U.S. Supreme Court Resolves Circuit Split and Affirms Secured Creditors’ Right to Credit Bid Under Chapter 11 Plan

On May 29, 2012, in RadLAX Gateway Hotels, LLC et al. v. Amalgamated Bank, the United States Supreme Court (Court) unanimously upheld the right of a secured creditor (such as a hedge fund that invests in secured distressed debt) to credit bid up to the full face value of its claim at the sale of collateral conducted under a so-called “cramdown” reorganization plan pursuant to Chapter 11 of the U.S. Bankruptcy Code.  The RadLAX decision resolved a split among the courts of appeals that led to uncertainty among lenders and debt investors, and forum shopping by debtors.  Previously, the Seventh Circuit affirmed the right to credit bid, whereas the Third and Fifth Circuits held that debtors could cram down a plan on dissenting secured creditors without affording them the right to credit bid as long as they were provided the “indubitable equivalent” of their claim.  See “Seventh Circuit Holds that Secured Lenders Must Have the Opportunity to Credit Bid in Asset Sales Under a Chapter 11 Plan,” Hedge Fund Law Report, Vol. 4, No. 24 (Jul. 14, 2011).  This article summarizes the factual background of RadLAX, the Court’s decision and the implications of the decision for hedge fund managers.

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