Does the Bankruptcy Code require credit bidding any time a sale of assets occurs under a plan? That question was posed recently during oral argument before the U.S. Court of Appeals for the Third Circuit in In re Philadelphia Newspapers, LLC.1 As of the deadline for this article, that question remains unanswered by the Third Circuit. However, the district court in that case, as well as the Fifth Circuit in its September 2009 ruling in In re Pacific Lumber Co.,2 have held in the negative. Consequently, secured lenders may no longer be able to rely on their long-established right to credit bid in a sale of collateral pursuant to a bankruptcy plan of reorganization.
Credit bidding is a secured party’s ability to “bid” the amount of its outstanding debt at a sale of its collateral. The secured party uses the amount of its debt as currency in an auction, and if it is the winning bidder, no exchange of cash occurs and the amount of the bid is instead credited against a like amount of the outstanding debt. Section 363(k) of the federal Bankruptcy Code3 (the “code”) expressly authorizes credit bidding, and the remedy has long been used under Article 9 of the Uniform Commercial Code and other non-bankruptcy laws governing secured transactions. Secured parties have relied on credit bidding to provide them a seat at the table in structuring a sale as well as to protect the value of their interest in collateral, including the opportunity to realize future appreciation in collateral value. By credit bidding their secured debt, secured parties can protect themselves from the risk that a collateral sale may not yield a fair price, whether because asset prices are depressed, the plan of sale requires payment of some proceeds to other creditors, or other reasons.
