Chapter II., C. "Credit Bid" Rights

• Jurisdiction: United States

C. "Credit Bid" Rights

Another matter that must be addressed is the ability of a secured creditor (i.e. a creditor with a lien against assets) to be a bidder for those assets pursuant to the use of a "credit bid".²³ A "credit bid" is where a secured creditor submits a bid, and the consideration it will pay for the asset will be a credit against the debt that is secured by that asset. As such, a creditor who is owed $200 secured by a particular piece of machinery could come in and be an opening bidder with a credit bid of $100. If there is going to be bidding in open court, the secured creditor can continue to credit bid until it reaches the amount of its secured debt. Thereafter, if it continued to bid, it would have to pay the amount of its bid not covered by the secured debt.

The right to credit bid is not absolute, however. If there is a dispute about the validity of the secured lien against the asset (such as, for example, a perfection problem under applicable law or other dispute), the court might not allow the secured creditor to credit bid unless some protection is given to the bankruptcy estate should the lien be determined to not be valid. For example, sometimes creditors with disputed liens on assets are made to post a letter of credit or other security.

1. How Clear Channel Muddied the Sale Waters So what happens when a 363 sale is attempted on property where there is a junior lienholder that is "out of the money," and that lienholder does not wish to credit its own junior debt (i.e., the bid is not sufficient to pay the first and second liens in full)? On May 30, 2008, the Ninth Circuit Bankruptcy Appellate Panel (BAP) faced such a situation in In re Clear Channel Outdoor Inc.²⁴ In Clear Channel, the BAP held that a court could not sell property free and clear of a junior lien where (1) the lien was not in a bona fide dispute, and (2) the junior lienholder did not consent to the sale. The issue in that case was frankly one of bad argument at the lower court. The trustee in the lower court argued that § 363(f)(5) allowed the sale because the junior lienholder could be compelled in a legal or equitable proceeding to take partial money in satisfaction of its claim. The hypothetical proceeding the trustee relied upon (as has been done in numerous other cases) was a hypothetical cramdown under a plan. The BAP rejected this as within the purview of § 363(f)(5), holding that a plan cramdown had numerous procedural and substantive safeguards available...