A secured creditor’s right to credit bid and the interplay of that right when a secured creditor’s collateral is being sold under a Chapter 11 plan has recently been put in focus by two court decisions: (i) In re Pacific Lumber Co ., 2009 WL 3082066 (5th Cir. Sept. 29, 2009); and (ii) In re Philadelphia Newspapers, LLC, et al., No. 09-11204, Docket No. 1234 (Bankr. E.D. Pa. 2009). While these opinions address various issues, this article focuses on each decision’s analysis of whether a debtor can satisfy the “indubitable equivalent” prong of section 1129(b)(2)(A) of the bankruptcy code when a Chapter 11 plan proposes to sell the secured creditor’s collateral and preclude the secured creditor from credit bidding in that sale. In light of these recent decisions, and because of the sale of a secured creditor’s collateral under a Chapter 11 plan has grown significantly in popularity, a debtor’s ability (or inability) to extinguish a secured creditor’s right to credit bid under a Chapter 11 plan is bound to become a heavily debated issue.

Generally, for a plan to be approved over the dissent of a secured creditor class, the proposed plan must be “fair and equitable” to that class. Section 1129(b)(2)(A) specifies three ways this standard may be met. Clause (i) of section 1129(b)(2)(A) provides that a plan may be fair and equitable if the secured creditor retains its lien and is given the right to receive deferred cash payments having a present value equal to the collateral’s value. Clause (ii) states that a plan may be fair and equitable where the collateral is sold free and clear of liens, with the liens attaching to the proceeds, so long as the creditor has the right to credit bid pursuant to section 363(k) (the “Sale Prong”). Clause (iii) provides that a plan may be a fair and equitable plan where it offers the secured creditors the “realization . . . of the indubitable equivalent of such claims” (the “Indubitable Equivalent Prong”).

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