LSTA and associations fight for credit bidding in Supreme Court brief

By Caroline Salls

Pittsburgh, March 12 - The Loan Syndications and Trading Association (LSTA), joined by nine other trade associations, submitted an amicus brief to the U.S. Supreme Court in a RadLAX Gateway Hotel case, arguing that secured creditors cannot be prevented from credit bidding in an auction of their collateral in a cramdown plan of reorganization, according to an LSTA news release.

The LSTA said it argued that credit bidding is a critical tool for protecting a secured creditor from having its collateral undervalued. If the creditor is not satisfied with the competing bids, the association said it can obtain the property by bidding more, using the amount of its unpaid debt as currency in the auction.

"In this case, the debtors are attempting to steer the collateral to a bidder with insider ties at a substantial discount at the expense of the secured creditor," LSTA executive vice president and general counsel Elliot Ganz said in the release.

"The Bankruptcy Code is specifically designed to prevent this type of mischief and ensure that secured creditors get the value they are entitled to receive."

According to the release, the LSTA and the other associations contend that the debtors' plan serves no legitimate bankruptcy or commercial purpose, and sanctioning it will seriously unsettle the credit markets.

In addition, they said credit bidding can only benefit bankruptcy estates by enabling creditors to bid more freely at auctions, thus potentially increasing an auction's proceeds.

LSTA and the associations said some secured creditors may not be able to join an auction at all unless they are allowed to credit bid.

"The debtors' attempt to prevent credit bidding is wholly inconsistent with the bankruptcy code's protections for secured creditors," Elliot said in the release.

"If it's allowed to proceed, the credit markets will respond by increasing the cost of borrowing, thus harming debtors, creditors and the economy as a whole."

The LSTA said RadLAX is the first case in more than a decade to present the Supreme Court with a major unresolved issue regarding the substantive provisions of Chapter 11. It reached the court after the U.S. Court of Appeals for the Seventh Circuit held that debtors could not bar credit bidding, the position strongly supported by the LSTA.

Oral arguments in the case are scheduled for April 23.

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