The US Court of Appeals for the Seventh Circuit has weighed in on the question of whether a secured creditor’s ability to credit bid—to offset the amount of the creditor’s debt against the purchase price of sale assets rather than bid in cash—is a right guaranteed by statute even in “cramdown” plans of reorganization conducted under Chapter 11 of the Bankruptcy Code. On June 28, 2011, the court ruled in favor of secured creditors with its much anticipated decision in In re River Road Hotel Partners, LLC (River Road).1

The Seventh Circuit recently held that a chapter 11 bankruptcy plan of liquidation is not confirmable over a secured lender's objection if such plan prohibits the lender from credit bidding at a sale of its collateral. In doing so, the Seventh Circuit split with the Third and Fifth Circuit Courts of Appeal which have confirmed plans that block secured creditors' rights to credit bid, potentially making the issue ripe for review by the United States Supreme Court.

When entering into secured transactions, most secured lenders long assumed that, even in a bankruptcy, their borrowers would not be able to sell encumbered assets free and clear of the lenders’ liens without the lenders’ consent or, without at least providing the lenders the opportunity to bid their secured debt at an auction.

On June 28, 2011, the United States Court of Appeals for the Seventh Circuit became the latest circuit to weigh in on the hotly contested question of whether a debtor can deny a secured creditor the right to credit bid as part of a Chapter 11 plan providing for the sale of assets encumbered by the secured creditor’s liens. InIn re River Road Hotel Partners, LLC,1 the Seventh Circuit upheld the right of secured creditors to credit bid, a decision that runs directly contrary to recent opinions in the Third and Fifth Circuits.

In a decision that is expected to have wide-ranging implications for secured lenders and reorganization plan sales nationwide, the Seventh Circuit’s June 28, 2011 opinion in In re River Road1 marks a jurisdictional split on the contours of credit bidding in bankruptcy. While this decision is squarely at odds with decisions of the Courts of Appeals for the Third and Fifth Circuits, its holding is in many respects a validation of Judge Ambro’s robust dissent in Philadelphia News,2 and is arguably more aligned with mainstream bankruptcy thinking on credit bidding issues.

When a corporate borrower faces financial difficulties, there are a variety of enforcement, restructuring and insolvency options available to creditors. From a creditor’s perspective, the choice of procedure will depend on whether the borrower has granted security. If security has been granted over the shares or the assets and undertakings of a Cayman Islands incorporated company pursuant to a Cayman Islands law governed security document, the most appropriate enforcement choice for any secured creditor may be receivership.

One of the significant changes to distributions in insolvency made by the Enterprise Act 2002 was the abolition of the preferential status of debts owed to the Crown and the introduction of a provision for the creation of a ‘ring-fenced fund’ (also known as the “prescribed part”, an amount currently capped at £600,000) from the proceeds of floating charges created after 15 September 2003 to be applied in distribution to unsecured creditors.

Re Powerhouse Limited: Prudential Assurance Company Limited v PRG Powerhouse Limited [2007] EWHC 1002 Ch Guarantees are widely used in commercial transactions to provide assurance to creditors that debts or other obligations owed to them are discharged fully in the event the principal debtor fails to perform. This assurance was shaken by the steps taken in early 2006 by PRG Powerhouse Limited (Powerhouse) to enter into a company voluntary arrangement (CVA) that contained proposals to release certain parent company guarantees given to landlords of premises being vacated by Powerhouse.

In a decision that will have important repercussions for creditors with the benefit of guarantees, the High Court this week has held that a company in financial difficulties may not propose a voluntary arrangement which is unfairly prejudicial on its terms to certain creditors.

Re Powerhouse

The courts have long struggled with the question of whether particular orders entered by a bankruptcy court are final, and therefore appealable as a matter of right. It is generally recognized that a bankruptcy case is distinctly different from the usual civil case in that it is a framework within which a variety of disputes arise and are resolved. That distinction is recognized in 28 U.S.C. §158(d)(1), which provides that appeals as of right maybe taken not only from final judgments in cases but from “final judgments, orders, and decrees…in cases and proceedings….”