June 14, 2012
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Commercial Financial Services Brief: Supreme Court Affirms a Secured Creditor's Right to Credit Bid for its Collateral at a Sale Under a Bankruptcy Plan

The U.S. Supreme Court has delivered its much anticipated decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. ___ (2012), holding that a secured creditor may not be denied the right to credit bid at a bankruptcy sale of its collateral that is conducted pursuant to a Chapter 11 plan of reorganization. This decision, which resolves conflicting precedent among the federal Circuit Courts of Appeal, confirms that a secured creditor has a right to credit bid at a bankruptcy sale of its collateral regardless of whether the sale occurs prior to, or pursuant to, a Chapter 11 plan of reorganization.

A secured creditor’s right to credit bid (i.e., bid its debt rather than cash) at a foreclosure sale of its collateral is a well-recognized state-law right that allows a secured creditor to protect itself against a foreclosure sale of its collateral at a price below the amount of its debt. This important secured creditor protection is incorporated into federal bankruptcy law by Section 363(k) of the Bankruptcy Code, which provides that a secured creditor also may bid its debt at a bankruptcy sale of its collateral. In recent years, however, a split of authority has arisen as to whether this right may be denied to a secured creditor if the bankruptcy sale occurs pursuant to the terms of a plan of reorganization that has been confirmed by the bankruptcy court over the secured creditor’s objection. Section 1129(b)(2)(A) of the Bankruptcy Code provides that a bankruptcy court may confirm a plan of reorganization over the objection of a secured creditor if the plan provides:

(ii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale …; or

(iii) for the realization by such holders of the indubitable equivalent of such claims.

(Emphasis added.) Section 1129(b)(2)(A)(ii) explicitly requires that, if a secured creditor’s collateral is to be sold free and clear of its lien pursuant to a confirmed plan of reorganization, the secured creditor must be allowed to credit bid at the sale. Notwithstanding that express reference to the section 363(k) credit bidding rights, in In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3rd Cir. 2010), the Third Circuit Court of Appeals held that a secured creditor’s right to credit bid at a sale of its collateral under a confirmed plan of reorganization was not absolute if the selling debtor otherwise provided the secured creditor with the indubitable equivalent of its secured claim. In RadLAX, the Supreme Court overturned that decision, describing its interpretation of Section 1129(b)(2)(A) as “hyperliteral and contrary to common sense.” RadLAX, 566 U.S. at ___.

The Supreme Court’s RadLAX decision has made the secured creditor’s right to credit bid at a sale of its collateral complete, whether the sale is a state-law foreclosure sale or any type of bankruptcy sale.

This article is provided for general informational purposes only and should not be construed as legal advice or legal opinion on any specific facts or circumstances. You are urged to consult a lawyer concerning any specific legal questions you may have.