Credit Bidding, Security, and The Obsolescence of Chapter 11

Chapter 11 was a monumental achievement when it was enacted as part of the Bankruptcy Code in 1978. Reflecting the financial world of the times, chapter 11 and related provisions effected a carefully calibrated balance between the rights and powers of competing stakeholders. A core component of that delicate balance was to protect the right of secured creditors to “credit bid” if their collateral was being sold, whether during the pendency of the case or in a cramdown reorganization plan. Some high-profile recent cases denied secured creditors the right to credit bid in a sale under a cram-down plan, concluding that alternative protection may be afforded through invocation of the “indubitable equivalent” option. The Supreme Court, however, upheld the secured creditor’s right to credit bid in a plan sale in Gateway Hotel, LLC v. Amalgamated Bank RadLAX. The Court decided RadLAX on very narrow statutory grounds.After a detailed examination of the nature of secured credit and the historical evolution of the treatment of secured claims in bankruptcy, this Article first explains why, on the statute as written in 1978, Congress intended for secured creditors to have the right to credit bid in a sale under a cram-down plan and did not intend for that right to be supplanted by an alternative indubitable equivalent treatment. In RadLAX, the Supreme Court agreed. The Article then demonstrates, however, how the financial world for which the 1978 Code was written has fundamentally changed, with the rise of dominant secured creditors. That change has upset the balance of power, rendering the Code’s scheme obsolete as regards secured creditors in this context.The Article then asks what can and should be done, either judicially or legislatively, to address the problem of chapter 11’s obsolescence. As a matter of statutory interpretation, a “faithful” Court should be bound to uphold the secured creditor’s right to credit bid, as the Supreme Court did in RadLAX, although a dynamic interpretation might counsel otherwise. Legislatively, the time has come to amend the Bankruptcy Code to reverse the default rule on credit bidding; suggested Code amendments are offered. Contrary to the virtually unanimous body of scholarly opinion, the Article argues that credit bidding should not presumptively be required. Instead, a secured creditor should be permitted to credit bid only if it makes a specific showing of “cause” to the court, demonstrating how denial of that right would prejudice the secured creditor in the particular case.

The full text of this Article is available to download as a PDF.