In a significant victory for secured creditors, the US Court of Appeals for the Seventh Circuit held in In re River Road Hotel Partners, LLC(1) that a bankruptcy court cannot confirm a Chapter 11 plan providing for the sale of the debtor's assets where dissenting secured creditors did not have an opportunity to 'credit bid' for their collateral during the auction process. This decision notably departs from two recent circuit court rulings, In re Philadelphia Newspapers, LLC(2) and In re Pacific Lumber Co,(3) which declined to recognise any legal entitlement of dissenting secured creditors to credit bid for assets sold pursuant to a Chapter 11 plan.


A secured creditor's right to bid up to the full amount of its claim in a sale of its collateral (commonly referred to as 'credit bidding') has long been a fundamental creditor protection under the Bankruptcy Code. Credit bidding enables a creditor to obtain possession of its collateral to satisfy its secured claim in lieu of receiving proceeds from the sale of the collateral which the creditor considers inadequate. The Third Circuit's decision in Philadelphia Newspapers and the Fifth Circuit's decision in Pacific Lumber created substantial uncertainty for secured creditors. Both courts held that the Bankruptcy Code does not require credit bidding when the collateral is sold pursuant to a Chapter 11 plan.

The statutory provision driving this controversy is Section 1129(b)(2)(A) of the Bankruptcy Code. This section contains the test for determining whether a proposed Chapter 11 plan is "fair and equitable" with respect to a class of secured claims that has voted to reject the plan. If the proposed plan passes this test and meets all other requirements set forth under the Bankruptcy Code, it may be confirmed (or 'crammed down') over the dissenting vote of a secured creditor class. Under Section 1129(b)(2)(A), a proposed plan is "fair and equitable" to secured creditors if:

"(i) holders of secured claims retain the liens securing their allowed claims and receive deferred cash payments having a present value at least equal to the value of their collateral;

"(ii) holders of secured claims retain a lien on the proceeds of any 'free and clear' sale of their collateral, so long as such creditors were permitted to credit bid their claims during the sale process; or

(iii) the proposed plan provides for the secured creditors to receive the 'indubitable equivalent' (an undefined term) of their secured claims.".(4)

Clause (ii) was commonly understood to enable secured creditors to credit bid their claims in any sale involving their collateral conducted pursuant to a Chapter 11 plan, but the courts in Philadelphia Newspapers and Pacific Lumber adopted an alternative interpretation of Section 1129(b)(2)(A).

Those courts ruled that a sale of collateral without credit bidding could be "fair and equitable" under the nebulous 'indubitable equivalent' prong of Clause (iii). Both the Third Circuit and the Fifth Circuit reasoned that the word 'or' at the end of Clause (ii) rendered the three options set forth in Section 1129(b)(2)(A) disjunctive, so the 'indubitable equivalent' prong constituted an alternative 'fair and equitable' treatment of a secured creditor's claim distinct from the secured creditors' entitlement to credit bid contained in Clause (ii).


The debtors in River Road sought to sell substantially all of their assets pursuant to plans of reorganisation and to distribute the sale proceeds to their creditors in accordance with the priority provisions of the Bankruptcy Code. The debtors separately filed motions to approve bid procedures to govern the asset sales. Notably, the proposed procedures did not offer the debtors' secured lenders the opportunity to credit bid their claims in the auction process. The agent for the secured lenders objected to these procedures on the grounds that they impinged the secured lenders' right to credit bid under Section 1129(b)(2)(A)(ii). The debtors responded that their proposed plans were confirmable under the 'indubitable equivalent' test contained in Section 1129(b)(2)(A)(iii). The bankruptcy court sided with the secured lenders and denied the debtors' motions. The debtors appealed directly to the Seventh Circuit Court of Appeals.(5)

The Seventh Circuit affirmed the bankruptcy court's decision, holding that:

"the [Bankruptcy Code] requires that cramdown plans that contemplate selling encumbered assets free and clear of liens at an auction satisfy the requirements set forth in Subsection (ii) of [Section 1129(b)(2)(A)]."(6)

The appeal court concluded that Section 1129(b)(2)(A) is vague and subject to two different interpretations. In analysing the two possible readings, the appeal court reasoned that under a "cardinal rule of statutory construction", a statute should be construed so that no clause, sentence or word would be rendered superfluous, void or insignificant.(7) Based on this principle, the Seventh Circuit observed that the debtors' proposed expansive interpretation of the 'indubitable equivalent' prong would render the first two clauses of Section 1129(b)(2)(A) superfluous in situations that are expressly contemplated in those provisions. The appeal court concluded that under "[t]he infinitely more plausible interpretation of Section 1129(b)(2)(A)", "plans could only qualify as 'fair and equitable' under Subsection (iii) if they proposed disposing of assets in ways that are not described in [s]ubsections (i) and (ii)".(8)

In reaching this decision it appears that the Seventh Circuit was guided by the policy reason for offering secured creditors the right to credit bid. After noting that the ability to credit bid "provides lenders with means to protect themselves from the risk that the winning auction bid will not capture the asset's actual value",(9) the appeal court proceeded to list a number of factors that contribute to such a risk – including the "inherent risk of self-dealing on the part of existing management".(10) The appeal court then concluded:

"Because the Debtors' proposed auctions would deny secured lenders the ability to credit bid, they lack a crucial check against undervaluation. Consequently, there is an increased risk that the winning bids in these auctions would not provide the [secured lenders] with the current market value of the encumbered assets."(11)


The Seventh Circuit's decision in River Road departs from the recent trend towards limiting the credit bid option when collateral is sold pursuant to a plan of reorganisation. This decision is a positive development for secured creditors, whose leverage over Chapter 11 debtors had eroded after Philadelphia Newspapers and Pacific Lumber. In light of River Road, secured creditors can credit bid their claims in any sales of their collateral pursuant to a Chapter 11 plan in the Seventh Circuit.

By contrast, courts in the Third and Fifth Circuits will not necessarily permit secured creditors to submit credit bids in sales conducted pursuant to a Chapter 11 plan. In Philadelphia Newspapers, however, the Third Circuit left open the possibility that a proposed treatment might not constitute an indubitable equivalent of the secured claim due to the absence of an opportunity for the secured party to credit bid.(12) In the Third and Fifth Circuits (and in any of the other judicial circuits that have yet to decide this issue), it may be advisable for secured creditors to attempt to negotiate a court-approved agreement from debtors to refrain from pursuing a 'cramdown' plan that omits the credit bid option, for example, in the context of a cash collateral order.

For further information on this topic please contact Fredric Sosnick at Shearman & Sterling LLP by telephone (+1 212 848 4000), fax (+1 212 848 7179) or email ([email protected]).


(1) In re River Road Hotel Partners, LLC, Case 10-3597 (7th Cir, June 28 2011).

(2) In re Philadelphia Newspapers, LLC, 599 F 3d 298 (3d Cir 2010).

(3) Bank of NY Trust Co, NA v Official Unsecured Creditors' Comm (In re Pacific Lumber Co), 584 F 3d 229 (5th Cir 2009).

(4) 11 USC § 1129(b)(2)(A).

(5) A bankruptcy court's decision can be appealed directly to the circuit court in certain situations. See 28 USC § 158(d)(2)(A).

(6) In re River Road Hotel Partners, LLC, Case 10-3597 at 24 (7th Cir, June 28 2011).

(7) Id at 21.

(8) Id at 23.

(9) Id at 18.

(10) Id at n6.

(11) Id at 20.

(12) Philadelphia Newspapers, 599 F 3d at 317 to 318.