Agent May Consent to a "Free-and-Clear" Sale or Credit Bid under Section 363 of the Bankruptcy Code over Objection of Dissenting Minority Secured Lenders

In August 2009, the United States Court of Appeals for the Second Circuit held that a dissenting minority lender could not object to a "free-and-clear" sale in circumstances where the loan documents authorized the agent to act on behalf of the secured lenders and a majority in interest of the lenders consented.
In this commentary, Paul Zumbro, of Cravath, Swaine & Moore LLP, analyzes the decision in In re Chrysler LLC, 2009 U.S. App. LEXIS 17441 (2d Cir. Aug. 5, 2009), in which the court considered whether the consent requirement of section 363(f)(2) could be satisfied without the unanimous consent of the secured lenders. He writes:
     It has become increasingly popular for a debtor to utilize section 363 of the Bankruptcy Code to sell all or substantially all of its assets. Given the highly leveraged capital structure of many debtors, the agent for the secured lenders is often playing a primary role in the section 363 sale process by acting at the direction of the secured lenders to consent to a sale free and clear of interests or to use the secured lenders' claims as currency to buy the debtor's assets in a "credit bid."
     The courts rejected the Indiana Funds' argument that the amendment and waiver provision of the credit agreement required that the administrative agent receive the consent of all lenders before it could authorize the collateral trustee to release all or substantially all of the collateral. Rather, the transfer of the debtors' assets to New Chrysler pursuant to section 363 of the Bankruptcy Code was simply a "collective action to enforce rights as authorized under the agreed-upon specific provisions of the parties' loan agreements," which did not require any amendment, supplement or modification of the loan documents. The Second Circuit stated that "[b]ecause the Sale required no amendment to loan documents, Chrysler was not required to seek, let alone receive, the [dissenting lenders'] written consent." Moreover, the consent to the sale was not a "release" of collateral because the secured lenders' lien would attach to the proceeds of the sale, which remained as collateral to secure the loan made by the lenders.
   [R]ecent decisions suggest that when secured lenders broadly delegate to an agent or trustee the power to take collateral enforcement actions or to exercise any other remedies against the collateral, an objecting secured creditor will likely be bound by the decision of lenders holding a majority of the indebtedness. When a secured lender enters into syndicated loan agreement containing provisions like the ones examined in Chrysler and In re GWLS Holdings, Inc., 2009 Bankr. LEXIS 378 (Bankr. D. Del. Feb. 23, 2009) (appeal pending).it is agreeing to a collective arrangement under which the agent or trustee may be authorized to exercise remedies under section 363 of the Bankruptcy Code, including to consent to the sale of all or substantially all of a debtor's assets free and clear of any liens or interests or to credit bid for a debtor's assets, without receiving the unanimous consent of the secured lenders.
(citations and footnotes omitted)
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