Chapter I Introduction

• Jurisdiction: United States

Chapter I Introduction

Under both state law and bankruptcy law, a creditor with a perfected lien in a debtor's property has certain rights and remedies vis-a-vis the debtor and its collateral. Among other things, the secured creditor can generally credit bid the amount of its allowed claim in any sale of its collateral by its debtor. A secured creditor's right to credit bid is expressly preserved in bankruptcy law pursuant to § 363(k) of title 11 of the U.S. Code (the "Bankruptcy Code"), which provides:

At a sale under subsection (b) of this section of property that is subject to a lien that secures an allowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property.¹

The right of a secured creditor to credit bid is likewise expressly recognized in § 1129(b) of the Bankruptcy Code, which addresses the scenario wherein a secured creditor's assets are sold in a cramdown chapter 11 plan.²

Credit bidding ensures that the secured creditor receives the basic benefit of its bargain. It enables a secured creditor to compete with cash bids from third parties by allowing the secured creditor to bid up to the full amount of its secured obligation in a sale of its collateral. It thereby preserves a secured creditor's fundamental nonbankruptcy right to get either the money owed to it or the property securing its debt, and protects a secured creditor from a sale of its collateral for less than its full value.

Although credit bidding is acknowledged as an important part of the secured creditor's bundle of rights, some argue that in certain circumstances credit bidding can chill bidding or otherwise prevent the debtor from maximizing the value of its assets. Perhaps for this very reason, Congress saw fit, in enacting § 363(k) of the Bankruptcy Code, to expressly permit a bankruptcy court to limit a secured creditor's credit bid "for cause." Because the term "cause" is not defined in the Bankruptcy Code, there has been significant litigation in bankruptcy cases over the years regarding the merits of credit bidding generally, and when it is appropriate to prohibit or limit a secured creditor's credit bidding rights.

This book provides a general overview of credit bidding in bankruptcy. While the issues and cases discussed herein could fill a much larger book, the purpose of this book is to provide...