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Credit Bidding Gets Day in High Court in April

The Supreme Court of the United States has set an April date to consider the topic of credit bidding in bankruptcy auctions.

Supreme Court justices will hear arguments involving a Seventh Circuit Court of Appeals ruling in the Chicago case RadLAX Gateway Hotel LLC v. Amalgamated Bank on April 23. In that case, a lower court judge allowed a secured creditor to bid its claim in lieu of a cash bid. That directly conflicts with a pair of other cases including, most notably, the Third Circuit decision in Delaware in Philadelphia Newspapers LLC. In the latter, a creditor group was ruled against by a three-judge Third Circuit panel after it tried to use credit bidding in the auction of the company, which as operator of the Philadelphia Inquirer and Philadelphia Daily News owed the bidders a significant amount of money. The group eventually did gain control, but only after it pledged its own cash during a new auction set by the judge.

Credit bidding—the use of what is owed to a creditor instead of cash in the bidding process for said creditor to purchase/own assets at auction in a Chapter 11-based assets sale—has established two strongly opinionated camps. One alleges the process is often unfair and freezes out some lower-level credit-granters, effectively setting a ceiling for how much the auction can raise. Meanwhile, those in support find it can be helpful when applied in the proper context to get bids started in an asset sale that could otherwise generate low interest and poor returns for secured and unsecured creditors alike.

Brian Shappell, NACM staff writer