In the
United States Court of Appeals
For the Seventh Circuit
Nos. 10-3597 & 10-3598
IN THE M ATTER OF:
R IVER R OAD H OTEL P ARTNERS, LLC,
R IVER R OAD E XPANSION P ARTNERS, LLC,
RADLAX G ATEWAY H OTEL, LLC and
RADLAX G ATEWAY D ECK, LLC,
Debtors-Appellants,
v.
A MALGAMATED B ANK,
Appellee.
Appeals from the United States Bankruptcy Court
for the Northern District of Illinois, Eastern Division.
Nos. 09-B-30029, 09-B-30047—Bruce W. Black, Bankruptcy Judge.
A RGUED A PRIL 7, 2011 — D ECIDED JUNE 28, 2011
Before C UDAHY, M ANION, and H AMILTON, Circuit Judges.
C UDAHY, Circuit Judge. Debtors-Appellants appeal from
a bankruptcy court order denying the bid procedures
motions that they filed in connection with the their Chap-
ter 11 reorganization plans. They argue that the bankruptcy
2 Nos. 10-3597 & 10-3598
court erred in finding that their plan could not be con-
firmed over the objections of its secured creditors because
it did not qualify for “fair and equitable” status under 11
U.S.C. § 1129(b)(2)(A). We affirm.1
I. Factual Background
A. The River Road Debtors
In 2007 and 2008, River Road Hotel Partners, LLC, River
Road Expansion Partners, LLC, and related entities
(“the River Road Debtors”) built the InterContinental
Chicago O’Hare Hotel and affiliated event space. In
order to construct the hotel and event space, these entities
obtained construction loans totalling approximately
$155,500,000 from the Longview Ultra Construction
Loan Investment Fund and the Longview Ultra I Construc-
tion Loan Investment Fund (“the River Road Lenders”).
The loan documents designated Amalgamated Bank as
the administrative agent and trustee of the River Road
Lenders.
The InterContinental Chicago O’Hare Hotel and affili-
ated facilities opened in September 2008. Several months
later, the River Road Debtors requested that the River Road
Lenders supply them with several million dollars
1
This opinion has been circulated among all judges of this court
in regular active service pursuant to Circuit Rule 40(e). No judge
asked to hear this case en banc. Judge Flaum took no part in the
consideration or decision of this case.
Nos. 10-3597 & 10-3598 3
in additional funding so that they could finish building
the hotel’s restaurant and pay their general contractors and
suppliers. The River Road Lenders entered into negotia-
tions with the River Road Debtors concerning the condi-
tions under which additional funding would be provided,
but the parties could not agree on mutually satisfactory
terms.2
On August 17, 2009, each of the River Road Debtors filed
voluntary petitions for relief under Chapter 11 of 11
U.S.C. §§ 101, et seq. (the Bankruptcy Code, hereinafter
“the Code”) in the United States Bankruptcy Court for
the Northern District of Illinois, Eastern Division. At the
time the petition was filed, the River Road Debtors owed
at least $140,000,000 on the loans, with over $1,000,000
in interest accruing per month. In addition, approximately
$9,500,000 in mechanics’ liens have been asserted against
the InterContinental Chicago O’Hare Hotel and its affili-
ated event spaces.
B. The RadLAX Debtors
In 2007, RadLAX Gateway Hotel, LLC, purchased the
property now known as the Radisson Hotel at Los Angeles
2
The River Road Lenders hesitancy to extend the River Road
Debtors additional credit is understandable, given that the River
Road Debtors had already been provided with additional funds
once and defaulted under one of the existing loans by failing to
make required interest payments.
4 Nos. 10-3597 & 10-3598
International Airport. In order to purchase the hotel, pay
for renovations and build a parking structure on an
adjacent parcel of real estate (which was to be owned by
a related entity, RadLAX Gateway Deck, LLC), RadLAX
Gateway Hotel, LLC, and its affiliates (“the RadLAX
Debtors”) obtained a construction loan totaling approxi-
mately $142,000,000 from the Longview Ultra Construction
Loan Investment Fund (“the RadLAX Lenders”). The
loan documents designated Amalgamated Bank as the
administrative agent and trustee of the RadLAX Lenders.
During the course of building the parking structure the
RadLAX Debtors incurred several million dollars of
unanticipated costs. Around March 2009, the RadLAX
Debtors ran out of funds and had to halt construction.3
The RadLAX Lenders entered into negotiations with the
RadLAX Debtors concerning the conditions under which
additional funding would be provided, but the parties
could not agree on mutually satisfactory terms.
