Supreme Court Protects Secured Creditors' Rights in Bankruptcy

The Supreme Court Holds That Debtors May Not Deprive Secured Creditors of a Right to Credit-Bid in Bankruptcy Sales

June 1, 2012

On May 29, 2012, the Supreme Court ruled that a secured creditor cannot be denied the right to credit-bid on collateral that is sold free of liens through a Chapter 11 plan. Radlax Gateway Hotel, LLC et al. v. Amalgamated Bank, U.S. No. 11-166, (argued April 23, 2012, decided May 29, 2012).

This week's decision resolved a recent split amongst the United State Courts of Appeals. In Radlax, the Supreme Court unanimously upheld the Seventh Circuit's ruling in an opinion by Justice Scalia, who called this an "easy case." The Court held that "the debtors may not obtain confirmation of a Chapter 11 cramdown plan that provides for the sale of collateral free and clear of the [B]ank's lien, but does not permit the [B]ank to credit-bid at the sale, we affirm the judgment." Previously, the Third and Fifth circuits each confirmed plan sales that deprived secured creditors of their right to credit-bid. See In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010); Scotia Pacific Co., LLC, v. Official Unsecured Creditor's Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. 2009).

Now, the Court has promulgated a bright-line rule that secured creditors must be allowed to credit-bid in a sale of collateral pursuant to a Chapter 11 plan