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Credit Bidding Case Hits Supreme Court on Monday

The Supreme Court of the United States will hear arguments Monday in one of the few cases this year directly related to creditors and bankruptcy. The decision, expected to follow next week's hearing by a couple of months, will go a long way to clearing up unwanted uncertainty regarding the use of credit bidding during bankruptcy-related assets auctions.

The federal justices will weigh RadLAX Gateway Hotel LLC v. Amalgamated Bank in the chambers of the high court. At stake is whether secured creditors will be able to use the value of money owed by the debtor selling assets at the auction table when the sale is part of the reorganization plan as opposed to straight cash, a process called credit bidding, as the U.S. Bankruptcy Court for the Seventh Circuit ruled in RadLAX. However, that view is competing with contrary decisions out of the U.S. Bankruptcy Courts for the Third and Fifth Districts, which preceded it and would limit credit bidding if widely adopted.

One camp of credit experts and attorneys believes that credit bidding within an auction process helps facilitate other bidding, thus driving up the price and providing a bigger pot for creditors—unsecured and secured alike—to draw from at plan confirmation time. However, there's the flip side that believes if too much is owed to a secured creditor, it essentially freezes out outside bidders and those with lower standing and can discourage a "robust" auction process.

What seems to be agreed upon is that conflicting judgments, even if from respected bankruptcy courts, are not good for anyone in the process. Lynnette Warman, Esq., of Hunton and Williams LLP, and Wanda Borges, Esq., of Borges and Associates LLC, noted a degree of uncertainty will exist without the decision expected this summer and that's never a positive thing financially for credit-grantors or seekers.

"I think it will be very helpful," Borges said of the eventual ruling. "We have a split decision, and we need to put this to rest."

Warman believes the case could hinge on which justices take a particular interest in the case and who is responsible for writing the opinion on behalf of the high court. Still, neither side of the credit bidding argument can claim to be the prohibitive favorite going into arguments, especially with the Supreme Court's history on bankruptcy-related rulings.

"The court has not always been consistent in its decisions with its respect to the Bankruptcy Code," Warman noted.

NACM will be present at the RadLAX hearing and will post coverage following the Monday event on the NACM blog.

Brian Shappell, CBA, NACM staff writer