Seventh Circuit Holds that Secured Lenders Must Have the Opportunity to Credit Bid in Asset Sales Under a Chapter 11 Plan

“Credit bidding” refers to the ability in bankruptcy of a secured creditor to bid up to the amount of its secured claim in order to acquire the assets against which it holds a lien.  By allowing a secured creditor to bid up to the full amount, even where the fair market value of the collateral is less than the amount of the debt, the secured creditor can protect against the undervaluation of its collateral in the bankruptcy sale process.  While Section 363(k) of the Bankruptcy Code guarantees the right of a secured creditor to credit bid in sales under Section 363, absent certain extraordinary circumstances, two recent opinions from the Third and Fifth Circuits had created substantial doubt as to whether the secured creditor’s right to credit bid is, in fact, absolute.  In those appeals, arising in the context of asset sales conducted in conjunction with Chapter 11 plans of reorganization, the Third Circuit (In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010)) and the Fifth Circuit (In re Pacific Lumber Co., 584 F.3d 229 (5th Cir. 2009)) held that a debtor may sell a secured creditor’s collateral free and clear of liens without providing the secured creditor with a right to credit bid in the sale process.  On June 28, 2011, the United States Court of Appeals for the Seventh Circuit confronted similar facts but reached a different legal conclusion.  We examine the background of the Seventh Circuit’s opinion, its legal analysis and the opinion’s implications for secured lenders.

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