On August 17, 2009, each of the RadLAX Debtors
filed voluntary petitions for relief under Chapter 11
of the Code in the United States Bankruptcy Court
for the Northern District of Illinois, Eastern Division.
3
While the RadLAX Lenders claim that the RadLAX Debtors
exhausted all of the money available under their loan, the
RadLAX Debtors claim that they only came up short because the
RadLAX Lenders improperly denied their construction draw
requests. Which account is correct is inconsequential for the
purposes of this appeal.
Nos. 10-3597 & 10-3598 5
At the time the petition was filed, the RadLAX Debtors
owed at least $120,000,000 on the loans, with over
$1,000,000 in interest accruing per month. In addition,
over $15,000,000 in mechanics’ liens have been asserted
against the RadLAX properties.
C. Proceedings Before the Bankruptcy Court
On August 20, 2009, the bankruptcy court entered orders
directing the joint administration of the River Road Debt-
ors’ bankruptcy cases under Case No. 09-30029. The court
also entered orders directing the joint administration of
the RadLAX Debtors’ bankruptcy cases under Case No. 09-
30047. Each set of Debtors continues to operate their
businesses as debtors-in-possession pursuant to sections
1107(a) and 1108 of the Code.
On June 4, 2010, the River Road and RadLAX Debtors
(collectively, “the Debtors”) submitted their reorganization
plans to the bankruptcy court for confirmation. Both
plans sought to sell substantially all of the Debtors’ assets,
with the proceeds to be distributed among the Debtors’
creditors in accordance with the Code’s priority rules.
The Debtors also filed motions requesting the court’s
approval of their proposed procedures for conducting
the asset sales. Both sets of proposals sought to auction
off the Debtors’ assets to the highest bidder, with the initial
bid in each auction being supplied by a stalking horse
bidder that had been lined up in the post-petition, pre-plan
period. In one of their bid procedures motions, the River
Road Debtors claimed that they had procured a stalking
6 Nos. 10-3597 & 10-3598
horse offer of $42,000,000 for their assets. On June 22, 2010,
the RadLAX Debtors filed copies of a proposed
asset purchase agreement that offered $47,500,000 for
their assets.
On July 8, 2010, Amalgamated Bank, on behalf of the
River Road and RadLAX Lenders (collectively, “the
Lenders”), filed objections to the Debtors’ proposed
bid procedures. Because the Debtors’ plans would impair
the Lenders’ interests and the Lenders had not accepted
the plans, they could not be confirmed unless they quali-
fied for one of the exceptions listed in Section 1129(b)(2)(A)
of the Code. See 11 U.S.C. § 1129(a)(8), (b). Amalgamated
argued that the Debtors’ plans could not satisfy Section
1129(b)(2)(A)’s requirements because they sought to
sell encumbered assets free and clear of liens without
allowing the Lenders to bid their credit at the asset auc-
tions, in violation of 11 U.S.C. § 1129(b)(2)(A)(ii)’s require-
ment that secured lenders be given credit-bidding rights.
The Debtors filed omnibus replies to Amalgamated’s
objections, arguing that, while their plans did not
comply with Section 1129(b)(2)(A)(ii)’s requirements, they
were still confirmable because they satisfied Section
1129(b)(2)(A)(iii)’s requirements.
On July 22, 2010, the bankruptcy court orally ruled that
the Debtors’ plans could not be confirmed under Section
1129(b)(2)(A)(iii). On October 5, 2010, the court entered
orders denying the Debtors’ bid procedure motions. The
Debtors filed notices of appeal and motions requesting that
the bankruptcy court certify their appeals directly to this
Nos. 10-3597 & 10-3598 7
court pursuant to 11 U.S.C. § 158(d)(2)(A). On November
4, 2010, the court entered certifications for direct appeal
to this court for both cases. On November 30, 2010, we
entered an order authorizing and consolidating the River
Road and RadLAX appeals.
II. Discussion
This appeal presents two issues for this court to decide.
First, we must determine whether events that occurred
subsequent to the filing of the appeal have mooted the
parties’ dispute. Second, if we find that the appeal is not
moot, we must turn to the merits of the Debtors’ appeal
and decide whether the bankruptcy court’s interpretation
of 11 U.S.C. § 1129(b)(2)(A) was correct.
A. The Issue Raised by the Debtors’ Appeal Is Not
Moot
The Lenders claim that it would be inappropriate for this
court to review the bankruptcy court’s denial of the Debt-
ors’ bid procedure motions because the Debtors’ proposed
plans are no longer pending before the bankruptcy court.
