South Bay Law Firm | “Collateral Damage”? Or “Credit to Whom Credit is Due”?
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“Collateral Damage”? Or “Credit to Whom Credit is Due”?

“Collateral Damage”? Or “Credit to Whom Credit is Due”?

Collateral Damage (film)

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Outside of bankruptcy, a creditor whose loan is secured by collateral typically has the right to payment in full when that collateral is sold – or, if the collateral is sold at an auction, to “credit bid” the face amount of the debt against the auction price of the collateral.

Inside bankruptcy, however, the right to “credit bid” is not always guaranteed.

In July, this blog predicted Supreme Court review of a Seventh Circuit case addressing the question of whether a bankruptcy court may confirm a plan of reorganization that proposes to sell substantially all of the debtor’s assets without permitting secured creditors to bid with credit.  The courts of appeals are divided two to one over the question, with the Third and Fifth Circuits holding that creditors are not entitled to credit bid and the Seventh Circuit holding to the contrary (for a review of the more recent, Seventh Circuit decision, click here).

The question is one of great significance for commercial restructuring practice, with several bankruptcy law scholars suggesting the answer “holds billions of dollars in the balance.”

Apparently, the Supreme Court agrees.  Last week, the justices granted review of the Seventh Circuit decision.  For the petitioners’ brief, respondent’s opposition, and amicus briefs, click here.

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