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Supreme Court Rules in Favor of Right to Credit-Bid

May 29, 2012

As appeared in The Deal

In the RedLAX case, the US Supreme Court ruled that secured creditors must be allowed to credit-bid for a debtor’s assets, in a way that offsets the offer against the balance owed.

According to Madlyn Primoff, a partner in the New York bankruptcy and restructuring department at Kaye Scholer LLP, “Many observers of the case were surprised at the decision in the Philadelphia Newspapers' case, thinking it was an easy decision, as selling collateral without giving a secured creditor the opportunity was not a legitimate course of action. In contrast, RadLAX assured a lender that they would get repaid or get their property.”

Calling the Supreme Court ruling an "excellent decision" from a "clear and unanimous voice,” Primoff explained: "Certainly, it does settle once and for all that the general rule is that [a secured] lender is entitled to credit-bid. ... [It's] as clear and as strong a precedent as any of us can get on any issue."

“Under Section 363(k) of the Bankruptcy Code, bankruptcy courts could still keep a lender from credit-bidding if cause existed, but such a move would take a debtor into uncharted waters,” Primoff added. “There is very little precedent. ‘Cause’ to me suggests some sort of wrongdoing on the lender's part, or if the creditor was not playing fair.”

Primoff concluded: “Debtors have always had that right but I have never seen that employed to deny a lender the right to credit-bid."

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