The Lenders contend that the reorganization plans that the
court originally considered are no longer viable due to
the passing of several expiration dates contained in the
asset purchase agreements that the Debtors filed. They
alternatively argue that statements from the Debtors
indicate that the Debtors have abandoned their original
reorganization plans.
8 Nos. 10-3597 & 10-3598
We reject the Lenders’ mootness argument. While “it
is well-settled that a federal court has no authority to give
opinions upon moot questions or abstract propositions,”
Porco v. Trs. of Ind. Univ., 453 F.3d 390, 394 (7th Cir.
2006), an issue will not be considered moot unless the
parties lack a “legally cognizable interest in the outcome.”
Olson v. Brown, 594 F.3d 577, 580 (7th Cir. 2010). It does not
appear that the Debtors’ reorganization plans suffer from
either of the defects—the passing of expiration dates or
abandonment—identified by the Lenders. On February 15,
2011, the RadLAX Debtors filed an amended asset pur-
chase agreement with the bankruptcy court that largely
resembled the agreement that was submitted in connection
with the original reorganization plans. On March 2, 2011,
the River Road Debtors filed a similar agreement. None
of the confirmation deadlines contained in the amended
agreements have expired. Further, the Debtors’ statements
before this court and the fact that they have filed amended
agreements provide convincing evidence that the Debtors
have not abandoned their asset sale plans.
Even if we were to find that the Debtors’ original reorga-
nization plans were based on asset purchase agreements
that had expired, the Lenders have failed to show why
this appeal would not fit squarely within the exception
to mootness that we have recognized for cases that, due
to timing issues, would otherwise evade review. See,
e.g., Fed. Election Comm’n v. Wis. Right to Life, Inc., 551 U.S.
449, 462 (2007); Krislov v. Rednour, 226 F.3d 851, 858
(7th Cir. 2000). A court can disregard mootness and retain
jurisdiction over an appeal when the challenged action is
Nos. 10-3597 & 10-3598 9
(1) too short in duration to be fully litigated prior to
cessation or expiration and (2) there is a reasonable expec-
tation that the same appealing party will be subject to
the same action again. Fed. Election Comm’n v. Wis. Right to
Life, Inc., 551 U.S. at 462.
This appeal satisfies both of these requirements. First,
essentially all bankruptcy plans that seek to liquidate the
debtor’s assets will be based on asset purchase agreements
that contain sales provisions with confirmation deadlines.
These deadlines are, by economic necessity, quite short
in duration. Hence, it will rarely, if ever, be the case that
an appellate court would have the opportunity to review
a bankruptcy court’s confirmation decision prior to
the expiration of such deadlines. Second, it is reasonable to
expect that, if this appeal were dismissed for mootness,
the Debtors would simply re-file their reorganization plans
with new asset purchase agreements and the bankruptcy
court would deny confirmation on the same grounds,
giving the Debtors grounds for bringing the same appeal
before this court.
B. 11 U.S.C. § 1129(b)(2)(A) Does Not Authorize
Debtors To Use Subsection (iii) To Confirm a
Reorganization Plan that Seeks To Sell Encum-
bered Assets Free and Clear of Liens Without
Providing Secured Creditors the Right To Credit
Bid
The Debtors contends that the bankruptcy court misinter-
preted Section 1129(b)(2)(A) of the Code when it held
10 Nos. 10-3597 & 10-3598
that their plans could not be confirmed because they
did not “comply with the specific requirements of Section
1129(b)(2)(A)(ii).” They argue that their plans should
have been confirmed because they satisfied the conditions
set forth in Section 1129(b)(2)(A)(iii). Thus, this appeal
presents a single, relatively straightforward question
concerning the proper interpretation of Section
1129(b)(2)(A) and its subsections.
The bankruptcy court held that, when a debtor’s reorga-
nization plan has not been approved by its secured credi-
tors and proposes the sale of encumbered assets free and
clear of liens, Section 1129(b)(2)(A) provides the exclusive
means by which it can be confirmed. The court did not
attempt to provide its own in-depth justification for its
construal of Section 1129(b)(2)(A), but stated that its
holding was based upon the statutory analysis set forth in
Judge Ambro’s dissent in In re Philadelphia Newspapers, 599
F.3d 298 (3d Cir. 2010). Because we review a bankruptcy
court’s interpretation of the Code’s provisions under the de
novo standard, we must conduct our own, independent
analysis of Section 1129(b)(2)(A)’s meaning. Frey v. EPA,
403 F.3d 828, 833 (7th Cir. 2005).
(1) Overview of Section 1129(b)(2)(A) and Relevant
Precedents
Before attempting to decipher Section 1129(b)(2)(A)’s
proper meaning, a brief review of the statute and the way it
has been construed by the courts is merited. Section 1129
of the Code sets forth the criteria that a debtor’s Chapter
11 reorganization plan must satisfy to be confirmed by
Nos. 10-3597 & 10-3598 11
a bankruptcy court. While the Code generally requires that
reorganization plans be accepted by each class of claimants
(or, alternatively, leave the claims of non-assenting classes
unimpaired), see 11 U.S.C. § 1129(a)(8), Subsection (b)
of Section 1129 excepts certain plans from this requirement.
