Contributed by Abigail Lerner
Nearly six months ago, the secured lenders in the River Road Hotel Partners, LLC v. Amalgamated Bank bankruptcy cases, and no doubt lenders nationwide, breathed a sigh of relief as the United States Court of Appeals for the Seventh Circuit concluded that a lender had a right to credit bid on assets sold pursuant to a plan of reorganization. Specifically, the Seventh Circuit ruled that the debtors’ plans could not be confirmed because they sought to sell encumbered assets free and clear of liens without allowing the lenders to credit bid, reasoning that the right to credit bid was protected by section 1129(b)(2)(A)(ii) of the Bankruptcy Code, which cross-references section 363(k) and preserves credit bid rights unless the court, for cause, orders otherwise. Our Blog post on the River Road decision can be found here.
The Seventh Circuit’s ruling ran contrary to the decisions of its sister circuits on the issue. Specifically, the Fifth Circuit, in Pacific Lumber, and the Third Circuit, in Philadelphia Newspapers, held that a plan that contemplates a sale of assets free and clear of liens may be deemed “fair and equitable” under section 1129(b)(2)(A) of the Bankruptcy Code even in the absence of a provision that allows for credit bidding. The split among the circuits left lenders and debtors alike wondering whether they could be precluded from credit bidding when assets are sold pursuant to a plan.
On December 12, 2011, the United States Supreme Court granted the River Road debtors’ petition for certiorari, agreeing to tackle the question of whether a debtor may pursue a chapter 11 plan that proposes to sell assets free of liens without allowing the secured creditor to credit bid, but instead providing it with the indubitable equivalent of its claim under section 1129(b)(2)(A)(iii) of the Bankruptcy Code. The Supreme Court’s decision, expected toward the end of the Court’s term in June 2012, likely will have significant implications for secured lenders and their rights in chapter 11.