REPORT FROM THE U.S.—In a landmark ruling that has its roots in the hotel industry, the U.S. Supreme Court has found that secured creditors cannot be denied the right to credit bid for their own assets.
The ruling stems from Radlax Gateway Hotel LLC, et al. v. Amalgamated Bank. At issue was 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 entities of River Road Hotel Partners LLC—the InterContinental Chicago O’Hare and the Radisson Hotel at Los Angeles Airport—which declared bankruptcy in August 2009. Court filings show River Road had secured stalking horse bids totaling $89.5 million for the properties.
But before the transactions closed, Amalgamated, the principal secured lender for the hotels that court documents show is owed in excess of $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 were split on allowing.
Associate Justice Antonin Scalia, delivering the opinion of the court, said River Road attempted to “confirm a 'cramdown' bankruptcy plan over the bank’s objection.”
“The debtors’ reading of (U.S. bankruptcy law) is hyperliteral and contrary to common sense,” Scalia wrote. The decision was nearly unanimous, with only Associate Justice Anthony Kennedy not taking part in the decision.
View the Supreme Court’s opinion.
In an emailed statement, officials at Amalgamated said the decision strengthens the bank’s ability to be repaid and allows the company to proceed with its plans for the Radisson Hotel at Los Angeles Airport, for which it provided a $142-million loan to be used for a renovation of the property and the construction of a parking deck. That loan will eventually be worked out, according to the statement.
David Neff, an attorney at Perkins Coie who argued the case before the Court on behalf of River Road, is “disappointed” in the decision.
“We think it limits the opportunity Chapter 11 debtors have to confirm financing over the objections of secured creditors,” he said. “Obviously, that would include hotel owners on the bankruptcy level.”
In 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 a ruling from the Third and Fifth Circuit Courts of Appeals.