Supreme Court Affirms Rights of Lenders to Credit-Bid in Chapter 11

In May, with RadLAX Gateway Hotel LLC v. Amalgamated Bank (“RadLax”), the U.S. Supreme Court handed secured lenders a major victory, ruling 8-0 that a Chapter 11 plan, which proposes to sell collateral free and clear of liens, must permit the secured creditor to credit-bid on the sale of that collateral. 

The Debtor’s Chapter 11 Plan proposed to sell substantially all of the Debtor’s assets free and clear of liens.  The assets to be sold were encumbered by a first lien in favor of Amalgamated Bank.  The Plan also provided that the Bank would not be permitted to credit-bid on the assets during the sale.

The right of a secured creditor to credit bid is found in §363(k) of the Bankruptcy Code which provides: “At a sale…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.” 

Credit bidding allows a secured lender to participate in bidding on its collateral during an auction with the expectation that the lender will first credit any bid against the lien held by the lender and only pay cash in connection with the sale to the extent that the lender’s bid exceeds the full balance of the lender’s lien.  Credit-bidding assures a lender that if its collateral is sold, then the price will be, at a minimum, the fair value of the collateral securing the debtor’s obligations to lender, thus diminishing the chance that the lender will lose the benefit of the collateral’s value with respect to its secured claim.  After the sale or auction, the lender's existing lien attaches to the cash proceeds of that sale or auction if the purchaser is a third party.

A secured creditor may credit bid the entire amount of its claim secured by the property to be sold, irrespective of the value of the property.  Under §363, the creditor’s right to credit bid is not absolute and may be modified for cause.  The RadLax Court ruled, however, that a sale of the debtor’s property conducted as part of a confirmed Chapter 11 plan cannot prohibit the secured creditor to credit bid under the circumstances present in that case.

Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.