Not everyone regrets that the Supreme Court's recent ruling on a case involving credit bidding wasn't more of a home run for secured lenders.
Robert Drain, a U.S. bankruptcy judge for the Southern District of New York, thinks that the justices were right to leave some leeway for the courts to deny lenders the ability to use their debt as currency in auctions.
The ruling in RadLAX Gateway Hotel, LLC and RadLAX Gateway Deck, LLC v. Amalgamated Bank is widely viewed as a victory for secured lenders. The high court sided with lender Amalgamated Bank, which protested efforts by the owners of a Los Angeles airport hotel to engineer a cash-only auction, barring the bank from bidding the $120 million it was owned. Instead, the debtor wanted to sell the hotel and an adjacent parking garage to a stalking horse bidder for just $55 million.
But the opinion, which was delivered by Justice Antonin Scalia, declined to rule on the merits of credit bidding, saying this is a question "for the consideration of Congress, not the courts."
Instead, the opinion focused on the language that governs bankruptcy sales and creditor-payment plans. The justices found the hotel owner's reading of the Bankruptcy Code "hyperliteral and contrary to common sense."
Adam Lewis, a senior counsel at Morrison & Foerster who argued the case for Amalgamated, thinks that this narrow focus is "both a blessing and a curse." Speaking at a seminar on the case sponsored by the Loan Syndication and Trading Association last week, Lewis said it won't be easy for a debtor to argue to a judge that the facts of its case are different from those of Radlax, since the court's decision was based on a reading of the Bankruptcy Code, not the facts of the case. "On the other hand," he said, "it would have been nice if the court had addressed the pros and cons of credit bidding.
"I'm glad it didn't," responded Drain, who was also speaking at the seminar. "It appears to me that the 'for cause' is important," he said, referring to the exception in the Bankruptcy Code that allows courts to deny lenders the right to credit bid when they think it is appropriate.
Drain said he agreed with the other panelists that, in general, an auction is only fair if a secured creditor is allowed to bid its credit. But "there will be unusual circumstances. … There should be some flexibility to deal with these cases."
He cited an example: "a shipping company has a fleet of 10 vessels, there are five different lenders, and a buyer wants eight vessels, not 10 or seven … it's the luck of the draw which one goes first," he said. "Vessel eight could sell for five times what vessel one sells for and 20 times what vessel 10 sells for. It's a complete windfall [for the creditor] just based on who structures the auction."
Drain is a fellow of the American College of Bankruptcy and a member of the American Bankruptcy Institute, the International Insolvency Institute, and the National Conference of Bankruptcy Judges, according to a profile on the website of the U.S. court system.
Drain is also a past member and secretary of the Bankruptcy and Reorganization Committee of the Association of the Bar of the City of New York. He is an adjunct professor at St. John's University School of Law and has lectured and written on numerous bankruptcy-related topics. Since his appointment he has presided over such chapter 11 cases as Loral, RCN, Cornerstone, Refco, Allegiance Telecom, Delphi, Coudert Brothers, Frontier Airlines and Star Tribune.