On July 1, , the Court of Appeals for the Federal Circuit (CAFC) issued an opinion vacating and remanding the decision of the United States. Feb 28, · If there is a bona fide dispute as to the validity, extent or priority of the secured creditor's lien or the amount of its allowed claim, the Bankruptcy Court may condition the creditor's ability to credit bid on the creditor's agreement to pay the purchase price in cash if the claim is ultimately karacto.xyz: Boris I. Mankovetskiy. These issues are presented in this appeal from the Order of the District Court denying the application of the appellant for review of an Order of the Referee in Bankruptcy which denied appellant's petition for the return of his bid deposit and then went further and directed him to pay the balance of the bid.
In such circumstances, the credit bidder may be able to allocate value between its collateral and the assets not subject to its lien, and provide separate consideration in addition to the credit bid for the assets that are not subject to the bidder's lien. Allocating value to specific assets can be challenging. Although there was a divergence of opinion whether only the secured portion based on the value of the collateral or the full amount of the claim can be credit bid, the prevailing view today is that a secured creditor can credit bid up to the full face amount of its claim.
A creditor who credit bids its secured claim at a sale under Section k can also include in its bid interest and costs to the extent permitted under the governing loan documents. First lien lenders can credit bid their debt on the assets subject to their first lien. Second lien or junior lenders can also credit bid their debt, as long as they pay in cash the full amount of the claims of lenders in front of them first including interest and fees under applicable loan documents.
Section k of the Bankruptcy Code provides that the court can deny a credit bid for cause. The term "cause" is not defined in Section , but it is intended to be a flexible concept enabling a court to fashion an appropriate remedy on a case-by-case basis.
Further, the language of Section k does not prohibit a bankruptcy court from placing conditions upon a secured creditor's ability to credit bid. Typically, "cause" to deny a credit bid may be found where i there is a bona fide dispute as to the extent, validity or priority of the creditor's lien in the property for which it seeks to credit bid; ii there is a bona fide dispute as to the allowed amount of the creditor's claim; iii when determining the status of a creditor's security interest or lien in the property would substantially extend the sale process and diminish the value of the property being sold; or iv where the secured creditor fails to follow the bidding procedures established by the Bankruptcy Court.
Frequently, unsecured creditors who, as a result of the credit bid would not receive any recovery, attempt to foil the credit bid by challenging the validity or priority of the secured creditor's lien. Some courts have criticized credit bidding by dominant creditors as unfair and likely to chill other bidding because a dominant creditor can submit a credit bid over and above the reasonable value of the assets.
If a pure credit bid, without any other consideration, is successful, then the bankruptcy estate receives no money for the assets sold, making it difficult or impossible for administrative expenses incurred during the bankruptcy case and other priority claims to be paid. If a sale based on a credit bid is likely to leave the debtor administratively insolvent, the Bankruptcy Court may be inclined not to approve the sale based on a credit bid without any cash component necessary to maintain the estate solvent.
Some courts have held that the Bankruptcy Code does not afford a secured creditor an absolute right to credit bid when the sale of the debtor's assets is part of a plan of reorganization as opposed to a stand-alone Section sale. In those instances, to protect their collateral from being sold at depressed value, holders of secured debt still have the ability to bid in cash for their collateral at an auction, with the expectation that they will receive most of the cash used in the bid back on account of their allowed secured claims.
In a simple credit bid scenario a single lender holds both the claim and the lien securing the claim. In syndicated loan transactions, each member of the syndicate holds a separate claim against the debtor, but the lien securing those claims is usually held by a collateral or administrative agent for the benefit of all members of the syndicate.
This does not mean, however, that only the agent can present a credit bid. Each lender, as a holder of a claim, can present a credit bid in the amount of the claim that it holds.
A number of recent Bankruptcy Court decisions have confirmed that, although the right to credit bid belongs to the individual lender, the collateral agent, under appropriate circumstances, can make a credit bid in the full amount of the outstanding loan on behalf of the entire syndicate. The courts in those cases have focused on the governing loan documents and concluded that when the loan documents give the agent the right to exercise remedies upon default with the consent of the majority of lenders, the agent can credit bid the full amount of the syndicated facility pursuant to the direction of the majority over an objection of minority lenders.
This leads to the question of what treatment must be afforded to those members of the syndicate who oppose the credit bid. The answer again lies in the governing loan documents. In most syndicated loan transactions, lenders agree to share recoveries on their claims on a pro rata basis. One way to satisfy this requirement could be for the lender or group of lenders who made a successful credit bid to provide a cash paydown to the non-credit bidding lenders that would yield the same net paydown for all members of the syndicate.
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