In re River Road Hotel Partners, LLC, et al., Case No. 09-B-30029 (Bankr. N.D. Ill. 2010)


In the River Road Hotel Partners, LLC chapter 11 proceeding, a bankruptcy judge in the Northern District of Illinois rejected an attempt to restrict the secured lender’s ability to credit bid at a sale of the debtors’ assets. In a decision issued October 5, 2010, Bankruptcy Judge Bruce Black denied the debtors’ motion to approve procedures for the sale of substantially all of their assets in connection with a proposed plan of reorganization. The motion had sought to preclude credit bidding both as a matter of law and also “for cause,” based on the facts and circumstances of the case.


River Road Hotel Partners, LLC and its affiliates own and operate the InterContinental Hotel Chicago O’Hare, which is a full-service hotel with 556 rooms that opened in September 2008. The hotel was significantly affected by the financial crisis of 2008 and early 2009, with the result that the Debtors were forced to file for chapter 11 in August 2009. The Debtors had constructed their hotel and adjacent conference facilities with financing in excess of $135 million. This debt was secured by, among other things, a first mortgage upon the hotel property.

However, four months after the opening of the hotel, the lender had refused to advance funds to permit the Debtors to make final payments to contractors and suppliers for the construction of the hotel. This allegedly halted the completion of both the restaurant inside the hotel and the installation of furnishings, fixtures and equipment in certain of the guestrooms. As a result, the hotel is in default under its franchise license agreement and is subject to mechanics lien claims totaling nearly $10 million for unpaid construction costs.

Following the chapter 11 filing, the Debtors marketed the hotel and negotiated an agreement for the sale of the property in connection with a plan of reorganization for a proposed stalking horse price of $42 million, subject to any higher or better offers received. The terms of the offer specified that the sale would be conducted under Sections 1123(a) and (b) and 1129(b)(2)(A)(iii) of the Bankruptcy Code, and not Section 363(k) of the Bankruptcy Code; therefore, no holder of a lien on any of the assets to be sold would be permitted to credit bid at the sale.


The Debtors’ motion to approve the sale procedures followed the same procedure employed in Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010), where the court held that there is no absolute right to credit bid at a sale of assets in connection with a plan. In addition to the decision in that case, the Debtors relied on In re The Pacific Lumber Co., 584 F.3d 229 (5th Cir. 2009) and In re CRIIMI MAE, Inc., 251 B.R. 796 (Bankr. D. Md. 2005) in support of their argument that the lender could be precluded from credit bidding at a sale of the Debtors’ assets pursuant to a plan of reorganization confirmed under Section 1129(b)(2)(A)(iii).

The lender objected to the motion, arguing that Section 1129(b)(2)(A)(ii) is the exclusive means of selling assets free and clear of liens under Section 1129(b) (2)(A), and therefore the court could only deny the right to credit bid for cause. The court agreed, relying on what it described as the “well-reasoned dissent” of Judge Ambro in the Philadelphia Newspapers decision.

The court also rejected the Debtors’ attempt to prohibit credit bidding for cause. The Debtors relied on three primary factual arguments: that the lender’s failures to advance sufficient funds to finish the hotel construction and furnishings injured the Debtors, the hotel property, other creditors and the lenders themselves; that allowing credit bidding would chill the bidding at a sale; and the $10 million in mechanics lien claims were still being litigated in state court (and would likely be senior to the lender’s secured claims under state law to the extent allowed).

After an evidentiary hearing, the court held that none of the circumstances alleged by the Debtors constitutes “cause” sufficient to justify denying the lender the right to credit bid at a sale.

The Debtors had not shown that the lender had either breached contractual obligations to the Debtors or acted with the intent to harm the Debtors. The actions taken by the lender were efforts to protect its own interests and do not constitute cause to deny credit bidding, even if they had the effect of accelerating the Debtors’ failures.

The Debtors also failed to persuade the court that the potential to chill other bids at a sale is a reason to deny credit bidding. The evidence did not demonstrate that credit bidding would in fact chill bidding in this case. Therefore, this contention did not demonstrate cause to deny credit bidding.

The pendency of unresolved mechanics liens against the hotel property was also not a reason to deny credit bidding. The court indicated that it could condition a secured creditor’s right to credit bid by requiring it to place cash in escrow, pay a portion of the bid in cash, or furnish a letter of credit for the amount of the alleged senior liens.

The Debtors had also suggested that the existence of an FDIC loan-loss guarantee resulting from the FDIC’s takeover of one of the loan participants and subsequent sale to another bank, was also a factor supporting cause to prohibit credit bidding. However, the court appeared to have assigned no weight to this argument since it was not even mentioned in the October 5 decision. None of these factors, either individually or collectively, provided a basis for denying the right to credit bid to a secured creditor.


Credit bidding is an important right of secured lenders to ensure that they receive what they perceive to be fair value if their collateral is sold. Reorganizing debtors, however, are more frequently attempting to restrict credit bidding, and more courts are addressing this conflict. Clearly, this is a developing area of the law. It is no surprise, then, that the Debtors have filed a notice of appeal with respect to this decision, and the legal issue has been certified by Bankruptcy Judge Black for a direct appeal to the Court of Appeals for the Seventh Circuit.