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