Much to the anticipation of the bankruptcy community, on May 29, 2012 the Supreme Court of the United States issued a decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank and put an end to the split among the Circuit Courts of Appeal on the issue of whether a secured creditor has the right to credit bid its claim when its collateral is being sold pursuant to a plan of reorganization. Writing for a unanimous Court, Justice Scalia found RadLAX to be “an easy case” and, in 10 succinct pages, definitively established that a secured creditor must be afforded its right to credit bid on collateral that a debtor proposes to sell free and clear of the creditor’s liens pursuant to a cramdown plan of reorganization.
What is Credit Bidding?
Significant asset sales by a debtor subject to a chapter 11 bankruptcy case can be effectuated either by a sale of assets outside the ordinary course of business under section 363 (a “363 Sale”) of title 11 of the United States Code (the “Bankruptcy Code”) or pursuant to a confirmed plan of reorganization (a “Plan Sale”). Both 363 Sales and Plan Sales are typically subject to a competitive auction mechanism to increase the likelihood that the debtor receives the maximum value for the asset. When property of a debtor that secures indebtedness is proposed to be sold through a 363 Sale, the secured creditor is given a statutory right to bid the face value of its allowed secured claim at the auction. Specifically, section 363(k) provides:
At a sale under subsection (b) of this section of property that is subject to a lien that secures an allowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property.
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