In 2007, RadLAX Gateway Hotel, LLC purchased the Radisson Hotel at Los Angeles Airport and neighboring properties with the objective to renovate the hotel and construct a new parking structure. During the financial crisis of 2008, RadLAX ran out of funds and stopped construction on the project. RadLAX filed for Chapter 11 bankruptcy protection in 2009, and proposed a plan to sell substantially all of its property at auction and using the proceeds to pay the bank. RadLax sought to bar its creditors from bidding on the property using the debt it was owed to offset the purchase price, a practice known as “credit bidding.” The Bankruptcy Court denied the debtor’s request, because the auction procedure did not comply with the federal Bankruptcy Code’s requirements. Specifically, because the proposed plan was rejected by a class of creditors, it was a “cramdown” plan, under which certain applicable standards must be met for confirmation by a Bankruptcy Court. The Seventh Circuit affirmed, holding that the debtors could not sell encumbered assets free of any liens without allowing the creditors to credit-bid. RadLAX appealed to the Supreme Court.
In RadLAX Gateway Hotel, LLC v. Amalgamated Bank, the Supreme Court unanimously held that a debtor cannot confirm a Chapter 11 cramdown plan that provides for the sale of collateral free of existing liens, but prevents a creditor from credit-bidding at the sale. In doing so, the Court acknowledged that protecting the creditors’ right to credit-bid would help “to protect against the risk that its collateral [would] be sold at a depressed price.” The holding in RadLAX is significant for creditors’ rights. Both the Third and Fifth Circuits previously upheld plans that barred credit-bidding where the assets were to be sold free and clear of liens. Now the Supreme Court has set a uniform standard under which creditors are better protected in cramdown plans.
To read a copy of the Opinion, please click here.
Author(s): Brooke P. Dolara
