U.S. Supreme Court Upholds Right of Secured Creditors to Credit Bid Under Chapter 11 Plan

On May 29, 2012, the U.S. Supreme Court, in a unanimous decision, resolved a high-profile circuit split regarding the right of secured creditors to credit bid in an asset sale under a chapter 11 plan. In RadLAX Gateway Hotel, LLC v. Amalgamated Bank, the Court held that a debtor cannot deny a secured creditor the right to credit bid as part of a chapter 11 plan providing for the sale of assets free and clear of the secured creditor’s liens on those assets. The decision is a resounding victory for secured creditors—one that eliminates a once significant threat to secured creditor rights in bankruptcy.

Credit Bidding in Bankruptcy

Credit bidding refers to the ability of a secured creditor to apply up to the full amount owed to that creditor as a bid in connection with an auction and sale of collateral encumbered by its liens. Credit bidding provides secured creditors with the option of taking possession of collateral rather than accepting sale proceeds from that collateral. Such flexibility may be especially crucial in the context of a severely distressed market environment, as sale prices often fail to properly reflect the real or expected future value of collateral.

In a chapter 11 case, sales of the debtor’s property outside of the ordinary course of business are conducted through either a sale under section 363 of the Bankruptcy Code, or pursuant to a plan of reorganization. Under section 363(k), a secured creditor has the express right to credit bid in connection with a section 363 sale of property subject to the secured creditor’s liens. In the case of a sale pursuant to a chapter 11 plan, however, the circuit courts were split as to whether a debtor could sell its property free and clear of a secured creditor’s liens without being required to provide the secured creditor with the opportunity to credit bid. Both the Third Circuit in In re Philadelphia Newspapers, LLC3 and the Fifth Circuit in In re Pacific Lumber Co.4 found that a debtor was permitted, pursuant to section 1129 of the Bankruptcy Code, to deny a secured creditor its right to credit bid as part of a sale under a chapter 11 plan. More recently, the Seventh Circuit in In re River Road Partners, LLC5 disagreed with the Third and Fifth Circuits, finding that such a sale pursuant to a chapter 11 plan is not permitted under section 1129 of the Bankruptcy Code. The U.S. Supreme Court agreed to hear the RadLAX debtors’ appeal.