U.S. Supreme Court Upholds Bank’s Right to Credit Bid in Bankruptcy

On May 29, 2012, the U.S. Supreme Court issued a unanimous opinion Radlax Gateway Hotel, LLC v. Amalgamated, rejecting a Chapter 11 bankruptcy debtor’s plan which proposed to sell their property free and clear of the Bank’s liens and repay the Bank with the sale proceeds, but failed to permit the Bank to credit-bid at the sale to protect its security interest in the property.  The Court held that the debtor’s proposal to provide the Bank with the “indubitable equivalent” of its secured claim, in the form of cash generated by the auction, did not satisfy the requirements of §1129(b)(2)(A) of the Bankruptcy Code.  The Court recognized that a secured creditor’s ability to credit-bid helps to protect a creditor against the risk that its collateral will be sold at a depressed price and enables the creditor to purchase the collateral for a fair price without committing additional cash to protect the loan.  Banks and other security creditors cannot be forced to throw good money after bad in a cash-only bankruptcy auction in order to protect the value of their claim.

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