Maryland residents who are considering Chapter 11 bankruptcy will be interested to hear of a U.S. Supreme Court case involving credit bidding. Credit bidding is a process whereby a secured creditor can force a bankrupt company to hold an auction in which the lender can bid its secure debt instead of cash. Recently, the high court agreed to hear an appeal and resolve a split between federal appellate courts. The appeal centers on the question of whether a secured creditor should be able to engage in credit bidding.

In 2011, a U.S. Court of Appeals in Chicago decided that the plain meaning of the U.S. Bankruptcy Code provides that a secured lender can credit bid. However, it appears now that the U.S. Supreme Court will have the final say in the matter. People in Annapolis and the surrounding areas will have to wait until April for the oral arguments to begin. A final decision is expected in late June when the high court concludes its term.

U.S. appeals courts in Philadelphia and New Orleans previously ruled in opposition to the Chicago court. It was ruled in Philadelphia and New Orleans -- in 2010 and 2009, respectively -- that lenders have no absolute right to credit bid because Chapter 11 bankruptcy already offers certain protections for secured lenders.

The Supreme Court will now hear an appeal from the owners of the InterContinental Chicago O'Hare hotel, since the circuit court ruled that the bankruptcy reorganization plan was defective, based on the fact that it did not give secured lenders an opportunity to credit bid.

Source: Bloomberg Businessweek, "Credit Bidding, RoomStore, MF Global, Dynergy: Bankruptcy," Dec. 13, 2011