Credit Bidding: Secured Creditor Beware

Credit bidding has historically been a valuable right afforded to secured creditors under the Bankruptcy Code and state law. It permits the secured creditor who has a perfected lien on the debtor's property to bid the amount of its allowed claim in any sale of its collateral, without paying cash for its bid. Rather, the secured creditor can set off the amount of its secured claim against the purchase price. Secured creditors may credit bid, not only in the context of a section 363 sale, but also in the context of a Chapter 11 plan. The Supreme Court in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S.Ct. 2065 (2012) established that when collateral is sold free and clear of a creditor's lien through a Chapter 11 plan, the secured creditor must be permitted, subject to the provisions of section 363(k), to bid on the assets using its outstanding secured debt. The right to credit bid under section 363(k) of the Bankruptcy Code can be an important safeguard that protects a secured creditor against the risk that its collateral may be undervalued at an asset sale, and courts have traditionally described a secured creditor's right to credit bid as fundamental and near absolute. However, as some bankruptcy courts have recently reminded us, the right is not absolute, and may be limited by the bankruptcy court “for cause” under section 363(k) of the Bankruptcy Code.