Chapter VII Conclusion

• Jurisdiction: United States

Chapter VII Conclusion

Credit bidding in bankruptcy was once a fairly straightforward concept: Absent "cause," a creditor with a perfected lien in the debtor's property was entitled to bid the amount of its debt in a sale of its collateral by the debtor. "Cause," for the most part, was limited to cases involving extreme misconduct by the secured creditor or a legitimate challenge to the secured creditor's secured claim. In recent years, however, credit bidding has become one of the more hotly debated topics in bankruptcy law. Bankruptcy court decisions in Fisker and Free Lance-Star generated a great deal of discussion, and a circuit court split in Philadelphia Newspapers, Pacific Lumber and RadLAX, regarding whether a secured creditor must be afforded the right to credit bid in a sale of a debtor's assets under a plan, went all the way to the U.S. Supreme Court before finally being resolved.

Bankruptcy law has evolved tremendously in recent years. It is often stated that the fundamental goals of chapter 11 include rehabilitating the debtor and maximizing the value of estate assets for the benefit of all creditors. These goals were generally furthered in chapter 11 by a process that allowed a commercial enterprise to continue to operate its business and repay its creditors over time through a court-approved plan of reorganization or, alternatively, a sale of the enterprise as a going concern to a third party through a competitive auction process that would generate the highest or best return for the company's creditors. Within this framework, the ability of a secured creditor to credit bid was an important check and balance against the debtor in that it ensured that a secured creditor's collateral was not sold for less than its value.

For better or worse, this is not the typical chapter 11 case that we see today. With the emergence of such nontraditional lenders such as hedge funds and private-equity groups, today's large chapter 11 cases are now as much about acquisition as they are about traditional notions of reorganization. The "loan to own" phenomenon has become prevalent, and many chapter 11 cases now contemplate a sale of substantially all of the debtor's assets early in the case, often with the "loan to own" creditor serving as the DIP lender and the stalking horse. These dual roles allow such creditors to exert a great deal of control over the bankruptcy case.

In this context, credit bidding has increasingly been used for strategic purposes...