Credit Bidding and the Design of Bankruptcy Auctions

26 Pages Posted: 1 Feb 2010 Last revised: 21 Jul 2013

See all articles by Vincent S. J. Buccola

Vincent S. J. Buccola

University of Pennsylvania - The Wharton School - Legal Studies & Business Ethics Department

Ashley C. Keller

University of Chicago Law School

Date Written: January 31, 2010

Abstract

Now that most chapter 11 “reorganizations” are glorified asset sales in which the debtor uses bankruptcy to prepare itself for auction, the design of sale procedures has become a paramount concern to bankruptcy practitioners and courts. Among the choices they face is whether - and if so, how - to permit credit bidding, the practice of offsetting the value of a creditor’s claim against the purchase price of the debtor’s assets. This paper shows that credit bidding tends to augment, and cannot depress, total creditor recoveries, and we therefore conclude that it should be a mandatory feature of bankruptcy auctions. Yet two recent decisions hold that a bankruptcy court may cram down a plan of reorganization that denies secured creditors the right to bid credit. We argue that these cases were wrongly decided as a matter of both law and policy. In their parsing of one Code provision - 11 U.S.C. §1129(b) - the courts lost sight of what we think crucial: Even where a proposed plan satisfies the strictures of §1129(b), the court may cram down a plan only in its sound discretion. As it is always an abuse of discretion to order something that can lower but not increase stakeholder recoveries, we conclude that bankruptcy courts should be obligated to permit credit bidding.

Keywords: Credit Bidding, Auction, Asset Sale, Bankruptcy, Cram Down, 1129(b), 363(k), Philadelphia Newspapers, Pacific Lumber

Suggested Citation

Buccola, Vincent S. J. and Keller, Ashley C., Credit Bidding and the Design of Bankruptcy Auctions (January 31, 2010). 18 George Mason Law Review 99 (2010). Available at SSRN: https://ssrn.com/abstract=1545423

Vincent S. J. Buccola (Contact Author)

University of Pennsylvania - The Wharton School - Legal Studies & Business Ethics Department ( email )

3730 Walnut Street
Suite 600
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://https://lgst.wharton.upenn.edu/profile/27349/

Ashley C. Keller

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

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