River Road Hotel Partners, LLC v. Amalgamated Bank

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