Supreme Court Makes The 'Easy Case' For Credit Bidding In Bankruptcy Plans Of Reorganization

The recently decided case of RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. ____ (2012), puts to rest a conflict among the Third, Fifth, and Seventh Circuits as to the right of secured creditors to credit bid at a proposed sale of their collateral under a plan of reorganization that the secured creditor opposes. The practice of credit bidding is codified in the Bankruptcy Code at 11 U.S.C. §363(k) and is the right of a secured creditor to bid the amount of its secured debt at a debtor's sale of the creditor's collateral in bankruptcy. If the secured creditor is the winning bidder, for an amount that does not exceed its secured debt, it will not have to put up cash to take possession of the collateral. This reduces the creditor's secured claim by the amount bid, but also gives the secured creditor the right to prevent the sale of its collateral for a lower value. The secured creditor must therefore make a judgment as to the real value of its collateral when bidding. If the secured creditor does not bid, or bids and loses, it will get the cash paid by the winning bidder, up to the amount of its secured claim. The collateral will then pass to the winning bidder, free and clear of the secured creditor's lien.

Credit bidding can play a critical role in the confirmation of a Chapter 11 reorganization plan, as well as in sales of assets. Most secured creditors assumed that their right to credit bid was preserved in a plan of reorganization that proposed to sell the secured creditor's collateral as part of the plan. Under 11 U.S.C. §1129(b)(1), a plan cannot be confirmed over the negative vote of a class of secured creditors (a so-called "cram...