Yesterday I posted here the first of what I expect will be several entries about the bankruptcy case to be argued before the Supreme Court of the United States on Monday, April 23. The debtor, RadLAX Hotel, claims that a bankruptcy court can prohibit secured lenders from "credit bidding" what the debtor owes against the property subject to their mortgage. Not surprisingly, the mortgage lenders argue otherwise, that they should be allowed to bid up to the amount of the debt owed to them without putting more money on the table. In other words, why should they have to pay twice, only to get the money back when all is said and done?
While we might think that banks and other lenders have bottomless pots of cash in their vaults, it's simply not the case that the lenders who originally lent RadLAX $142 million can come up with that much cash again to buy the mortgaged property at an auction.
But what does the Bankruptcy Code say? Do lenders have a right to credit bid or don't they? Not surprisingly for a case that has split the Circuit Courts of Appeal in America and made it to the Supreme Court, the Code isn't perfectly clear.
On the one hand, if a Chapter 11 reorganizing debtor in bankruptcy wants to sell property before it gets the bankruptcy court to confirm its plan, the secured creditor must be allowed to credit bid. Bankruptcy Code 363(k). On the other hand, the Code isn't quite as clear when it comes to a sale as part of a plan of reorganization. A bankruptcy court must employ one of three options of Bankruptcy Code section 1129(b)(2) if it is to confirm a plan of reorganization over a lender's objection:
The lenders don't so much object to the concept that they should get what an auction produces; they object to not being able to bid in what they're owed, so they can buy the hotel without putting more cash on the table. Taking away their right to credit bid at an auction under #3 simply can't be the "indubitable equivalent" of an auction where they do have the right to credit bid under #2.
(Why, you might ask, would the lenders want to buy a hotel for more than the "stalking horse" is willing to pay? In short, because they believe the market is currently depressed but will bounce back so they'll be able to resell if for more in the future. Or, for the more conspiratorially minded, because they think the debtor and the stalking horse are in cahoots to buy the property for less than it's worth and leave the lenders holding even more of the bag. Are the lenders right? All I know is that I'm not putting in a bid.)
A fine kettle of fish. Does "or" mean "or;" that is, does the statute simply say that the debtor can eliminate the lenders' right to credit bid by offering an "indubitable equivalent?" Or does the very presence of option #2 require that, whatever "indubitable equivalent" might mean in #3, it can't simply be an avenue to run around #2 without something more?
Next time, what the Courts of Appeal have said.
While we might think that banks and other lenders have bottomless pots of cash in their vaults, it's simply not the case that the lenders who originally lent RadLAX $142 million can come up with that much cash again to buy the mortgaged property at an auction.
But what does the Bankruptcy Code say? Do lenders have a right to credit bid or don't they? Not surprisingly for a case that has split the Circuit Courts of Appeal in America and made it to the Supreme Court, the Code isn't perfectly clear.
On the one hand, if a Chapter 11 reorganizing debtor in bankruptcy wants to sell property before it gets the bankruptcy court to confirm its plan, the secured creditor must be allowed to credit bid. Bankruptcy Code 363(k). On the other hand, the Code isn't quite as clear when it comes to a sale as part of a plan of reorganization. A bankruptcy court must employ one of three options of Bankruptcy Code section 1129(b)(2) if it is to confirm a plan of reorganization over a lender's objection:
- The lender keeps its lien on the property after the sale (won't work here because, not surprisingly, the buyer of the Radisson L.A. Airport Hotel wants the hotel free of the lenders' mortgages), or
- The property is sold under section 363(k), which, of course, mandates credit bidding, or
- The lenders get the "indubitable equivalent" of their claims (huh?).
The lenders don't so much object to the concept that they should get what an auction produces; they object to not being able to bid in what they're owed, so they can buy the hotel without putting more cash on the table. Taking away their right to credit bid at an auction under #3 simply can't be the "indubitable equivalent" of an auction where they do have the right to credit bid under #2.
(Why, you might ask, would the lenders want to buy a hotel for more than the "stalking horse" is willing to pay? In short, because they believe the market is currently depressed but will bounce back so they'll be able to resell if for more in the future. Or, for the more conspiratorially minded, because they think the debtor and the stalking horse are in cahoots to buy the property for less than it's worth and leave the lenders holding even more of the bag. Are the lenders right? All I know is that I'm not putting in a bid.)
A fine kettle of fish. Does "or" mean "or;" that is, does the statute simply say that the debtor can eliminate the lenders' right to credit bid by offering an "indubitable equivalent?" Or does the very presence of option #2 require that, whatever "indubitable equivalent" might mean in #3, it can't simply be an avenue to run around #2 without something more?
Next time, what the Courts of Appeal have said.
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