Third Circuit Court of Appeals Denies Secured Lender Right to Credit Bid in Auction of Collateral, Enhancing Ability of Equity Sponsors to Buy Assets in Bankruptcy

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If a business is worth less than its secured obligations, a bankruptcy auction sale is often a means for recovering value for the secured lenders. In auction sales, a secured lender typically has the ability to “credit bid,” i.e., to participate in the auction and to acquire collateral by bidding the amount of its secured debt. This important right protects the secured lender; a secured lender’s consent is effectively required for a sale of assets if the purchase price is less than the amount necessary to pay the secured lender in full.

In a recent decision, the U.S. Court of Appeals for the Third Circuit has weakened this protection, permitting a company in bankruptcy to accept a “stalking horse” bid by an insider and to establish bidding procedures that deny the secured lenders a right to credit bid at auction.

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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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