One of the great debates in bankruptcy law over the past year is whether a Chapter 11 debtor can hold a bankruptcy sale of a secured creditor’s collateral without affording the creditor the right to “credit bid” the amount of the debt against the purchase price bid at the sale. In a foreclosure sale conducted under state law, the foreclosing lender generally has the right to bid at the sheriff’s auction sale and offset the amount of the bid against the amount of the lien or judgment indebtedness.

This “credit bid right” is incorporated into the Bankruptcy Code as well. In bankruptcy, a sale of a debtor’s assets out of the ordinary course of business can be effectuated during the pendency of the case under Section 363, or in Chapter 11 under a plan of reorganization under Section 1129 of the Bankruptcy Code. Both provisions refer to a sale free and clear of assets being subject to the lienholder’s right to credit bid. Court decisions involving Section 363 sales deny the right to credit bid “for cause” if the secured party engaged in wrongful conduct. For decades, practitioners have assumed the credit bid right set forth in Section 1129 of the Bankruptcy Code extended to all asset sales, and a secured party would not be required to put up cash to buy back its own collateral if the sale occurred under a plan.

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