The Case Against Credit Bidding: Optimal Creditor Behavior in Chapter 11 Collateral Auctions

Jared Kawalsky

Abstract

This paper will attempt to advance some theoretical justifications for recent bankruptcy decisions that have denied the existence of a right for secured creditors to credit bid in the course of a reorganization under § 1129 of the Bankruptcy Code. § 363 of the Bankruptcy Code specifically grants secured creditors the right to bid their credit in a sale of their collateral as part of a going concern sale. However, in a reorganiztion under § 1129, secured creditors are not necessarily permitted to participate in an auction of the collateral underlying their liens. Relying on the broad auction theory literature developed to analyze reservation prices and rights of first refusal, this paper will attempt to forward an economic justification for why the rights of creditors may be limited in this fashion.