Plans that are confirmed under Section 1129(b) are often
referred to as cramdown plans because they have been
“crammed down the throats of objecting creditors.”
Kham & Nate’s Shoes No. 2, Inc. v. First Bank, 908 F.2d 1351,
1359 (7th Cir. 1990). Subsection (b)(1) states that, in order
for a plan to be confirmed over the objection of a class
of creditors, it must be “fair and equitable, with respect
to each class of claims or interests that is impaired under,
and has not accepted, the plan.” Subsection (b)(2)(A)
defines what constitutes “fair and equitable” treatment
in the secured creditor context. It states that a plan is “fair
and equitable” if it provides:
(i)
(I) that the holders of such claims retain the liens
securing such claims, whether the property subject to
such liens is retained by the debtor or transferred to
another entity, to the extent of the allowed amount of
such claims; and
(II) that each holder of a claim of such class receive on
account of such claim deferred cash payments totaling
at least the allowed amount of such claim, of a value,
as of the effective date of the plan, of at least the value
of such holder’s interest in the estate’s interest in such
property;
12 Nos. 10-3597 & 10-3598
(ii) for the sale, subject to section 363(k) of this title, of
any property that is subject to the liens securing such
claims, free and clear of such liens, with such liens to
attach to the proceeds of such sale, and the treatment of
such liens on proceeds under clause (i) or (iii) of this
subparagraph; or
(iii) for the realization by such holders of the indubitable
equivalent of such claims.
11 U.S.C. § 1129(b)(2)(A).
Traditionally, the majority of cramdown plans have
sought confirmation under Subsection (ii) of 1129(b)(2)(A).
Given the detailed and carefully tailored language used
in this subsection, it has rarely been difficult for courts
to determine whether plans qualify for “fair and equitable”
status. Plans that propose selling an encumbered asset free
and clear of liens could be confirmed over the objections
of secured creditors so long as the debtor’s asset sale
complies with Section 363(k) of the Code. Sales comply
with Section 363(k) if they permit parties with secured
claims to “offset [their] claim against the purchase price
of [the asset]” when entering bids to purchase the asset, an
arrangement that is popularly referred to as credit bidding.
An increasing number of debtors, however, have begun
to seek confirmation of their plans under Subsection (iii)
of 1129(b)(2)(A). Because the language used in this provi-
sion is both sparse and general, determining whether
a reorganization plan can qualify as “fair and equitable”
under this subsection is no simple task. As written,
the statute does not provide guidance concerning (1) what
types of plans fall within Subsection (iii)’s scope or
Nos. 10-3597 & 10-3598 13
(2) what constitutes the “indubitable equivalent” of
a secured creditor’s claim. Resolving the first issue is not
easy because nothing in the text of Section 1129(b)(2)(A)
indicates whether subsection (iii) can be used to confirm
every type of reorganization plan or only those plans that
fall outside the scope of Subsections (i) and (ii). Resolving
the second issue is difficult because “indubitable equiva-
lent” is not a term that has been defined by the Code or
the courts. In re Pacific Lumber, Co., 584 F.3d 229, 246 (5th
Cir. 2009) (noting that “[w]hat measures constitute the
indubitable equivalent of the value of the [secured credi-
tor’s] collateral are rarely explained in case law”).
Two of our sister circuits recently issued opinions
analyzing Section 1129(b)(2)(A). Philadelphia Newspapers,
599 F.3d 298; Pacific Lumber, 584 F.3d 229. In Pacific
Lumber, the Fifth Circuit held that a plan that proposed the
sale of the debtor’s encumbered assets to a specified
purchaser for an amount equal to the judicially-determined
value of the assets qualified as “fair and equitable”
under Subsection (iii) of Section 1129(b)(2)(A).
