A Secured Creditor's Absolute Legal Right to Credit Bid under 11 U.S.C. § 1129(b)(2)(A)

In this Emerging Issues Analysis, James M. Lawniczak addresses decisions from the Third and Fifth Circuits holding that secured creditors do not have an absolute legal right to credit bid when their collateral is sold through a plan of reorganization. While there may be a small swing in negotiation power towards plan proponents and away from secured creditors, he concludes that the decisions may not have that much practical significance.

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Mr. Lawniczak writes: In September 2009 and in March 2010, the Courts of Appeals for the Fifth and Third Circuits each considered whether a plan of reorganization could be confirmed over the objection of a secured creditor where the collateral was sold and the secured creditor was not given an opportunity to credit bid. In re Philadelphia Newspapers, LLC (free, unenhanced version available), 2010 U.S. App. LEXIS 5805 (3d Cir. Mar. 22, 2010); Bank of New York Trust Co., NA v. Official Unsecured Creditors' Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. Tex. 2009). Section 1129(b)(2)(A) of the Bankruptcy Code was the applicable statutory provision that the two courts considered and interpreted.

The legal issue before each court was one of statutory interpretation-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 provision of the Bankruptcy Code applicable to sales pursuant to a plan. The interpretation adopted by both courts of appeals allows plans to be confirmed over the objection of a secured creditor that is given the "indubitable equivalent" of its claim, because section 1129(b)(2)(A)(iii) is also available to a plan proponent even when collateral was being sold. Therefore, according to both courts, the right to credit bid when collateral is sold under a plan of reorganization is not absolute.

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The question before the courts of appeals in Philadelphia Newspapers and Pacific Lumber was whether a plan proponent seeking cramdown against a secured creditor class that does not accept the plan must use clause (ii) of section 1129(b)(2)(A). If yes, then the secured creditor would have an absolute right to credit bid unless, under section 363(k), "the court for cause orders otherwise." If the answer is no, then the plan proponent could proceed under clause (iii) and attempt to confirm the plan by proving that it had provided the secured creditor with the "indubitable equivalent" of its claim.

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See also: Podcast: LexisNexis® Bankruptcy Law Community Podcast featuring James Lawniczak of Calfee, Halter & Griswold on a secured creditor's absolute legal right to credit bid