Can a Chapter 11 debtor propose a plan to sell a lender’s collateral free and clear of the lender’s lien without allowing the lender to credit bid? The Supreme Court says “no”—unless there’s cause.
There are three ways for a debtor to confirm a plan without the affirmative vote of a secured creditor: (1) the plan could provide that the creditor retain its lien to the extent of the value of the collateral and receive deferred cash payments totaling the amount of the claim which have a present value at least equal to the value of the collateral; (2) the plan could provide for the sale of the collateral free and clear of the lien, with the lien attaching to the proceeds of the sale; or (3) the plan could propose to give the secured creditor the “indubitable equivalent” of its secured claim. 11 U.S.C. § 1129(b)(2)(A). With respect to the second option—selling the property free and clear—the bankruptcy code provides that such a sale must be made in accordance with the provisions of § 363(k), which requires credit bidding for the secured creditor, unless “the court for cause orders otherwise.” Courts have interpreted this to mean the creditor may bid the entire amount of its claim—both the secured and unsecured portions.
In Radlax Gateway Hotel, LLC v. Amalgamated Bank, 132S. Ct. 2065 (2012), the debtor’s plan proposed to sell the creditor’s collateral free and clear of the lien and repay the creditor with the proceeds. But the plan did not allow for the creditor to credit bid. The debtor argued that it was proceeding under the third option—providing the creditor the indubitable equivalent of its lien because the debtor received the proceeds of the sale. The Supreme Court rejected the argument, holding instead that where the plan proposes to sell a secured creditor’s collateral free and clear of the lien, the creditor must be permitted to credit bit unless the court “for cause” orders otherwise. The Supreme Court did not consider whether cause had been shown because the bankruptcy court’s finding that no cause existed had not been appealed.
Therefore, although, the sale of a lien free and clear ordinarily requires that the creditor be permitted to bid the full value of its claim, it is possible that a court may find cause to deny credit bidding. Examples of “cause” include: when the lien is disputed, when there is a lien priority dispute between secured creditors, and where there has been inequitable conduct by the secured creditor.