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Sit Back and RadLAX

posted by Adam Levitin

I'm having trouble getting excited over RadLAX going before SCOTUS.  Ronald Mann has written that RadLAX "well might be the most important business bankruptcy case since its 1999 decision in Bank of America National Trust & Savings Ass’n v. 203 North LaSalle Street Partnership." I think that statement is literaly true, but that's not saying much; the Supreme Court doesn't hear very many business bankruptcy cases, period.

As it stands, I don't think the outcome in RadLAX is going to have much of an impact on bankruptcy practice on the ground.  If the creditors prevail, the world will look like status quo, say 2009:  credit bidding is allowed in sales under plans (and there will be little reason to teach RadLAX in a bankruptcy course).

If the debtor prevails, then de jure there will be no right to credit bid, but there will be one de facto in most cases (making the case well worth teaching).  If there's a DIP financing agreement, that agreement will almost certainly provide for the DIP lender to have a right to credit bid.  That means a ruling for the debtors will affect a narrow class of creditors and cases.  It will affect secured lenders not in the DIP consortium, and it will affect secured lenders in cases where there is no DIP financing. That's cases financing themselves on cash collateral or unrestricted cash or trade credit or unsecured insider DIP loans.  In other words, no impact whatsoever on the mega-cases.  Maybe a greater impact on middle market. We'll also see syndication agreements including provisions to deal with cash bidding situations.  In other words, a ruling for the debtors in RadLAX is unlikely to result in a major realignment of power in bankruptcy cases.  

Sadly, SCOTUS taking RadLAX (which is reasonable to deal with a circuit split) is a reminder that SCOTUS hasn't addressed the two key issues in Chapter 11:  the use of DIP financing agreements and asset sales as sub rosa plans.  Obviously SCOTUS has to have a proper case to deal with these problems, and SCOTUS generally has discretion on hearing appeals.  The Court could have dealt with this in Chrysler, but because of the macroeconomic impact of Chrysler (via GM), it was not the ideal case for addressing the interaction between the DIP loan, the sale, and the plan. So while it's nice to see a business bankruptcy case before the Court, I don't think too much rides on this one.  

Comments

I suspect the lack of comments on this post indicates that "DIP financing agreements and asset sales as sub rosa plans" are not key issues to actual practitioners. The sub rosa plan issue is by and large one of form, in part because the disclosure statement process has itself become one of form. The substanctive aspects of reorganization - valuation, debt service capacity and the ranking of claims - are generally firmly established before the disclosure statement ever hits the docket. Thus, DIP financing agreements and asset sales don't generally alter the substantive outcome. The best thing SCOTUS can do is ignore the issues entirely. The best thing Congress could do is add a chapter legitimizing best practices in 363s and 364s and eliminate the theoretical argument.

mt--I would disagree somewhat. First, we tend not to get a lot of comments on anything about business bankruptcy. Why is an interesting question--it could map onto our readership.

Second, lack of vocalization about sub rosa plans is necessarily a sign that it doesn't matter, but that it isn't a day-to-day issue. We have certainly seen it litigated in various forms in some of the most important recent cases (DBSD, Chrysler, e.g.).

Third, to claim that DIP financing and asset sales don't alter substantive outcomes is just bizarre. I'll agree that most things are determined before the disclosure statement hits the docket, but they've been hashed out in the shadow of 1129...except for when they're hashed out via 363/364. And that's the problem. By the time we get to the disclosure statement and plan, everything's already boxed up, but it's been boxed up via DIP finance and sales, not via negotiations in anticipation of a plan vote.

Consider the substantive effect of a DIP finance agrement. Besides priming liens and superpriority status, it might mandate asset sales, give veto power over a plan, appoint a CRO, and have case deadlines. Of course those affect major substantive issues. 365(d)(4) is a death blow in a free-fall bankruptcy to a retailer that leases its stores because of the terms of the DIP agreement mandating assumption/rejection of leases in a limited window in order to have in-store GOB sales. That's substantive.

Similarly, DIP agreement's stingy carveouts and waivers limit ability to rerank claims via avoidance actions. And one need no better example than Chrysler to see how a sale could possibly be an end-run on absolute priority. That's a substantive outcome. I could go on and on.

That said, I agree that SCOTUS is the wrong place for this to get resolved. Congress needs to legislative better 363/364 practices and in the interim, the UST needs to be pushing harder on this rather than focusing so intently on fees.

Alright, I'm confused. I haven't seen the plan itself, and the summaries don't say what was to happen to the sale proceeds. If Debtor was trying to use the sale to raise a pot, how was the "no credit bidding" clause supposed to assure that? Was the secured supposed to take a smaller percentage of the proceeds of a third-party sale? Was the secured supposed to receive time payments? If so, where's the substitute lien? And how would either of these qualify as indubitable equivalents, thereby justifying the precluding of credit bids?

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