Credit Bidding and the Design of Bankruptcy Auctions
26 Pages Posted: 1 Feb 2010 Last revised: 21 Jul 2013
Date Written: January 31, 2010
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
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