Supreme Court Decision Affirms Secured Creditors' Rights to Credit Bid

On May 29, 2012, the Supreme Court issued its opinion in the RadLAX Gateway Hotel, LLC v. Amalgamated Bank case. The Court resolved the question of whether a debtor may confirm a plan of reorganization that prohibits a secured creditor from credit bidding the amount of its claim as part of an auction sale. A credit bid allows a secured lender to use the debt owed to it as "currency" to bid for the debtor's assets in which it has a security interest.

The decision and its rationale are important both within the bankruptcy community and beyond due to its potential impact upon long standing notions of the rights of a secured creditor in bankruptcy. While the underlying assets involved in this case were two hotels, the Court’s holding likely will be applied in the future to multiple fact patterns involving real estate and other types of collateral.

Justice Scalia delivered the unanimous opinion of the Court, and described RadLAX as an "easy case." The Court ruled that a bankruptcy plan of reorganization may not be confirmed over the secured creditor's objection if the plan provides for the sale of assets free and clear of the secured creditor's lien and does not provide the secured creditor with the right to credit bid. By affirming the holding of the Seventh Circuit, the Supreme Court resolved a split between the Seventh Circuit, on one hand, and the Third and Fifth Circuits, on the other hand, over whether secured creditors could be stripped of the right to credit bid in plan sales.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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