court requires that lenders be allowed to bid with their debt and not cash, it is likely that we will see much shorter hotel bankruptcies where the hotel is worth considerably less than what the lender is owed,” he said.
Credit bidding seems to be an increasingly popular bankruptcy tactic, Neff said.
“More and more hotel owners that are unable to reach a deal with their lender are resorting to proposing an auction of their assets as a way to fund their bankruptcy plan,” he said.
Neff said lenders claim the cost of credit could increase if the Court rules in favor of the debtors, but “there is no evidence that would be the case, and indeed it hasn’t happened since several courts of appeals have ruled against lenders on this issue.”