On Tuesday, the U.S. Supreme Court upheld the ruling of though 7th U.S. Circuit Court of Appeals that said that a secured creditor has the right to make a “credit bid” involving sale of assets as part of a bankruptcy reorganization plan. Though, this point has been long at issue before the courts and several Circuit courts have ruled against such a supposition, in the instant case, the Supreme Court held that the 7th Circuit did not err in its judgment.
While affirming the judgment of the appeals court, Justice Antonin Scalia noted that a debtor may not obtain confirmation of such a Chapter 11 bankruptcy plan that does not permit the bank to make a credit bid at a sale of assets, but allows for sale of collateral under Chapter 11.
The Supreme Court said that the law on the matter was clear, “Although the jargon in this case is complicated, the statutory interpretation question is an easy one.”
The case involved the bankruptcy of RadLAX Gateway Hotel which wanted to block its lender, the Amalgamated Bank, from credit bidding – that is exchanging its debt for the hotel in a court-overseen auction, instead of paying cash.
The argument placed before the court to block the bank from making a credit bid was that it discourages third parties from participating in the auction. However, the bank argued that denial of their rights to credit bid could result in them having much less than the full value of the assets on auction.
The Supreme Court case is RadLAX Gateway Hotel v. Amalgamated Bank, No. 11-166.
