I. Introduction -

In a big win for creditors, the U.S. Supreme Court unanimously ruled on May 29, 2012 that a secured creditor must be granted the right to credit bid up to the full amount of its claim where the debtor pursues a Chapter 11 plan that proposes to sell assets free and clear of liens. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166 (U.S. May 29, 2012). The decision strengthens a secured creditor’s ability to maximize repayment and recovery against its collateral, removes a Chapter 11 debtor’s unfair advantage to attempt a sale of its assets at the creditor’s expense, and provides creditors with assurance that their rights will be protected.

II. Background -

In 2007, the jointly administered debtors sought to build a Radisson Hotel near the Los Angeles International Airport and borrowed $142 Million. When funds ran out in 2009 and the debtors were unable to secure additional financing they filed Chapter 11. The debtors proposed plans to sell substantially all of their assets through an auction sale. Pursuant to the plans, the secured creditors would receive the “indubitable equivalent” of their claims and would not be permitted to credit bid at the sale. In connection with the proposed plan and sale, the debtors filed their motion to establish bidding procedures which specified that no credit bids were allowed. Using a credit bid, the creditor is able to purchase its collateral at auction by crediting the purchase price against the secured debt in lieu of paying cash. The secured creditors objected to the bidding procedures motion and argued that the sale could only be approved if credit bidding was allowed, and since credit bids were prohibited, the plans were unconfirmable.