Pacific Lumber, 584 F.3d at 249. In Philadelphia Newspapers,
the Third Circuit held, in a 2-1 decision with one of
the members of the majority concurring in the judgment,
that a plan that proposed selling the debtor’s encumbered
assets free and clear of liens in an auction where
credit bidding would not be allowed could qualify as
“fair and equitable” under Subsection (iii). Philadelphia
Newspapers, 599 F.3d at 318. Both majority opinions held
that Subsection (iii)’s scope was not limited by its neigh-
boring subsections and that the proceeds from the sale
of encumbered assets constituted the indubitable equiva-
14 Nos. 10-3597 & 10-3598
lent of the secured creditors’ claims. Judge Ambro’s dissent
in Philadelphia Newspapers rejected both of these conclu-
sions, arguing that the majority’s reading of the statute
was at odds with the text of the statute itself, various
canons of statutory interpretation, the statute’s legislative
history, interests expressed in other parts of the Code and
the settled expectations of lenders and borrowers.
(2) The Plain Language of Section 1129(b)(2)(A) Does
Not Clearly Authorize Confirmation of the Debt-
ors’ Reorganization Plans
With this background information in mind, we can
begin our analysis of Section 1129(b)(2)(A)’s meaning
in earnest. When attempting to decipher the proper
interpretation of a statute, we begin by determining
“whether the language at issue has a plain and unambigu-
ous meaning with regard to the particular dispute in
the case.” Robinson v. Shell Oil Co., 519 U.S. 337, 340 (1997).
When interpreting statutory language, the meaning
attributed to a phrase “depends upon reading the
whole statutory text, considering the purpose and context
of the statute, and consulting any precedents or authorities
that inform the analysis.” Kasten v. Saint-Gobain Performance
Plastics Corp., 131 S.Ct. 1325, 1330 (2011); see also United
States v. Webber, 536 F.3d 584, 593 (7th Cir. 2008) (stating
that “we give words their ordinary meaning unless
the context counsels otherwise”). If we find that the
language in a statute is unambiguous, we will not conduct
further inquiry into its meaning and enforce the statute
in accordance with its plain meaning. BedRoc, Ltd. v. United
Nos. 10-3597 & 10-3598 15
States, 541 U.S. 176, 183 (2004); Ind. Forest Alliance, Inc.
v. United States Forest Serv., 325 F.3d 851, 857 (7th Cir.
2003). Thus, the first step we must take in resolving this
appeal is determining whether the language of Section
1129(b)(2)(A) unambiguously authorizes the confirmation
of reorganization plans such as those proposed by
the Debtors under Subsection (iii).
The Debtors contend that the plain language of Section
1129(b)(2)(A) orders courts to approve any cramdown
plan—including those that propose selling encumbered
assets free and clear of liens—that satisfies Subsection (iii)’s
requirement that the plan provides secured creditors
with the indubitable equivalent of their claims. They
also argue that the statute’s language unambiguously
indicates that a plan that provides a secured creditor
with the proceeds from the sale of an asset at an auction
that does not permit credit bidding satisfies the indubitable
equivalence requirement. In support of their positions,
the Debtors cite the majority’s decision in Philadelphia
Newspapers, reiterating many of the arguments articulated
in that case.4 Unsurprisingly, the Lenders disagree with
the Debtors’ claims, arguing that cramdown plans that seek
to sell encumbered assets free and clear of liens must
satisfy Subsection (ii)’s requirements and that the Debtors’
proposed sales would not provide the Lenders with
4
Given that the Debtors’ assets in this case have not gone
through the judicial valuation process and the Debtors’ reorgani-
zation plans involve using an auction to determine the assets’
current value, it is clear that Philadelphia Newspapers is more
relevant precedent than Pacific Lumber.
16 Nos. 10-3597 & 10-3598
the indubitable equivalent of their claims. The Lenders
contend that Judge Ambro’s dissent in Philadelphia Newspa-
pers provides a superior analysis of Section 1129(b)(2)(A).
We reject the Debtors’ contentions for two reasons. First,
like the bankruptcy court, we find the statutory analysis
articulated by Judge Ambro in his Philadelphia Newspapers
dissent to be compelling. Nothing in the text of Section
1129(b)(2)(A) directly indicates whether Subsection (iii)
can be used to confirm any type of plan or if it can only
be used to confirm plans that propose disposing of assets
in ways that can be distinguished from those covered
by Subsections (i) and (ii).5 Hence, there are two plausible
interpretations of the statute: one that reads Subsection (iii)
as having global applicability and one that reads it
as having a much more limited scope. See Philadelphia
Newspapers, 599 F.3d at 324-27 (Ambro, J., dissenting).
