19 February 2013

RadLAX Redux

Warning: Bankruptcy Geek Alert

I posted numerous thoughts before and after last year's decision by SCOTUS in RadLAX Gateway Hotel v. Amalgamated Bank (go here, here, and here for three of them). In any event, my predicted (and preferred) outcome came to pass by an 8-0 vote.

Last week the Seventh Circuit struck down a too-cute-by-half effort of a debtor to avoid the strictures of RadLAX in Castleton Plaza, LP (2013 WL 537269). In brief, if a shareholder of a corporate general partner of a bankruptcy debtor can't "buy" the debtor without putting the business up for an auction, his wife can't do it for him either.

Pretty straightforward if you ask me. So why did the bankruptcy court confirm a plan that violated the requirements of the Bankruptcy Code? Because, it seems, the holder of the $10 million secured claim was not the original lender but an entity that had purchased the claim at, perhaps, cents on the dollar, and because the local unsecured creditors wanted Mrs. Debtor to own the outfit so they could continue to do business with it.

So far the law has resisted efforts to hold purchasers of claims to the purchase price rather than the face amount of the claim. Were the law otherwise, who would buy claims? No one. And what effect would that have on initial lending decisions? Seems too obvious to need stating.

The interests of local creditors certainly appeals to the faculty of sympathy but when push comes to shove an efficient market system depends on clearly defined legal claims. Congress could certainly change the law at either of these points but the systemic costs would be substantial. There is, as has often been said, no such thing as a free lunch.

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