Credit bidding under section 363(k): buying IP and data collateral with debt

The short answer: the lender can bid its debt, unless the court limits it for cause

Section 363(k) of the Bankruptcy Code provides that at a sale under section 363(b) of property subject to a lien that secures an allowed claim, the holder of that claim may bid at the sale and, if it buys the property, offset its claim against the purchase price, unless the court for cause orders otherwise. In plain terms, a secured lender can pay for its collateral with the debt it is already owed.

Whether a particular credit bid works depends on three things: whether the claim is allowed, whether the assets being sold are actually subject to the lien, and whether anyone persuades the court that there is cause to limit the bid. For IP and data, the second question is often the hardest.

What a credit bid covers, and what still needs cash

A credit bid offsets the lender's claim only against property its lien covers. Everything else in the deal is paid another way.

• Unencumbered assets. Anything outside the collateral description, or where perfection failed, must be paid for in cash or carved out of the purchase.
• Senior liens. A junior lender's credit bid does not discharge a senior lender's claim on the same assets.
• Cure costs. Contracts the buyer wants assumed and assigned, such as software licenses or customer agreements, can carry cure amounts.
• Wind-down and professional fees. Sale orders often require cash for the estate's remaining administration.

Courts have limited credit bids for cause in some cases, for example where the lien itself was disputed or where an uncapped credit bid would have chilled a competitive auction. Those decisions are fact-specific, and whether a lender can bid the full face amount of its claim or only the value of its collateral has also been argued. Estate counsel and the lender's counsel will assess the risk in the specific case.

How it applies to IP and data collateral

The personal information rule sits in the same statute. Under section 363(b)(1), if the debtor's privacy policy in effect when the case began prohibited transferring personally identifiable information to unaffiliated persons, the trustee may sell or lease that information only if the sale is consistent with the policy, or if, once a consumer privacy ombudsman has been appointed and notice and a hearing held, the court approves the sale on a finding that no showing was made that it would violate applicable nonbankruptcy law. A credit bidder takes customer data on whatever terms the sale order sets.

Health information follows its own rules. Under the HIPAA Privacy Rule, health information is no longer protected once it is de-identified by expert determination or by the safe harbor method of removing specified identifiers, as HHS guidance on de-identification explains. Records that are mainly protected health information without authorization or de-identification are not a fit for SourceX.

What happens after the lender owns the records

Once the sale closes, the lender, usually through an acquisition vehicle, owns the records it bought, subject to the sale order. If it keeps the operating business, the records are part of a company it controls. That is where the question few lenders ask comes in: should the operational history be licensed to AI developers for a one-time payment?

1. Read the sale order and purchase agreement for use restrictions on customer data and any transferred privacy commitments.
2. Confirm who can sign for the acquisition vehicle; the first-100-days playbook for a lender-owned company covers board authority.
3. Screen the acquired business. SourceX's who qualifies criteria start with 50+ full-time employees at peak (contractors excluded) and several years of documented operations, then turn to rights in the records and who may sign. The company fit checker offers a preliminary, non-binding screen.
4. Introduce the company to SourceX. SourceX qualifies it, the company completes a data inventory, and price and terms are agreed before buyers review anything.
5. Ask the company's auditors about accounting. Under ASC 606, whether a license gives a right to use IP as it exists or a right to access it over time can affect when revenue is recognized, as Deloitte's revenue roadmap describes.

If the business is being wound down rather than run, liquidating a company with no physical assets shows where records fit next to code and domains. If the lender acquired the business outside bankruptcy, Article 9 sales of IP and data collateral covers the state-law version of a lender bid, and Article 9 sale vs section 363 sale compares the two routes.

Disclosure and consent good practice

• Make sure the purchase agreement and sale order describe the records, systems and data being transferred, and the conditions attached to personal information.
• Keep administrator access and exports in scope at closing; owning records you cannot reach is a common post-closing surprise.
• If you introduce the company to SourceX, partners earn 25% of the eligible platform fees SourceX actually collects from the referred company's licensing deals, capped at $100,000 per referred company, payable only after the buyer pays and SourceX receives its fee; no reward is guaranteed. Where the referrer's own fund controls the company, read the program terms on eligibility and check your internal policies first.

Questions to ask counsel

1. Is our claim allowed, and is our lien over IP and records beyond challenge?
2. Which assets are unencumbered and must be paid for in cash?
3. Would the privacy policy in force on the petition date require a consumer privacy ombudsman before customer data can move?
4. What use restrictions will the sale order place on customer data after closing?
5. Do the records include health information that must be excluded or de-identified?
6. Which entity takes title, and who will have authority to sign licenses after closing?

This is general information, not legal, tax or financial advice. Confirm with your own counsel and auditors before acting.

Next step

If you are preparing a credit bid for a business with years of operational records, map which records the lien covers before the bid deadline. After closing, register as a partner to introduce the acquired company.