Because, at this stage of our analysis, we are limited to
considering the plain text of the statute and “reasonable
minds can differ on the interpretation of Section
1129(b)(2)(A) as it applies to plan sales free of liens,” we
5
We disagree with the Philadelphia Newspapers majority’s
conclusion that the use of “or” in Section 1129(b)(2)(A) resolves
this issue. Philadelphia Newspapers, 599 F.3d at 305-06. While
Section 102(5) of the Code indicates that “or” should be under-
stood in the term’s non-exclusive sense, several exceptions to
this rule have been recognized. See Philadelphia Newspapers, 599
F.3d at 324 (Ambro, J., dissenting); Lawrence P. King et al.,
2 Collier on Bankruptcy ¶ 102.06 (16th ed. Rev. 2011). Hence, the
mere presence of the term “or” is insufficient to resolve this
issue.
Nos. 10-3597 & 10-3598 17
find that the statute does not have a single plain meaning.
Id. at 322. Accordingly, we must look beyond the text
of Section 1129(b)(2)(A) to determine which of its possible
interpretations is the correct one. Second, we find that,
even if we analyze Subsection (iii) of Section 1129(b)(2)(A)
in isolation, the text of the provision does not unambigu-
ously indicate that plans such as those proposed by
the Debtors qualify for “fair and equitable” status. Subsec-
tion (iii) states that a reorganization plan can be confirmed
over the objections of secured creditors if it provides
the creditors with the “indubitable equivalent” of their
claims. What constitutes the “indubitable equivalent” of
a creditor’s secured claim depends on the amount of
the creditor’s lien and the current value of the secured
asset. If a creditor’s claim is oversecured, then the indubita-
ble equivalent of the creditor’s claim is its face value.
For instance, where a creditor has a $100,000 lien on an
asset worth $500,000, a reorganization plan will only
give the creditor the indubitable equivalent of its claim if it
gives it something worth $100,000 (e.g., that amount
in cash or a replacement lien for that amount on another
asset). If a creditor’s claim is undersecured, then the
indubitable equivalent of the creditor’s secured claim
equals the current value of the asset. For instance, where
a creditor has a $100,000 lien on an asset that has depreci-
ated in value and is now worth less than $100,000, a
reorganization plan will give the creditor the indubitable
equivalent of its claim if the plan gives the creditor some-
thing worth the asset’s current market value.
Determining the value of an undersecured creditor’s
claim is problematic because it is usually difficult to
18 Nos. 10-3597 & 10-3598
discern the current market value of the types of assets that
are sold in corporate bankruptcies. The Code recognizes
two basic mechanisms for solving these types of valuation
problems: judicial valuation of an asset’s value, 11 U.S.C.
§ 506(a)(1), and free market valuation of an asset’s value
as established in an open auction, 11 U.S.C. §§ 363(k),
1129(b)(2)(A). The Debtors argue that, because their
proposed plans would sell their assets at an open auction
and the Lenders would receive the proceeds from these
sales, the free market will determine the assets’ current
values and the Lenders will receive the indubitable equiva-
lent of their secured claims.
The Debtors’ argument is flawed, however, because
of the incongruity between the auctions proposed in
the plans and those recognized elsewhere in the Code.
In order to auction off an encumbered asset free and clear
of liens under Sections 363(k) or 1129(a)(2)(B)(ii), for
instance, the Code requires that parties with secured
interests in the assets be permitted to credit bid. By grant-
ing secured parties this ability, the Code provides lenders
with means to protect themselves from the risk that
the winning auction bid will not capture the asset’s actual
value. If a secured lender feels that the bids that have
been submitted in an auction do not accurately reflect
the true value of the asset and that a sale at the highest bid
price would leave them undercompensated, then they
may use their credit to trump the existing bids and take
possession of the asset. In essence, by granting secured
creditors the right to credit bid, the Code promises lenders
that their liens will not be extinguished for less than
face value without their consent. This protection is impor-
Nos. 10-3597 & 10-3598 19
tant since there are number of factors that create a substan-
tial risk that assets sold in bankruptcy auctions will be
undervalued.6
6
Multiple factors contribute to the risk that an asset will be
undervalued in such sales. First, the speed and timing of a
bankruptcy auction often results in undervaluation. Lorie R.
Beers, Preparing the Distressed Company for Sale, Am. Bankr. Inst.
J. 44, 45 (Aug. 26, 2007). Second, and closely related, is the
inability to provide sufficient notice to interested parties. See id.
at 69 (explaining that because of financial constraints, the
development of formal marketing materials and notice
to prospective buyers is often abbreviated, resulting in a shorter
list of interested parties and thereby reducing the chance that
the sale will result in full realization of the asset’s value). Third,
there is an inherent risk of self-dealing on the part of existing
management. We have recognized that existing management
may have an incentive to favor “white knight” bidders favorably
disposed to preserving the existing business over others
who might enter higher bids. See Dynamic Corp. of Am. v.
