Rafael Zahralddin Interviewed by Law360 on Credit Bidding in Bankruptcy Asset Sales

Wilmington, Del. (May 10, 2024) - Wilmington Partner Rafael Zahralddin recently spoke with Law360 for an article titled, “When Philly Newspapers Cast Credit Bidding Into Doubt,” which discusses the current state of credit bidding as a feature of bankruptcy asset sales.

The article describes that for a period between the Third Circuit’s 2010 ruling in Philadelphia Newspapers and the U.S. Supreme Court’s 2012 ruling in RadLax, credit bidding was eliminated from auction procedures. The article further explains that although the Supreme Court determined in RadLax that “lien-holders have the right to credit bid under a Chapter 11 plan that calls for a free and clear sale,” the Court did not address an important footnote from the Philadelphia Newspapers decision. This footnote, along with additional cases (Fisker Automotive Holdings, Inc. in Delaware and Free Lance-Star Publishing Co. in Eastern Virginia) suggested that credit bidding could be restricted if it might otherwise chill bidding from other parties.

Mr. Zahralddin told Law360 that in addition to its potential impact on bidding, courts find that bidding may be restricted for “cause,” which may include improper conduct, disputes over liens, and breaches of sale procedures. He explained that these scenarios may include buyers purchasing a note from someone at a deep discount and then trying to assert the face value of the note. This activity, he noted, would chill bidding and would not help bring more money into the estate.

Moreover, Mr. Zahralddin described that judges in Delaware have stated that a secured lender can only credit bid new money it has brought into a case, such as debtor-in-possession financing. He also explained that judges have allowed lenders to put the full amount of the credit bid into escrow, especially if it has not yet been determined that the claim is permitted. Mr. Zahralddin noted, "You can have the auction, do the credit bid, but you better have the money to back that up in case it's adjudicated or found that you don't really have that credit bid.”

Mr. Zahralddin is a member of Lewis Brisbois’ Corporate, Bankruptcy, Complex Business & Commercial Litigation, Digital Asset, and Ukraine Conflict Response Practices. He is a skilled business lawyer and litigator with significant experience advising clients in corporate and commercial litigation, insolvency, distressed M&A, compliance, corporate law and entity formation, corporate governance, commercial transactions, cyber law, regulatory actions, and cross-border issues.

Read the full Law360 article here (subscription may be required).

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