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Credit Bidding: Secured Creditor Beware
Credit bidding has historically been a valuable right afforded to secured creditors under the Bankruptcy Code and state law. It permits the secured creditor who has a perfected lien on the debtor's property to bid the amount of its allowed claim in any sale of its collateral, without paying cash for its bid. Rather, the secured creditor can set off the amount of its secured claim against the purchase price. Secured creditors may credit bid, not only in the context of a section 363 sale, but also in the context of a Chapter 11 plan. The Supreme Court in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S.Ct. 2065 (2012) established that when collateral is sold free and clear of a creditor's lien through a Chapter 11 plan, the secured creditor must be permitted, subject to the provisions of section 363(k), to bid on the assets using its outstanding secured debt. The right to credit bid under section 363(k) of the Bankruptcy Code can be an important safeguard that protects a secured creditor against the risk that its collateral may be undervalued at an asset sale, and courts have traditionally described a secured creditor's right to credit bid as fundamental and near absolute. However, as some bankruptcy courts have recently reminded us, the right is not absolute, and may be limited by the bankruptcy court “for cause” under section 363(k) of the Bankruptcy Code.
Historically, courts have found “cause” to limit credit bidding pursuant to section 363(k) in cases where there is a bona fide dispute as to the validity or extent of the secured creditor's lien or where the secured creditor has engaged in misconduct. Two recent bankruptcy court decisions, however, suggest a trend by the courts to limit a secured creditor's right to credit bid by broadening the application of the “for cause” standard under section 363(k), all in furtherance of certain policy considerations and bankruptcy goals. The courts focused on fostering a competitive and robust bidding environment and to ensure the success of the reorganization process. Limiting a secured creditor's right to credit bid, as was recently done by the courts in the In re Fisker Automotive Holdings, Inc., 2014 WL 210593 (Bankr. D.Del. Jan. 17, 2014) and In re Free Lance-Star Publishing, Case No.14-30315-KRH (Bankr. E.D.Va. April 14, 2014) bankruptcy cases, may ultimately have a dramatic impact not only on the market for secured claims but also on the overall sale and reorganization process in general, as the rights of secured creditors, especially those that purchase secured debt as a loan-to-own strategy, are becoming increasingly uncertain.
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