Last year, the Bamberger Blog reported on a disturbing decision by the United States Court of Appeals for the Third Circuit in the In Re: Philadelphia Newspapers case. A link to that article is here, and that article described the importance of credit bid rights to secured creditors and how the Third Circuit impaired them.
At that time, we indicated that we believed that the Third Circuit’s interpretation was faulty, and we expressed hope that the decision would not be followed by other Circuits. In an important move for lenders doing business in Indiana and Illinois, the Seventh Circuit late last month refused to follow the Third Circuit’s impairment of credit bid rights. In In Re: River Hotel Partners, LLC, Case Nos. 10-3597,10-3598, the Seventh Circuit performed its own analysis of the credit bid requirements to the Bankruptcy Code.
The Seventh Circuit recognized that “in essence, by granting secured creditors the right to credit bid, the [Bankruptcy Code] promises lenders that their liens will not be extinguished for less than face value without their consent. This protection is important since there are number [sic] of factors that create a substantial risk that assets sold in bankruptcy auctions will be under valued.” The Seventh Circuit went on to correctly find that the better interpretation of the Code’s credit bid rules is that a Plan of Reorganization that calls for the sale of the Debtor’s assets must include credit bid rights if demanded by the secured lender.
The Seventh Circuit’s decision now creates a split in the Circuits that the Supreme Court may be called upon in time to address. In the interim, secured lenders must be mindful that the location of the bankruptcy filing will have an impact on their credit bid rights, and that different post-petition negotiation positions may be required depending on the location of the case.
Author: Andrew C. Ozete (bio)
Phone: 812.452.3582
email: aozete@bamberger.com