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.
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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Secured Creditor's Absolute Legal Right to Credit Bid
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