Credit Bid Improperly Denied by Auction Company

Credit Bid Improperly Denied by Auction Company

One of the most important protections that the Bankruptcy Code provides to secured creditors in the context of a sale of collateral is the right to bid up to the face value of their loan as consideration for the assets being sold. 11 U.S.C. § 363(k).

The Supreme Court has recognized that credit bidding protects a secured creditor “against the risk that its collateral will be sold at a depressed price […] [by enabling] the creditor to purchase the collateral for what it considers the fair market price (up to the amount of its security interest) without committing additional cash to protect the loan.” RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 644 (2012).

However, some claim that credit bidding “chills” or discourages bidding by third parties, especially when the credit bid exceeds the value of the collateral. Despite these concerns, courts have not been receptive to requests to limit the right to credit bid based solely on the potential to chill bids. See In re Aéropostale, Inc., 555 B.R. 369, 417 (Bankr. S.D.N.Y. 2016).

Although Section 363(k) allows courts to limit the right to credit bid “for cause”, courts have usually required a showing of inequitable conduct to do so. See In re Fisker Auto. Holdings, Inc., 510 B.R. 55 (Bankr. D. Del. 2014). Even then, courts are hesitant to deny the right to credit bid in its entirety and, instead, opt to limit the amount that the creditor can credit bid.

In a recent case, an auction company denied a secured creditor the right to credit bid because the credit bid did not comply with the company’s funds verification procedure.

When the debtor asked the bankruptcy court for approval of the sale to the highest bidder, the secured lender objected, arguing that the requirements under Section 363 had not been met and that it was improperly denied the right to credit bid.

The debtor raised two arguments in favor of approval of the sale: (1) that the creditor waived its right to credit bid by not objecting to the sale procedures order or objecting at the time of the auction, and (2) that the interest in the finality and stability of 363 sales counseled in favor of not disturbing its result.

The first argument was rejected because, according to the court, the secured creditor had no reason to object to the sales procedures order, since such order did not purport to limit the right to credit bid.

Similarly, the court was satisfied in that the secured creditor attempted, but was not allowed, to credit bid during the auction. In sum, the court found that the creditor’s objection was appropriately raised once the request to approve the sale was before the court.

The second argument was also unsuccessful, given that the court deemed that considerations of finality and stability must yield to fundamental rights expressly protected by the Bankruptcy Code. https://www.govinfo.gov/content/pkg/USCOURTS-ianb-6_21-bk-00478/pdf/USCOURTS-ianb-6_21-bk-00478-0.pdf