Client Alert

Third Circuit Finds No Absolute Right To Credit Bid By A Secured Lender

March 25, 2010

The Finance and Restructuring Practice

A secured lenders well-worn tools to protect its security interest have included the right to credit bid when its collateral is being sold. Credit bidding refers to the ability of a secured lender to participate in a foreclosure or other form of auction for assets that are subject to its liens and, where the cash bids yield less value than the secured lender believes its collateral to be worth, to bid all or a portion of its debt in lieu of cash. Because any cash the secured lender pays would be round-tripped back to itself as proceeds of collateral, the lender need not actually put cash on the table; instead, it reduces the underlying debt by as much as it has to bid to take title to the collateral.

The same process has been long recognized in bankruptcy cases as well, and many lenders assumed the right to credit bid was absolute. In an appeal arising from the chapter 11 case In re Philadelphia Newspapers, LLC., however, a panel of the Third Circuit Court of Appeals ruled on March 22, 2010, that a debtor may, pursuant to a plan of reorganization, sell the secured creditors collateral free and clear of liens, and need not provide the secured lender with a right to credit bid in the sale process, so long as the plan otherwise provides the secured lender with the indubitable equivalent of its secured claim. For many secured lenders, the loss of a guaranteed right to credit bid will come as an unpleasant surprise.

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