The final bid at auction, not a secured creditor’s last credit bid, establishes the value of the lender’s collateral, according to former Bankruptcy Judge Kevin J. Carey, who was upheld by Delaware District Judge Maryellen Noreika.
The losing side based its argument on a “disingenuous and misleading misinterpretation of Third Circuit law,” Bankruptcy Judge Carey had said in his opinion last year. Upholding Judge Carey in her decision on August 27, Judge Noreika said, “Nothing in [Cohen v. KB Mezzanine Fund II, LP (In re SubMicron Sys., Corp.), 432 F.3d 448 (3d Cir. 2006)] stands for the proposition that a credit bid caps the value of a secured creditor’s claim.”
One lender had a claim of about $24 million secured by a lien on intellectual property. Another lender held a claim for some $25 million secured by a lien on accounts receivable. The chapter 11 debtor’s asset went on sale at auction.
At auction, the lender with a lien on intellectual property made a credit bid of about $12 million, but only for intellectual property. At the time, the highest bid for all the assets was about $17.2 million.
At the debtor’s request, the intellectual property lender refrained from making further credit bids to allow other prospective buyers to bid for all the assets. Ultimately, one buyer purchased all of the assets with a high bid of about $26 million, which Judge Carey approved.
The intellectual property lender made a motion for Bankruptcy Judge Carey to apportion the purchase price between the two secured creditors. Judge Carey held an evidentiary hearing and decided that the value of the intellectual property was some $17 million — that is, $5 million more than the lender’s credit bid.
The accounts receivable lender argued to Bankruptcy Judge Carey that the $12 million credit bid capped the value of the intellectual property. Judge Carey disagreed. He also found as a fact that the $12 million credit bid was not the “final” bid.
The accounts receivable lender appealed to District Judge Noreika, unsuccessfully.
As Judge Noreika said, “Section 363(k) of the Bankruptcy Code permits a secured creditor to credit bid up to the entire face amount of its claim when its collateral is being sold at a bankruptcy auction.”
Submicron establishes two principles, Judge Noreika said. First, it allows a creditor to credit bid up to the face amount of the claim. Second, she said, “a creditor is free to bid whatever amount of the debt it wishes regardless of the economic value of the collateral or the value of any cash bids for the collateral.”
Rejecting the appellant’s argument and siding with Bankruptcy Judge Carey, she said that nothing in Submicron “stands for the proposition that a credit bid caps the value of a secured creditor’s claim.”
The accounts receivable lender also made an argument based on one sentence in In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010). Given that the holding in Philadelphia Newspapers was overruled by the Supreme Court in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 647 (2012), Judge Noreika said that “it is unclear how much of the credit bidding commentary in Philadelphia Newspapers remains good law in light of RadLAX.”
Judge Noreika explained how “RadLAX held that a plan that provides for the sale of collateral but does not permit credit bidding cannot be confirmed under the indubitable equivalent prong of § 1129(b)(2)(A) of the Bankruptcy Code.”
Judge Noreika found no flaw in Judge Carey’s finding that the $12 million credit bid in the midst of auction was not a final bid. On that finding, the credit bid did not fix the value of the lender’s collateral. She also rejected the idea that “a creditor’s secured claim is capped by a credit bid that is subsequently exceeded by a higher bid.”
Bankruptcy Judge Carey stepped down from the bankruptcy bench last year, returning to private practice.
The final bid at auction, not a secured creditor’s last credit bid, establishes the value of the lender’s collateral, according to former Bankruptcy Judge Kevin J. Carey, who was upheld by Delaware District Judge Maryellen Noreika.
The losing side based its argument on a “disingenuous and misleading misinterpretation of Third Circuit law,” Bankruptcy Judge Carey had said in his opinion last year. Upholding Judge Carey in her decision on August 27, Judge Noreika said, “Nothing in [Cohen v. KB Mezzanine Fund II, LP (In re SubMicron Sys., Corp.), 432 F.3d 448 (3d Cir. 2006)] stands for the proposition that a credit bid caps the value of a secured creditor’s claim.”
One lender had a claim of about $24 million secured by a lien on intellectual property. Another lender held a claim for some $25 million secured by a lien on accounts receivable. The chapter 11 debtor’s asset went on sale at auction.
At auction, the lender with a lien on intellectual property made a credit bid of about $12 million, but only for intellectual property. At the time, the highest bid for all the assets was about $17.2 million.
At the debtor’s request, the intellectual property lender refrained from making further credit bids to allow other prospective buyers to bid for all the assets. Ultimately, one buyer purchased all of the assets with a high bid of about $26 million, which Judge Carey approved.