CTS Corp., 805 F.2d 705, 711 (7th Cir. 1986). Fourth, while
the credit markets are more recently showing signs of repair,
they remain in a state of limited liquidity. Liquidity constraints
are likely to keep many potential bidders on the sidelines,
greatly reducing the chance that competitive bidding will
occur. Finally, the fact that bidders must expend their resources
when putting together a bid and are likely to take these
costs into consideration when setting the value of their
bids increases the chance that the asset’s sale price will not
reflect its actual value. See Vincent S. J. Buccola & Ashley
C. Keller, Credit Bidding and the Design of Bankruptcy Auctions,
18 Geo. Mason L. Rev. 99, 121 (2010) (noting that an estate is
(continued...)
20 Nos. 10-3597 & 10-3598
Because the Debtors’ proposed auctions would deny
secured lenders the ability to credit bid, they lack a crucial
check against undervaluation. Consequently, there is an
increased risk that the winning bids in these auctions
would not provide the Lenders with the current market
value of the encumbered assets. Nothing in the text of
Section 1129(b)(2)(A) indicates that plans that might
provide secured lenders with the indubitable equivalent of
their claims can be confirmed under Subsection (iii). Hence,
we find that a plain-meaning reading of Subsection (iii)’s
text does not establish that it can be used to confirm plans
that propose auctioning off a debtor’s encumbered assets
free and clear of liens without allowing credit bidding.
(3) T he Bette r I n te rp r e tation of S ection
1129(b)(2)(A)(iii) Does Not Permit Confirmation
of the Debtors’ Reorganization Plans Under
Subsection (iii)
Because the text of Section 1129(b)(2)(A) suggests more
than one plausible understanding of the statute, we must
apply well-established principles of statutory interpreta-
tion to determine which of these understandings is supe-
rior. In general, canons of statutory construction urge
courts to interpret statutes in ways that make every part
of the statute meaningful. TRW Inc. v. Andrews, 534 U.S. 19,
31 (2001). Interpretations that result in provisions being
6
(...continued)
unlikely to realize the entire value of an asset because bids will
take into account the bidders’ financing costs).
Nos. 10-3597 & 10-3598 21
superfluous are highly disfavored. Id. Further, when
deciding between competing understandings of a statute,
courts often consider the objectives of the larger statutory
scheme and select the meaning that “produces a substan-
tive effect that is compatible with the rest of the law.”
United Sav. Ass’n of Tex. v. Timbers of Inwood Forest
Assocs.,Ltd., 484 U.S. 365, 371 (1988); Koons Buick Pontiac
GMC, Inc. v. Nigh, 543 U.S. 50, 60 (2004).
The Debtors’ proposed interpretation of Section
1129(b)(2)(A) violates a cardinal rule of statutory construc-
tion. One of the basic tenets that courts follow when
interpreting ambiguous text states that “a statute ought . .
. to be so construed that, if it can be prevented, no clause,
sentence, or word shall be superfluous, void,
or insignificant.” Duncan v. Walker, 533 U.S. 167, 174 (2001).
The first two Subsections of 1129(b)(2)(A) set forth
the specific conditions that reorganization plans that seek
to sell encumbered assets in particular manners must meet.
Subsection (i) sets forth requirements that apply to
all plans where the debtor seeks to retain possession of
or sell an encumbered asset with the liens attached.
Subsection (ii) sets forth requirements that apply to all
plans that seek to sell an encumbered asset free and clear
of liens. The Debtors propose that we should read Subsec-
tion (iii) as stating that any plan that satisfies a general
requirement— the indubitable equivalence stan-
dard—should be granted “fair and equitable” status.
Under their interpretation, plans could qualify for treat-
ment under Subsection (iii) even if they seek to dispose
of encumbered assets in the ways discussed in Subsections
(i) and (ii), but fail to meet these Subsections’ requirements.
