{"id":1291,"date":"2012-08-08T14:00:00","date_gmt":"2012-08-08T14:00:00","guid":{"rendered":"https:\/\/www.sherin.com\/real-estate\/2012\/08\/08\/supreme-court-affirms-secured-creditors-right-to-credit-bid\/"},"modified":"2017-03-30T14:58:25","modified_gmt":"2017-03-30T14:58:25","slug":"supreme-court-affirms-secured-creditors-right-to-credit-bid","status":"publish","type":"post","link":"https:\/\/www.sherin.com\/real-estate\/2012\/08\/08\/supreme-court-affirms-secured-creditors-right-to-credit-bid\/","title":{"rendered":"Supreme Court Affirms Secured Creditors\u2019 Right to Credit Bid"},"content":{"rendered":"

At the end of its most recent term, the U.S. Supreme Court unanimously affirmed the rights of secured creditors to \u201ccredit bid\u201d when their collateral is sold as part of a bankruptcy plan. The RadLAX Gateway Hotel, LLC et al. v. Amalgamated Bank<\/em><\/a> decision was necessitated by a split among the federal courts of appeals that left real estate developers and other companies with significant assets, as well as their secured creditors, confused about their rights in bankruptcy.<\/p>\n

The Bankruptcy Code<\/a> provides two different procedures for Chapter 11 debtors to sell property of the bankruptcy estate. Section 363 of the Code, which allows for the sale of property before a bankruptcy plan is approved, clearly allows secured creditors to bid the amount they are owed toward the purchase of the property. By \u201ccredit bidding,\u201d secured lenders can maximize the value that they receive for their collateral without needing to come up with additional cash. This gives them significant control over the sale process, and makes it difficult for other bidders to purchase the property without paying significant sums in cash.<\/p>\n

The alternative to \u00a7\u00a0363 is to sell property as part of a Chapter 11 plan. Bankruptcy Code \u00a7\u00a01123(b)(4), which governs these sales, is more ambiguous about whether secured creditors always have the right to credit bid.\u00a0 Since Chapter 11 plans usually need to be approved by each class of creditors, secured creditors have considerable leverage in negotiating Chapter 11 plans.\u00a0 If a plan is \u201cfair and equitable\u201d however, \u00a7\u00a01129(b)(1) allows a debtor to \u201ccram down\u201d the secured creditor\u2019s claim over its objection by reducing the value of the collateral to its market price.\u00a0 Section 1129(b)(2)(A) provides that a plan is fair and equitable if it permits, among other things, permits the creditor to credit bid or provides the creditor with the \u201cindubitable equivalent\u201d of its claim.\u00a0 Congress left it to the courts to determine what it meant by the indubitable equivalent of a claim.<\/p>\n

In recent years, the Third and Fifth Circuit Courts of Appeals held that Chapter 11 plans providing for a public auction sale of the property satisfied the \u201cindubitable equivalent\u201d requirement, and permitted plans to move forward even though they did not allow for credit bidding.\u00a0 These decisions gave debtors much more control over the outcome of their cases since they could force creditors to come up with cash to bid for their own collateral.\u00a0 The Seventh Circuit, based in Chicago, however, held that any plan to sell assets in Chapter 11 must permit secured creditors to credit bid.<\/p>\n

The Supreme Court agreed to take the appeal of the Seventh Circuit case, and upheld its ruling.\u00a0 Justice Antonin Scalia\u2019s<\/a> opinion for the unanimous Court, calling this an \u201ceasy case,\u201d held that the \u201cindubitable equivalent\u201d language was not an alternative to credit bidding, but rather applied only to plans for which neither the creditor\u2019s lien remained on the property, nor when the property was sold free and clear of the liens.\u00a0 It would apply, for example, when the creditor receives the property itself, which, would be, by definition, the indubitable equivalent of its secured claim.<\/p>\n

With this interpretation, the Court clarified that creditors always have the right to credit bid, regardless of the sale procedure chosen by a Chapter 11 debtor.\u00a0 Debtors, especially those with one primary asset such as commercial real estate developers and hotel owners, now need to come up with significantly more cash than their lenders in order to retain an interest in their property in a Chapter 11 case.\u00a0 They can no longer rely on the decisions of the Third and Fifth Circuits to strengthen their hand in their cases.\u00a0 Lenders, on the other hand, can now confidently control the sale price of their collateral and maximize their recovery in bankruptcy cases.\u00a0 Debtors and creditors alike will need to consider this case in their analysis of potential insolvency.<\/p>\n","protected":false},"excerpt":{"rendered":"

At the end of its most recent term, the U.S. Supreme Court unanimously affirmed the rights of secured creditors to \u201ccredit bid\u201d when their collateral is sold as part of a bankruptcy plan. The RadLAX Gateway Hotel, LLC et al. v. Amalgamated Bank decision was necessitated by a split among the federal courts of appeals […]<\/p>\n","protected":false},"author":1,"featured_media":1774,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":"","_links_to":"","_links_to_target":""},"categories":[],"tags":[],"class_list":["post-1291","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry"],"acf":[],"yoast_head":"\nSupreme Court Affirms Secured Creditors\u2019 Right to Credit Bid - Real Estate<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.sherin.com\/real-estate\/2012\/08\/08\/supreme-court-affirms-secured-creditors-right-to-credit-bid\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Supreme Court Affirms Secured Creditors\u2019 Right to Credit Bid - Real Estate\" \/>\n<meta property=\"og:description\" content=\"At the end of its most recent term, the U.S. Supreme Court unanimously affirmed the rights of secured creditors to \u201ccredit bid\u201d when their collateral is sold as part of a bankruptcy plan. 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