Credit Bid

To purchase one’s collateral without cash. The term “credit bid” is a colloquial term (it does not appear in the Bankruptcy Code) for a secured creditor’s right to bid at the sale of its collateral and then, at closing, to offset the purchase price by the value of its outstanding claim secured by the collateral being purchased. This colloquial term aptly describes a secured creditor’s rights as articulated in section 363(k) of the Bankruptcy Code.  A creditor with an allowed secured claim may credit bid at a sale of its collateral under a reorganization plan or outside a plan in a section 363 sale.

Section 363(k) provides that:

“At a sale under subsection (b) of this section of property that is subject to a lien that secures anallowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property.”

This subsection limits the credit bidding right to a holder of an “allowed” secured claim. Under section 502(a) of the Bankruptcy Code, a claim is “deemed allowed, unless a party in interest … objects.”  If a party objects (timely), the claim is no longer deemed allowed and may be allowed only after notice, hearing, and the court’s determination. Where resolution of a claim cannot occur timely and would unduly delay the administration of the case, the court may estimate the allowed claim (per section 502(c)(1)).

From section 363(k), the holder of an allowed secured claim gets two rights: (1) a right to bid; and (2) if it is the purchaser at such sale, it “may offset [its] claim against the purchase price.” At a plan sale or a section 363 sale of property of the estate (after proper marketing and notice), the holder of the allowed secured claim may bid for the property, and, if the trustee (or DIP) accepts that bid, the holder of the allowed secured claim may offset or setoff the contract price at closing by the amount of its allowed secured claim.  Therefore, if a secured creditor is owed more money than the value of the collateral, its credit bid alone may prevail at auction.

Section 363(k) provides that these two rights may be exercised “unless the court for cause orders otherwise.”  The bankruptcy court “for cause” may order that the right to bid or the right to offset shall be modified or denied. “Cause” is not defined in the Bankruptcy Code.  What counts as “cause” in this context is recently controversial.  Parts of this definition are paraphrased from In re RML Dev., Inc., 2014 WL 3378578, * 2-3 (Bankr. W.D. Tenn. July 10, 2014).