22 Nos. 10-3597 & 10-3598
This understanding of Section 1129(b)(2)(A)(iii) is
unacceptable because it would render the other subsections
of the statute superfluous.7 If, as the Debtors propose,
Subsection (iii) permits a debtor to sell an asset free and
clear of liens without permitting credit bidding, then it
is difficult to see what, if any, significance Subsection (ii)
can have. Similarly, the Debtors’ interpretation would
permit properly-designed reorganization plans to sell
encumbered assets without satisfying the conditions set
forth in Subsection (i). We cannot conceive of a reason
why Congress would state that a plan must meet certain
requirements if it provides for the sale of assets in particu-
lar ways and then immediately abandon these require-
7
This interpretation would also violate the canon of statutory
construction that states that when “there is an inescapable
conflict between general and specific . . . provisions of a statute,
the specific will prevail.” Norman J. Singer & J.D. Shambie
Singer, 2A Sutherland Statutes & Statutory Construction § 46:5;
see also Bloate v. United States, 130 S.Ct. 1345, 1354 (2010) (stating
that “general language of a statutory provision, although broad
enough to include [a matter], will not be held to apply to a
matter specifically dealt with in another part of the same
enactment”). Allowing plans to use Subsection (iii) to accom-
plish a sale free of liens without according lenders the proce-
dural protections prescribed by clause (ii) “places the two
clauses in conflict” and would allow the general to subsume the
specific. In re Philadelphia Newspapers, 559 F.3d at 329 (Ambro, J.,
dissenting).
Nos. 10-3597 & 10-3598 23
ments in a subsequent subsection.8 The infinitely more
plausible interpretation of Section 1129(b)(2)(A) would
read each subsection as stating the requirements for a
particular type of sale and “construing each of the []
subparagraphs . . . [as conclusively governing] the category
of proceedings it addresses.” Bloate v. United States, 130 S.
Ct. 1345, 1355 (2010). Under such a reading, plans could
only qualify as “fair and equitable” under Subsection (iii)
if they proposed disposing of assets in ways that are not
described in Subsections (i) and (ii).
Also counseling against the Debtors’ interpretation of
Section 1129(b)(2)(A)(iii) is the fact that it treats secured
creditors’ interests in a way that sharply conflicts with the
way that these interests are treated in other parts of
the Code. A review of the “sections of the Code related to
plan sales of encumbered property free of its liens, as
well as sections concerning the protection afforded to
secured creditors,” reveals that the Code has an expressed
interest in insuring that secured creditors are properly
8
Indeed, the legislative history for Section 1129(b)(2)(A)
indicates that Subsection (iii) was intended to apply to plans that
propose treating the estate’s encumbered assets in ways that
are different from those covered by Subsection (i) and (ii). In
re Philadelphia Newspapers, 559 F.3d at 335-36 (Ambro, J., dissent-
ing) (reviewing the congressional record and noting that neither
of the examples of plans that a court could confirm under
clause (iii)— abandonment of the encumbered asset or providing
the secured creditor with a replacement lien on similar
collateral — overlap with plans that could be confirmed under
Subsections (i) and (ii)).
24 Nos. 10-3597 & 10-3598
compensated. Philadelphia Newspapers, 599 F.3d at 331
(Ambro, J., dissenting). For instance, Sections 363(k) and
1129(b)(2)(A)(ii) provide a secured creditor with the right
to credit bid whenever a debtor attempts to sell the asset
that secures its debt free and clear of its lien. Id. Similarly,
Section 1111(b) provides secured creditors with means
to protect their claims when a debtor seeks to
retain possession of an encumbered asset. See In re 680
Fifth Ave. Assocs., 29 F.3d 95, 97-98 (2d Cir. 1994); Lawrence
P. King et al., 7 Collier on Bankruptcy ¶ 1111.03 (16th ed.
Rev. 2011). In contrast, the Code does not appear to contain
any provisions that recognize an auction sale where credit
bidding is unavailable as a legitimate way to dispose of
encumbered assets. Because the Debtors’ interpretation
of Section 1129(b)(2)(A) would not provide secured
creditors with the types of protections that they are
generally accorded elsewhere in the Code, their interpreta-
tion is less plausible than a construction of the statute that
reads Subsection (ii), which offers the standard protections
to creditors, as providing the only way for plans seeking
to sell encumbered assets free and clear of liens to obtain
“fair and equitable” status. Philadelphia Newspapers, 599
F.3d at 331 (Ambro, J., dissenting).
Because the Debtors’ suggested reading of Subsection
(iii) would nullify its neighboring subsections and ignore
the protections for secured creditors recognized in other
Code provisions, we reject their interpretation of the
statute. Instead, we find that the Code requires that
cramdown plans that contemplate selling encumbered
assets free and clear of liens at an auction satisfy the
requirements set forth in Subsection (ii) of the statute.
Nos. 10-3597 & 10-3598 25
III. Conclusion
For these reasons, the ruling of the bankruptcy court is
A FFIRMED
6-28-11