WASHINGTON The U.S. Supreme Court ruled on Tuesday that a secured creditor cannot be denied the right to make what has been known as a "credit bid" involving the sale of property or other assets as part of a bankruptcy reorganization plan.
The justices unanimously decided the issue after some lower courts in recent years have confirmed several Chapter 11 bankruptcy plans that provided for the sale of assets while denying the secured creditor the right to credit bid.
Under a credit bid, the creditor can purchase its collateral at auction by crediting the purchase price against the secured debt rather than paying cash.
Debtors argued that a such a credit bid discourages third parties from participating in the auction. Creditors argued that denial of their right to credit bid could force them to take less than the full value of the assets.
The case involved a debtor, RadLAX Gateway Hotel, which owns the Radisson Hotel and a neighboring parking structure at Los Angeles International Airport.
During the bankruptcy case, it sought to block lender Amalgamated Bank from credit bidding -- swapping its debt for the hotel in a bankruptcy-court-overseen auction rather than paying cash.
The 7th U.S. Circuit Court of Appeals upheld Amalgamated's right to credit bid, but other appeals courts have ruled differently on the issue.
The Supreme Court in an opinion by Justice Antonin Scalia affirmed the ruling by the Chicago-based appeals court in the case.
Scalia said a debtor may not obtain confirmation of such a Chapter 11 bankruptcy plan that provides for the sale of collateral free and clear of the bank's lien, but does not permit the bank to credit bid at the sale.
In reading the opinion from the bench, Scalia said the law's text was clear. "Although the jargon in this case is complicated, the statutory interpretation question is an easy one," he said.
Lawyers for Amalgamated said Congress had examined the precise problem at issue in the case and decided the best way to protect the secured creditor against the risk of undervaluation of the asset was to allow it to bid at auction.
U.S. government attorneys supported the bank. They said the right to credit bid was an essential protection for secured creditors, especially for lenders such as the U.S. government and federal agencies that often are unable to bid cash.
The Supreme Court case is RadLAX Gateway Hotel v. Amalgamated Bank, No. 11-166.
(Reporting By James Vicini; Editing by Maureen Bavdek)