Secured Creditors Must Insist on Credit-Bidding Rights; Otherwise Waivable
What happens if an undersecured creditor makes an election under 11 U.S.C. § 1111(b) but does not otherwise participate in the bankruptcy process? The Fifth Circuit Court of Appeals addressed this question in In re R.L. Adkins Corp.[1] In In re Adkins, the debtor filed a plan of reorganization recognizing the lien of Bakers Hughes Oilfield Operations, Inc. (BHO) on four mineral leases and one well. The total amount due to BHO far exceeded the value of its collateral.
Prior to the confirmation hearing, BHO filed an election for treatment of its claim under § 1111(b), which allowed its claim to be fully secured while giving up rights to any unsecured portion. BHO did not appear at the confirmation hearing, nor did BHO file any objection to the debtor’s plan. The plan proposed a sale of numerous mineral leases and several wells to a third party in a bulk sale. The bankruptcy court confirmed the plan. Following confirmation, BHO pursued its § 1111(b) election, arguing that it had a right to credit-bid at the sale of its collateral, or to be considered fully secured in its collateral up to the debt amount. The bankruptcy court and district court rejected BHO’s arguments.
BHO then appealed to the Fifth Circuit Court of Appeals, reasserting its arguments that the plan did not allow for BHO to credit-bid and that it did not recognize BHO’s election under § 1111(b). The Fifth Circuit found that the plan did, in fact, permit BHO to credit-bid its debt pursuant to § 363(k), but held that BHO never attempted to credit-bid and that any credit bidding would only be to the amount of the value of the secured claim before the § 1111(b) election. The Fifth Circuit further held that any objection to the bidding process or any impairment to BHO’s ability to credit-bid could have been resolved at the confirmation hearing, but that BHO chose not to participate in the confirmation and never objected to the plan.
The concurring opinion by Judge Jones goes beyond the majority’s holding and addresses the argument that BHO waived its § 1111(b) election by failing to pursue it at the confirmation hearing. It emphasizes three points for proper protection of a creditor’s interests. First, if a creditor properly asserts a § 1111(b) election, then the bankruptcy court must dispose of that issue prior to the confirmation hearing. The bankruptcy court’s decision on this issue will affect the amount of the creditor’s secured claim and treatment under the plan. Second, if the plan proposes the sale of the collateral under § 363 or under the plan, and if the protections and sale provisions are found not to properly protect the creditors’ secured claims, then the creditor will be allowed an election under § 1111(b). Third, a plan should provide for bid procedures that promote broadly publicized auctions that test the market for valuations, which will test a secured creditor’s sincerity in stating a desire to credit-bid.
The ruling of both the majority and the concurring opinions appears to be that in the Fifth Circuit, at least, a secured or partially secured creditor cannot simply rely on an election under § 1111(b) to protect its position. Instead, the creditor needs to actively object to a plan and participate in the process in order to protect its interests. Otherwise, a secured creditor may be precluded from asserting its right to credit-bid in a sale under § 363 of the Code.
[1] No. 14-10768, 2015 WL 1873137, at *1 (5th Cir. Apr. 23, 2015)
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