Secured Lender's Credit Bid Right In Bankruptcy Sale Denied

• Published date: 23 September 2021
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Jones Day
• Author: Ms Jane Rue Wittstein and Mark Douglas

A secured creditor's right to "credit bid" the amount of its allowed claim in a bankruptcy sale of its collateral is an important creditor protection codified in section 363(k) of the Bankruptcy Code. Even so, a ruling recently issued by the U.S. Bankruptcy Court for the Central District of California reaffirms the principle that the right to credit bid a claim is not absolute and may be limited or denied altogether "for cause." Because the determination of whether (and to what extent) a secured claim should be allowed often "cannot be adjudicated before there is a sale of the Debtor's assets," the court in In re Figueroa Mountain Brewing, LLC, 2021 WL 2787880 (Bankr. C.D. Cal. July 2, 2021), ruled in an unpublished decision that it "would be unfair to limit or deny [a lender] a credit bid simply because the Debtor has filed an objection." However, without adjudicating the claim objection, the court found that "cause" existed to deny a secured lender the right to credit bid its disputed claim in a bankruptcy sale of its collateral because there was a sufficient objective basis to support the debtor's allegations that, among other things, its loan agreement and all payments made by the debtor under it were fraudulent transfers and the lender had dominated and controlled the debtor in an effort to take control of its assets.

Credit Bidding

Section 363(k) of the Bankruptcy Code provides that a creditor with a lien on assets to be sold outside the ordinary course of business under section 363(b) may credit bid its "allowed claim" at the sale, "unless the court for cause orders otherwise." A credit bid is an offset of a secured claim against the collateral's purchase price. The U.S. Supreme Court explained in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 644 n.2 (2012), that "[t]he ability to credit-bid helps to protect a creditor against the risk that its collateral will be sold at a depressed price" and "enables the creditor to purchase the collateral for what it considers the fair market price (up to the amount of its security interest) without committing additional cash to protect the loan."

The Supreme Court ruled in RadLAX that, although the right to credit bid is not absolute, a nonconsensual, or "cram down," chapter 11 plan providing for the sale of encumbered property free and clear of a creditor's lien cannot be confirmed without affording the creditor the right to credit bid for the property.

In the aftermath of RadLAX, the debate shifted largely to the circumstances that constitute "cause" under section 363(k) to prohibit or limit a secured creditor's right to credit bid its claim. Because "cause" is not defined in the Bankruptcy Code, whether it exists has been left for the courts to determine. See In re Olde Prairie Block, LLC, 464 B.R. 337, 348 (Bankr. N.D. Ill. 2011) (citing cases).

In In re Fisker Automotive Holdings, Inc., 510 B.R. 55 (Bankr. D. Del. 2014), the court limited the amount of a credit bid to the discounted purchase price actually paid by the credit bidder to purchase the secured debt it was credit bidding. The court held that limiting the amount of the credit bid was warranted because an unrestricted credit bid would chill bidding and because the full scope of the underlying lien was as yet undetermined. The court also expressed concern as to the expedited nature of...