The United States Bankruptcy Court for the Eastern District of Virginia (the “Court”) issued an opinion limiting the ability of a “loan to own” secured creditor to credit bid at an auction for the sale of substantially all of the debtors’ assets. The Court focused on the fact that the creditor’s conduct interfered with the sale process and was motivated by its desire to “own the Debtors’ business” rather than to have its debt repaid. The Court’s decision suggests that secured creditors who “loan to own” may jeopardize their right to credit bid by being overly aggressive prior to or after the bankruptcy filing in their efforts to minimize competitive bidding.

Background -

The Free Lance-Star Publishing Company of Fredericksburg, VA and its affiliate William Douglas Properties, LLC (the “Debtors”) operated a family-owned publishing, newspaper, radio, and communication company. Among other assets, the Debtors owned three parcels of real estate that contained towers used in the Debtors’ radio broadcasting business (“Tower Assets”). As part of an expansion in the mid-2000s, the Debtors borrowed approximately $50.8 million (the “Loan”) from Branch Banking and Trust (“BB&T”). The Debtors granted BB&T liens and security interests in certain real and personal property, but did not provide the Tower Assets as collateral for the Loan.