In 2010, the U.S. Court of Appeals for the Third Circuit caused a stir in the secured creditor and claims trading communities by ruling in Philadelphia Newspapers that a debtor could propose a plan involving the sale of a secured creditor’s collateral free and clear of liens without allowing the secured creditor to credit bid its claim.1 Following a circuit split with the Seventh Circuit on the issue, the U.S. Supreme Court granted certiorari in RadLAX Gateway Hotel v. Amalgamated Bank and effectively overruled Philadelphia Newspapers.2 However, despite being overruled, the spirit of Philadelphia Newspapers may still be alive and well, as evidenced by the recent decisions by the bankruptcy and district courts in Fisker Automotive.
Section 363(k) of the Bankruptcy Code sets forth a creditor’s right to credit bid. It authorizes a creditor to bid its secured debt claim to purchase the assets subject to the creditor’s lien, unless the court orders otherwise “for cause.” In Fisker Automotive, the Bankruptcy Court for the District of Delaware held that a secured creditor’s right to credit bid its $168 million claim would be capped at $25 million, the amount the secured creditor had paid for its claim.3 In support of its ruling, the court cited to Philadelphia Newspapers, where, in a footnote, the Third Circuit stated that “[a] court may deny a lender the right to credit bid in the interest of any policy advanced by the [Bankruptcy] Code, such as to ensure the success of the reorganization or to foster a competitive bidding environment.” On appeal, the district court also cited approvingly to the Philadelphia Newspapers footnote.
