A Secured Creditor's Absolute Legal Right to Credit Bid (Part 2)

James Lawniczak considers the circuit split over whether a secured creditor has an absolute right to credit bid when its collateral is being sold through a chapter 11 reorganization plan. Looking in detail at the Seventh Circuit's decision in River Road Hotel Partners, which held that Bankruptcy Code section 1129(b)(2)(A) did confer such an absolute statutory right, the author contrasts the decisions in Philadelphia Newspapers and Pacific Lumber.

Excerpt:

In a case that has created a conflict among the circuit courts of appeals on two separate issues of statutory interpretation, the Seventh Circuit determined that a secured creditor has an absolute statutory right to credit bid when its collateral is being sold through a chapter 11 plan of reorganization. River Road Hotel Partners, LLC v. Amalgamated Bank (In re River Road Hotel Partners, LLC), 2011 U.S. App. Lexis 13131 (7th Cir. June 28, 2011). The decision conflicts with the results in the two previous circuit court of appeals cases, In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010), and Bank of N.Y. Trust Co., NA v. Official Unsecured Creditors' Committee (In re Pac. Lumber Co.), 584 F.3d 229 (5th Cir. 2009) [an enhanced version of this opinion is available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law] .

Section 1129(b)(2)(A) of the Bankruptcy Code [an annotated version of this statute is available to lexis.com subscribers] is the applicable statutory provision that the three courts considered and interpreted. The issues before the courts were of statutory interpretation. The first issue considered by the River Road was whether Bankruptcy Code section 1129(b)(2)(A)(ii), which provides that a plan can be confirmed over the objection of a secured creditor where the collateral is being sold and the secured creditor has the right to credit bid, is the exclusive cramdown provision of the Code applicable to sales pursuant to a plan. The court said it was. The second issue that River Road discussed was whether a secured creditor can be found to have received the "indubitable equivalent" of its claim when its collateral is sold at auction if the secured creditor did not have the right to credit bid. The court said no. Thus, in the Seventh Circuit, a secured creditor now has the absolute right to credit bid when its collateral is being sold pursuant to a plan.

Review of the Applicable Statutory Provisions

Sales of assets outside the ordinary course of business are generally governed by section 363(b) of the Bankruptcy Code. Section 363(k) provides that, in a sale governed by section 363(b), a secured creditor has the right to credit bid its claim, "unless the court for cause orders otherwise."

Sales pursuant to a plan of reorganization are governed by subchapter II of chapter 11 of the Code, principally sections 1123 and 1129. Thus, section 363(k) and the right to credit bid are not directly applicable when assets are sold pursuant to a plan. Subsection 1123(a)(5) states that a chapter 11 plan of reorganization shall provide adequate means for implementation, thereafter listing 10 nonexclusive examples of what might be such adequate means, including (D) "sale of all or any part of the property of the estate, either subject to or free of any lien . . . ."

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