REPORT FROM THE U.S.—Hotel bankruptcy proceedings might look a little different going forward now that the U.S. Supreme Court has upheld the practice of credit bidding, bankruptcy attorneys say.
Credit bidding is the practice of lenders using debt to purchase their own collateral during a bankruptcy auction. The Court upheld the practice last month.
Even though credit bidding has occurred in the past, the legitimacy given to it by the Court could bring about some changes, attorneys said.
One potential change could involve the time a case is in bankruptcy proceedings. David Neff, an attorney at Perkins Coie who argued the case before the Court on behalf of the debtor, said he imagines bankruptcy cases would be shortened as a result.
“It’s not going to provide the option of proposing a sale plan over the objections of secured creditors,” he said.
“It will shorten up certain cases,” he added.
Randye Soref, shareholder with Buchalter Nemer, said that while there are already time limitations within certain types of bankruptcy cases—for instance, in a single asset real estate case, the debtor must provide a reorganization plan to the court within 90 days of the bankruptcy filing—the Court’s decision could have the effect of quickening the pace of negotiations between debtor and lender.
Also, sources said, lenders have additional leverage on their side when it comes to making deals for assets in a bankruptcy auction. Knowing the lender can outgun bargain hunters will shut out some potential suitors, Soref said.
George B. Cauthen, partner and chairman of the bankruptcy group at Nelson Mullins Riley & Scarborough LLP
“This decision says to debtors, ‘If you’re going to file Chapter 11, be mindful because the lender will retain the benefit of the bargain,’” she said.
George B. Cauthen, partner and chairman of the bankruptcy group at Nelson Mullins Riley & Scarborough LLP, shared a similar sentiment. He said the decision “burns off the bottom feeders” looking to buy on the cheap.
“If you know the secured creditor can credit bid … you can’t have the person thinking they’re going to get a good asset for a real cheap price,” he said.
Also, Cauthen said he expects to see an increased amount of credit bidding following the Court’s decision. “There shouldn’t be any question about it now,” he said.
Sources contacted for this report were split over whether lenders might be more willing to lend if they knew they had the right to credit bid should the deal go bad.
“It might make them more confident,” Cauthen said.
Soref, however, took the opposite stance. She doesn’t anticipate any effect on the credit markets as a result of the decision.
She said lenders don’t make loans thinking the deal might eventually go sour. “Nothing’s changed,” she said.