Betting on the Upside: Why Affirming River Road Favors Distressed Debt Speculators over the Rehabilitation of Businesses

Onorato, Julia L. | July 1, 2013

The Chapter 11 bankruptcy process demands a careful balance between protecting the creditors’ rights to be repaid and allowing a failing entity the ability to restructure. The Supreme Court in RadLAX Gateway Hotel affirmed the Seventh Circuit’s holding in River Road and interpreted the Bankruptcy Code in a way that improperly shifts this balance towards the most senior creditors at the expense of business. This Note will analyze the circuit disagreement over the cramdown provision in the Bankruptcy Code and the Supreme Court’s ultimate resolution. It will argue that in light of recent trends in the credit markets – including highly liquid secondary markets for debt and aggressive lenders looking to speculate on restructuring businesses – the Supreme Court’s current interpretation of the Bankruptcy Code supports improper policy. It will also argue that consistent interpretation between two provisions in the Bankruptcy Code §§ 363 and 1129(b), focusing on balancing the needs of debtors to restructure with the rights of creditors to be repaid suggests that the Supreme Court should have interpreted the cramdown provision to grant more flexibility in plan design. This Note argues that Congress, in light of the RadLAX decision, should amend the Bankruptcy Code to better suit the goals of the modern-day bankruptcy.