Under section 363(f) of the bankruptcy code, a trustee may sell assets of the bankruptcy estate free and clear of liens and other interests. Generally, absent consent of the lienholder, a trustee may only sell assets free and clear of liens under one of the following conditions:

  • If some provision of nonbankruptcy law would permit the sale free and clear of the lien
  • If the sale would produce a large enough surplus to satisfy the lien
  • If there is a bona fide dispute concerning the validity of the lien
  • If the lienholder could be compelled, in a legal or equitable proceeding, to accept a lesser amount

Because these conditions will not exist in many bankruptcy cases, a creditor's right to withhold consent to the sale of its collateral is a powerful tool to protect its security interest.

Another powerful tool available to creditors is the right to place a credit bid at any sale for the amount of the indebtedness, rather than merely the value of the collateral. Thus, in cases in which a trustee may sell the assets free and clear of liens without the lienholders' consent, the right to place a credit bid can protect a creditor from losing its security.

Case in point: In a recent opinion, the Bankruptcy Court for the District of Delaware held that a lienholder waived its right to withhold consent to the release of its lien, but affirmed the lienholder's right to credit bid at a sale of assets free and clear of liens. In re GWLS Holdings, Inc., No. 08-12430, 2009 WL 453110 (Bankr. D. Del. Feb. 23, 2009).

Intercreditor Agreement

The GWLS Holdings decision followed from a murky factual scenario involving the interpretation of an intercreditor agreement. Like many businesses in the transportation industry, Greatwide Logistic Services ("Greatwide") experienced severe financial troubles in recent years, but by early 2008, Greatwide's debt load became inescapable. In October, its debt structure consisted of $337 million secured by first priority liens, and $117 million secured by second priority liens.

Greatwide's creditors, seeing the writing on the wall, started preparing for an inevitable bankruptcy filing. The first lien lenders entered into a series of agreements, in which they appointed a "Collateral Agent" to supervise, manage, and protect their interests. The second lien lenders did the same, appointing their own "Collateral Agent." The two Collateral Agents then entered into an intercreditor agreement, binding all the first and second lien lenders.

In late 2008, Greatwide and its related entities filed voluntary petitions under chapter 11 of the Bankruptcy Code. Soon after the petition date, the debtors-in-possession (acting as a trustee) filed a motion under section 363(f) to sell substantially all their assets free and clear of liens. The bidding procedures motion and the sale motion contemplated that the first lien lenders would place a credit bid for the full amount of the debt owed.

All of the first lien lenders consented to the credit bid and agreed to release their liens on the collateral, except for one—Grace Bay Holdings LLC and Grace Bay Holdings II, LLC ("Grace Bay"), which held approximately $1 million in first priority liens. The reasons for Grace Bay's refusal to release its lean were not explained in the court's opinion, but the creditor may have been unsatisfied with the bidding procedures, or simply may have wanted to have its cake and eat it too.

Despite Grace Bay's objecting to the bidding procedures motion, the first lien Collateral Agent supported to the debtors' attempted sale, resulting in the dispute that led to this opinion.

Consent to Sale

The issue for the court was one of contractual interpretation of the intercreditor agreements. Grace Bay cited provisions of these agreements that required "unanimous written consent" of the first lien lenders to waive provisions of, or modify, the intercreditor agreements. In response, the first lien Collateral Agent cited provisions of the intercreditor agreements providing that the first lien lenders appoint the Collateral Agent and authorized it to "sell, lease, license, sublicense, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof."

The court found in favor of the Collateral Agent. It determined that the "unanimous written consent" requirement applied only to waivers and modifications of the agreements themselves, not to the first lien creditors' rights under the agreements. Grace Bay, by entering into these agreements, had authorized the Collateral Agent to place the credit bid on its behalf. Under the same reasoning, Grace Bay waived its right to withhold consent to the release of its lien.

Consequently, the Collateral Agent was entitled to place the credit bid over Grace Bay's objection.

Credit Bid Affirmed

While the main thrust of the opinion focused on the interpretation of contracts between the parties, the court did not hesitate to affirm the secured creditor's right to credit bid. This right is preserved by section 363(k) of the Bankruptcy Code and is vital for secured creditors to preserve the value of their collateral.