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Supreme Court Upholds Creditor’s Rights

Creditor-Side Bankruptcy by Peter N. Brewer, Esq.

On May 29, 2012, the United States Supreme Court held that a secured lender must be allowed to credit bid on the sale of secured property when it is sold “free and clear” of liens.  In RadLAX Gateway Hotel, LLC v. Amalgamated Bank, the debtor was a developer who was attempting to build a Radisson Hotel.  The debtor ran out of funds and filed for bankruptcy.  While in bankruptcy, the debtor proposed to sell its assets with almost all of the proceeds going to the secured creditors who were owed more than $120,000,000.

In a Chapter 11 bankruptcy, the debtor is allowed to propose a sale of property that will remove all liens, including any liens secured by the property.  This sale can occur even over the objection of the secured creditor and even if the creditor will not paid in full from the sale proceeds.  Previously, as part of such a plan, creditors were not able to credit bid the amount of their lien.  (A credit bid is where the secured lender will be able to bid up to the amount it is owed without actually putting in additional funds.)  The right to credit bid was especially important in this case because the “stalking horse” buyer was only offering $47,500,000.  (A stalking horse buyer is the first party to make an offer to purchase a debtor’s asset.)  Thus the secured lender would have lost more than half of its loaned funds.

In order to drive up the bidding for the properties the creditors challenged the plan.  Both the bankruptcy court and the appellate court held that the plan was not acceptable because it did not allow for the creditor to credit bid the amount of its lien.  This was contrary to two earlier appellate court decisions that had examined this issue and ruled that the right to credit bid was not necessary for the plan.

In affirming the lower court and reversing the two other appellate courts, the Supreme Court of the United States noted the importance of the right to credit bid.  Not only does the right to credit bid give creditors the right they bargained for when they made the loan, it also helps to prop up the value of the collateral, making for a more competitive bidding situation.

The takeaway from this ruling is that bankruptcy plans that attempt to sell property “free and clear” of all liens must treat the creditors fairly, and must allow them the right to credit bid the amount they are owed.

If you or someone you know may need legal assistance regarding such matters, please contact Brewer Offord & Pedersen LLP at (650) 327-2900 or visit us on the web at www.BrewerFirm.com to schedule an appointment with one of our knowledgeable attorneys.

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