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In River Road Hotel Partners, LLC v. Amalgamated Bank, the Seventh Circuit Court of Appeals held that a cramdown plan of reorganization cannot be confirmed where the plan proposes selling the debtors' assets free and clear of liens without providing the secured creditor with an opportunity to credit bid at the sale. The Court of Appeals disagreed with the majority opinion of In re Philadelphia Newspapers and created a split among the circuit courts of appeals that will be reviewed by the Supreme Court of the United States later this year.

River Road Hotel partners, LLC, River Road Expansion Partners, LLC and RadLAX Gateway Hotel, LLC borrowed in excess of $300 million to finance the purchase, construction and renovation of hotels in Illinois and California. When the entities filed voluntary Chapter 11 petitions in August of 2009, over $260 million remained due on the loans. Interest was accruing at a rate of approximately $2 million each month, and mechanics liens in the amount of nearly $25 million had been filed against the properties.1

The debtors filed proposed plans of reorganization and requested approval of bidding procedures that contemplated a sale of the substantially all of the debtors' assets free and clear of liens without providing the secured lenders an opportunity to credit bid. Amalgamated Bank objected to the approval of the bidding procedures on the ground that the requirements of 11 U.S.C. § 1129(b)(2)(A) were not satisfied. Section 1129(b)(2)(A) provides that a plan may be confirmed over the objection of a secured creditor if the plan is "fair and equitable." Under Section 1129(b)(2)(A), a plan is fair and equitable to a secured creditor if it provides for: (i) the retention of the secured creditor's liens and deferred cash payments totaling at least the allowed amount of the creditor's claim, of a value, as of the effective date of the plan, of at least the value of the creditor's liens; (ii) sale of the assets free and clear of liens subject to the procedures set forth in Section 363(k) of the Bankruptcy Code (providing for credit bidding); or (iii) the realization of the secured creditor of the "indubitable equivalent" of its claims. The bankruptcy court sustained the bank's objection, and the case was appealed directly to the Seventh Circuit Court of Appeals.

The Court of Appeals first analyzed whether the language of the statue was unambiguous or whether it could be subject to multiple reasonable interpretations. If the Court found that the language was unambiguous, it would apply its plain meaning to the case. Alternatively, if the statute was subject to multiple interpretations, the Court would engage in additional analysis. The Court found that Section 1129(b)(2)(A)(iii) was subject to two different interpretations and therefore it did not clearly provide for confirmation of a plan similar to that proposed by the debtors. (This was the focal point of divergence with the majority of Philadelphia Newspapers, which found that the language was unambiguous). The Seventh Circuit Court noted that even in isolation from sections (i) and (ii), a sale of assets free and clear of liens that did not offer a secured creditor an opportunity to credit bid could not provide for the "indubitable equivalent" of the creditors' claim under subsection (iii), particularly given the high risk of undervaluation of collateral in the typical bankruptcy case.

Since the language of the statute was not clear, the Court looked for guidance through the use of canons of statutory interpretation and in other provisions of the Bankruptcy Code. The Court interpreted Section 1129(b)(2)(A)(iii) not to provide for an alternative means of providing for fair and equitable treatment of a secured creditor whose collateral is being transferred pursuant to a plan. If subsection (iii) could be used for that purpose, then a debtor could achieve confirmation of a plan that was similar to one under subsection (i) or (ii) without actually having to meet the requirements of those sections, rendering those sections meaningless. Moreover, the Court identified at least three provisions of the Bankruptcy Code that provided for a disposition of assets free of liens if credit bidding is available, but noted that there are no provisions of the Bankruptcy Code that would allow for a disposition free of liens without credit bidding. The court relied heavily upon Judge Ambro's dissent in Philadelphia Newspapers in its reasoning.2

The Seventh Circuit's holding in River Road directly contradicts the Third Circuit's holding in Philadelphia Newspapers and created a split among the circuits. RadLAX Gateway Hotel, LLC filed a Petition for a Writ of Certiorari, which was granted by the United States Supreme Court on December 12, 2011 (Case No. 11-166). The question presented to the Supreme Court is: "Whether a debtor may pursue a chapter 11 plan that proposes to sell assets free of liens without allowing the secured creditor to credit bid, but instead providing it with the indubitable equivalent of its claim under Section 1129(b)(2)(A)(iii) of the Bankruptcy Code." The case is set for argument in April of 2012.

1 River Road Hotel partners, LLC and River Road Expansion Partners, LLC and RadLAX Gateway Hotel, LLC entered into two separate loan agreements and filed two separate bankruptcy cases, which were later consolidated. Each of the River Road entities and the RadLax entities filed their own plan of reorganization, but for purposes of this summary and given the identical nature of the issues they will be discussed together.

2 On January 19, 2012 the Seventh Circuit determined that a plan that substituted collateral but otherwise complied with Section 1129(b)(2)(A)(i) was not confirmable. Its opinion, written by the noted jurist and scholar Richard A. Posner, stated: "While the debtor in River Road sought to avoid the creditor's right to credit bid under subsection (ii) by invoking indubitable equivalence, River East seeks to avoid the requirement in a subsection (i) cramdown of maintaining the mortgage lien on the debtor's property by transferring LNV's lien to different collateral, also in the name of indubitable equivalence. The logic of River Road forbids such an end run, but even if the Supreme Court reverses River Road, River East's plan could not be confirmed because the substitute collateral that it proposed was not the indubitable equivalent of LNV's mortgage. (Later we'll explain when substitute collateral can be indubitably equivalent to the original collateral.)" In re River East Plaza, LLC, --- F.3d ----, 2012 WL 169760 (7th Cir. 2012)