Radlax Gateway Hotel, LLC v. Amalgamated Bank

Background

In this case two companies that owned a hotel and adjacent lot borrowed money from investors, with a bank acting as trustee for the loan. When construction costs grew and financing ran out, the companies fell behind and filed for Chapter 11 bankruptcy. They proposed a plan to sell nearly all assets at an auction, using a "stalking horse" bidder, and to pay the bank from the sale proceeds. The proposed auction rules, however, would not let the bank "credit-bid" — that is, use its outstanding debt to offset the purchase price — and the bank objected.

Reasoning

The Court addressed whether the bankruptcy statute lets debtors sell encumbered property free of a creditor’s lien without allowing credit-bids. The statute lists three alternative protections for secured creditors. The Court applied the familiar rule that a specific provision controls a general one. It concluded that the clause about selling property free and clear expressly incorporates the credit-bidding rule in §363(k), so the sale option must allow credit-bids. The broad clause about giving creditors the "indubitable equivalent" cannot be read to swallow the specific sale rule. Because the debtors’ auction procedures barred credit-bidding, their plan could not satisfy the statute’s sale option and failed.

Real world impact

Bankruptcy plans that try to sell collateral free of liens without permitting credit-bids will be invalid under this decision. Secured lenders retain the practical ability to bid using their claims at bankruptcy sales, and bankruptcy courts must enforce the statutory sale protections.