Denying Secured Creditors the Right to Credit Bid in Chapter 11 Cases and the Risk of Undervaluation
Alan N. Resnick
Volume 63, Issue 2, 323-360
The Bankruptcy Code has reached a delicate balance between protecting the rights of secured creditors and providing financially troubled companies with flexibility in reorganizing their businesses. One protection that has been available to secured creditors is the right to “credit bid” at any sale of collateral free of liens, which allows the creditor to buy the property by offsetting its claim against the purchase price instead of paying cash. This right is designed to assure that property is not sold free of security interests at a price that is below the collateral’s true value. An inadequate sales price deprives the creditor of the full benefit of its security interest. The importance of credit bidding has grown as asset sales have become more common in chapter 11 cases.
Despite the universal view during the past three decades that the right to credit bid was essentially guaranteed when property is sold under a chapter 11 plan, two recent controversial decisions—the Fifth Circuit’s decision in In re Pacific Lumber Co. and the Third Circuit’s decision in In re Philadelphia Newspapers, LLC—curtailed this protection by holding that a secured lender may be denied the right to credit bid when its collateral is sold under a chapter 11 plan if the bankruptcy court makes a judicial finding that the creditor will realize the “indubitable equivalent” of its secured claim without credit bidding.