Credit Bids a No-Brainer, High Court Says

In a closely-watched decision, the US Supreme Court in RadLAX Gateway Hotel, LLC and RadLAX Gateway Deck, LLC v. Amalgamated Bank recently affirmed the right of secured lenders to use their debt as currency in bankruptcy auctions.

According to Madlyn Primoff, a bankruptcy and restructuring Partner at Kaye Scholer LLP, “It’s gratifying to see that the Supreme Court, in a unanimous decision, resolved the issue of whether secured lenders must be permitted to credit bid in favor of the Bankruptcy Code generally, and an interpretation of the Bankruptcy Code that comports with the understanding of most practitioners and scholars on this issue.”

“More than just the right to credit bid was at stake,” Primoff added. “Had the decision gone the other way, it could potentially have been open season for aggressive or clever borrowers and debtors to see what else they could get away with."

But by focusing narrowly on the language of the Bankruptcy Code, Primoff explained, the Supreme Court left some issues unresolved. “The words 'indubitable equivalence,' were used nearly 100 years ago in a decision by Justice Learned hand, and the words found their way into the Bankruptcy Code, although the Bankruptcy Code doesn’t define what they mean. Some people were hoping the Court would clarify their meaning in its decision."

“Another striking thing the decision leaves unclear,” continued Primoff, “is an exception to a secured lenders' right to credit bid that was not addressed by the RadLAX case. The statute says if there’s going to be a sale under a plan, it has to comply with [Section] 363k, which gives secured lenders the right to credit bid, unless the court orders 'for cause’ otherwise. In footnote 3, the Court refers to this exception, and notes that the Bankruptcy Court below found no cause to deny credit bidding. This leaves open a crack, and a debtor could ask that the secured lender be denied the right to credit bid ‘for cause.’"

“But in a typical situation, there needs to be some material showing, like bad faith, or manipulation of the process before a court would consider denying a credit bid,” Primoff concluded.