Section 363(k)

Credit bid

1Section 363(k) – Credit Bidding

Section 363(k) provides as follows:

At a sale under subsection (b) of this section of property that is subject

to a lien that secures an allowed claim, unless the court for cause
orders otherwise the holder of such claim may bid at such sale, and, if
the holder of such claim purchases such property, such holder may
offset such claim against the purchase price of such property.

“‘A credit bid allows a secured lender to bid the debt owed it in lieu of other

currency at a sale of its collateral.’” In re Howard, No. 11-11254, 2012 WL

314074, at *3 (Bankr. E.D. Tenn. Feb. 1, 2012) (quoting Citizens Bank v. Official

Comm. of Unsecured Creditors (In re Philadelphia Newspapers, LLC), 599 F.3d

298, 320 (3d Cir. 2010)).

When a secured creditor credit bids, if it purchases the property, it

may “offset such claim against the purchase price of such property.”
11 U.S.C. § 363(k); see In re Philadelphia Newspapers, LLC, 418
B.R. 548 (E.D. Pa. 2009), aff'd, 599 F.3d 298 (“[I]f the secured
creditor is the winning bid no exchange of currency occurs and the
amount of the bid is offset against the amount of the outstanding
debt.”).

Id. Credit bidding “provides a safeguard for secured creditors, by insuring against

the undervaluation of their collateral at an asset sale.” In re Aéropostale, Inc., 555

B.R. 369, 414 (Bankr. S.D.N.Y. 2016) (citing RadLAX Gateway Hotel, LLC v.

Amalgamated Bank, __ U.S. __, 132 S. Ct. 2065, 2070 (2012)).

 Cause Allowing a Court to “Order Otherwise”

“Under Section 363(k), a Bankruptcy Court is allowed to outright deny a

lender the right to credit bid as long as the denial is ‘for cause.’” Hybrid Tech

Holdings, LLC v. Official Committee of Unsecured Creditors (In re Fisker

Automotive Holdings, Inc.), No. 14-CV-99, 2014 WL 576370, at *2 (D. Del. Feb.

12, 2014). “The ‘modification or denial of credit bids should be the extraordinary

exception and not the norm.’” In re Aéropostale, 555 B.R. at 415 (quoting In re

RML Dev., Inc., 528 B.R. 150, 156 (Bankr. W.D. Tenn. 2014)). “‘A court may

deny a lender the right to credit-bid in the interest of any policy advanced by the

Code, such as to ensure the success of the reorganization or to foster a competitive

bidding.’” Id. at *3 (quoting Philadelphia Newspapers, 599 F.3d at 316, n.14 ).

Courts have denied “a secured creditor’s right to credit due to inequitable conduct”

or “when the validity of a creditor’s lien is in dispute.”

In re Aéropostale, 555 B.R. at 415-16 (citations omitted).

In In re Aéropostale, the court allowed secured lenders to credit bid, finding

no “inequitable conduct,” no “inappropriate behavior,” “no allegations of

collusion, undisclosed agreements, or any other actions designed to chill the

bidding or unfairly distort the sale process,” and observing the lenders had “been

relatively cooperative with the [sale] process.” 555 B.R. at 415-16 (distinguishing

other cases on the facts).

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 The bankruptcy court in Fisker recognized a right to credit bid, but capped

the amount to encourage bidding, fearing “that bidding will not only be chilled

without the cap; bidding will be frozen.” In re Fisker Automotive Holdings, Inc.,

510 B.R. 55, 60 (Bankr. D. Del. 2014). The court also found it “clear” that an

expedited sale process over a holiday season was “pure fabrication, designed to

place the maximum pressure on creditors and the Court.” Id. at 60, n.4. This “rush

to purchase” was “inconsistent with the notions of fairness in the bankruptcy

process.” Id. at 60-61.

The court in Free Lance-Star Publishing Co. of Fredericksburg, VA, 512

B.R. 798 (Bankr. E.D. Va. 2014) took the Fisker ruling one step further. The court

expressed its disapproval of the credit bidder’s “inequitable” conduct in attempting

to pad its security interest, pressuring the debtor into a sale process, and in

depressing, rather than enhancing, market value. It went on to question the

creditor’s “loan-to-own strategy in order to acquire the target company,” finding

that it “depressed enthusiasm for the bankruptcy sale in the marketplace.” Id. at

806. Despite its inequitable conduct, the court did “not extinguish [the creditor]’s

right to credit bid entirely. But sufficient cause exists for the Court to limit that

credit bid amount in order to foster a robust and competitive bidding environment.”

Id. at 808 (limiting the credit bid to $1.2 million for assets on which it had

$12.7 million “valid, properly perfected lien”).

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updated November 18, 2016

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