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Limiting Credit Bidding for 'Cause' Under Section 363(k)
Recently, the ABI Commission to Study the Reform of Chapter 11 released its 2012-2014 Final Report and Recommendations. There, the Commission acknowledged “the fundamental role of credit bidding under state law and section 363(k)” and that “all credit bidding chills an auction process to some extent.” Final Report at 146-47. The Commissioners stated that they did “not believe that the chilling effect of credit bids alone should suffice as cause under section 363(k).” Id. The Commissioners implicitly rejected the contrary reading of “cause” tendered by the Third Circuit in In re Philadelphia Newspapers, LLC, 599 F.3d 298 (2010) and both cited and seemingly applied, to some degree, in In re Fisker Automotive Holdings, Inc., 510 B.R. 55 (Bankr. D.Del. 2014) and in In re The Free Lance-Star Publishing Co. of Fredericksburg, VA, 512 B.R. 798 (Bankr. E.D. Va. 2014).
Throughout the present discussion, we will refer to the reading of “cause” tendered in Philadelphia Newspapers and rejected by the ABI Commission as the “In and Of Itself” reading, for it would justify a finding of “cause” to limit credit bidding in a bankruptcy sale based on the chilling effect of credit bidding in and of itself.
We agree with the Commission's rejection of the In and Of Itself reading of “cause” in section 363(k). Below, we trace the outlines of arguments that: 1) the In and Of Itself reading of “cause” has no precedent prior to Philadelphia Newspapers and is scarcely supported there; and 2) application of the In and Of Itself reading is not justified on policy grounds, as is proposed by Philadelphia Newspapers.
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