A secured creditor’s right to make a so-called credit bid for assets doesn’t bar an auctioneer from charging a buyer’s premium, according to Bankruptcy Judge Eduardo V. Rodriguez of Houston.
Unable to sell the assets as a going concern, the chapter 11 debtor engaged an auctioneer to sell the assets at auction. The debtor’s proposed sale and bidding procedures called for cash purchasers to pay a 7% buyer’s premium on top of the winning cash bid.
If a secured creditor were to purchase its collateral through a credit bid, the sale procedures called for the creditor to pay a 3% buyer’s premium to the auctioneer in cash. Predictably, secured creditors objected to paying a buyer’s premium. Judge Rodriguez overruled the objection in his June 29 opinion.
Judge Rodriguez evaluated the propriety of a buyer’s premium under Section 506(c), which allows a trustee to “recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim . . . .”
Typically, Judge Rodriguez said, a court may surcharge a lender’s collateral if (1) the expenditure was necessary, (2) the expenses were reasonable and (3) “the creditor benefitted from the expenses.” In addition, he said that a trustee “bears the burden of proving that the expense was incurred ‘primarily for the benefit of the secured creditor and that the expenses resulted in a quantifiable direct benefit to the secured creditor,’” quoting Fifth Circuit authority.
A secured lender objected to a buyer’s premium, contending that Section 363(k) permits a lender to offset its claim against the purchase price. However, Judge Rodriguez found “[n]othing in § 506(c) or the Fifth Circuit [that] prevents a court from permitting a surcharge against the collateral of a successful credit bidder, so long as the expenditure was necessary, the amount expended was reasonable, and the secured creditor benefitted from the expense.”
Indeed, the section itself permits a credit bid “unless the court for cause orders otherwise.”
Another lender argued that imposing a buyer’s premium would deprive the lender of the “indubitable equivalent” under Section 1129(b)(2)(A). Judge Rodriguez responded by saying that the section “does not come into play” because it’s a confirmation standard, not a provision governing sales.
Finally, a lender cited the Supreme Court’s decision in RadLAX Gateway Hotel LLC v. Amalgamated Bank, 566 U.S. 639, 644 n.2 (2012), for the idea that a secured creditor may purchase an asset “without committing additional cash to protect the loan.”
Judge Rodriguez retorted by saying that the payment of the buyer’s premium was not a surcharge to protect the loan but was compensation to the auctioneer for the costs of the sale.
Judge Rodriguez held that the surcharge was permitted, but the questions were not yet before him as to whether the “expenditures [were] necessary, the amount expended was reasonable, or that the secured creditors benefitted from the expense.”
The proposed sale procedures called for cash buyers to pay a 7% buyer’s premium. Judge Rodriguez lowered the premium to 3% for cash purchasers, “because a credit bid has the same effect as a cash bid.”
A secured creditor’s right to make a so-called credit bid for assets doesn’t bar an auctioneer from charging a buyer’s premium, according to Bankruptcy Judge Eduardo V. Rodriguez of Houston.
Unable to sell the assets as a going concern, the chapter 11 debtor engaged an auctioneer to sell the assets at auction. The debtor’s proposed sale and bidding procedures called for cash purchasers to pay a 7% buyer’s premium on top of the winning cash bid.
If a secured creditor were to purchase its collateral through a credit bid, the sale procedures called for the creditor to pay a 3% buyer’s premium to the auctioneer in cash. Predictably, secured creditors objected to paying a buyer’s premium. Judge Rodriguez overruled the objection in his June 29 opinion.
Judge Rodriguez evaluated the propriety of a buyer’s premium under Section 506(c), which allows a trustee to “recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim . . . .”