Credit Bidding in Chapter 11 after Radlax

Abstract

Outside of bankruptcy, the right of a secured creditor to “credit bid” allows the secured creditor to compete with cash bids in foreclosure to assure that the secured creditor’s collateral is not sold for less than the secured creditor thinks it is worth. In reorganization cases under chapter 11 of the Bankruptcy Code, credit bidding performs a similar function: it insulates the secured creditor from being cashed out at a time of depressed asset values and protects the secured creditor from the risk of suffering a “bankruptcy discount,” which some assert can occur in connection with chapter 11 sales.

In RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065 (May 29, 2012), the Supreme Court resolved an important circuit split concerning the right of secured creditors to credit bid in cases under chapter 11 of the Bankruptcy Code – disagreeing with decisions reached by the Third and Fifth Circuits and holding that under section 1129(b)(2)(A) of the Bankruptcy Code, secured creditors may not be denied the right to credit bid at a sale of their collateral pursuant to a chapter 11 plan of reorganization.

This article first explores secured creditors’ rights to credit bid at both sales of real and personal property under state law, as well as pre-Bankruptcy Code law supporting the right in bankruptcy of a secured creditor to credit bid. Next, it reviews the case law addressing the right to credit bid in cases under the Bankruptcy Code, including the rarely disturbed right to credit bid at pre-plan sales conducted pursuant to section 363 of the Bankruptcy Code and the interplay between sections 1111(b) and 1129(b)(2)(A) of the Bankruptcy Code in connection with credit bidding in sales of collateral under a plan. Finally, the conflicting opinions of the Third, Fifth and Seventh Circuits and the Supreme Court’s RadLAX decision are considered, together with a key issue never reached by the Supreme Court – the proper interpretation of the “indubitable equivalence” standard under section 1129(b)(2)(A)(iii).

Keywords: credit bidding, Bankruptcy Code, Chapter 11

JEL Classification: G33, G34, K20, K39