Wednesday, May 30, 2012

Financial Industry Applauds US Supreme Court Ruling Protecting Credit Bidding for Secured Lenders under Bankruptcy Code

In an outcome desired by the hedge fund and securities industries, the US Supreme Court ruled that a Chapter 11 bankruptcy plan may not be confirmed over the objection of a secured creditor bank if the plan provides for the sale of collateral free and clear of the creditor’s lien but does not allow  the creditor to credit-bid at the sale. The Court said that the ability to credit-bid protects a creditor against the risk that its collateral will be sold at a depressed price and enables the creditor to purchase the collateral for what it considers the fair market price without committing additional cash to protect the loan.  RadLAX Gateway Hotel, LLC v. Amalgamated Bank, Dkt. No. 11-166.

The hedge fund, securities and banking industries, along with other financial trade associations, earlier filed an amicus brief in the US Supreme Court arguing that the federal bankruptcy code does not allow a debtor to bar secured lenders from credit bidding to protect themselves against the potential undervaluation of their collateral in bankruptcy. A new rule allowing debtors to bar credit-bidding would increase the risk of undervaluation, they argued, and to compensate for that risk lenders would be forced to increase the cost of capital, contended the Managed Funds Association, SIFMA, and the American Bankers Association, among others.

They said that such a rule would have a significant negative impact on the market for secured financing at a moment when the ready availability of affordable credit remains essential to the national economic recovery. Generally supporting the trade groups, the US government also filed an amicus brief stating that a creditor’s opportunity to bid cash at an asset sale is not an adequate substitute for the right to bid credit.