Credit bidding has been a source of lively controversy in recent
years. In In re Fisker Automotive Holdings, Inc.,
Judge Kevin Gross of the United States Bankruptcy Court for the
District of Delaware ruled that a secured creditor with a partially
disputed claim would only be allowed to credit bid its claim in an
amount equal to the purchase price it had paid for
it.1
The court's ruling, which was upheld on appeal to the District
Court, reopens the uncertainty about whether secured creditors will
be able to credit bid. The Bankruptcy Court found that limiting the
secured creditor's right to credit bid would lead to an active
auction for the debtor's assets, but that allowing the secured
party to credit bid the full amount of its claim would prevent such
an auction. Accordingly, it found that the interest of the
debtor's estate in promoting an active auction was sufficient
cause to limit the right of the secured creditor to credit bid its
claim.
Prior to the Supreme Court's RadLAX
decision in April 2012, several circuits had
held that a debtor could confirm a plan of reorganization over a
secured creditor's objection without giving the secured
creditor the right to credit bid.2 But many
practitioners believed that the issue was resolved when the Supreme
Court ruled that a secured creditor had the right to credit bid in
connection with a plan of reorganization.3 Although
Fisker involved a section 363 sale, and not a plan of
reorganization, the decision nevertheless appears to reopen that
controversy, at least for 363 sales.
Fisker Automotive Holdings, Inc. ("Fisker") was a company
founded in 2007 to develop and produce hybrid plug-in electric
vehicles. Its largest lender was the United States Department of
Energy (the "DOE"), which had made pre-petition loans to
Fisker of approximately $168 million, secured by Fisker's
assets. When Fisker's business stumbled, it defaulted on
its loans, and the DOE conducted a public auction of its debt,
which was acquired by Hybrid Tech Holdings, LLC
("Hybrid") for $25 million. Hybrid's plan was
to acquire Fisker's assets in a section 363 sale for a credit
bid of $75 million. Fisker filed for chapter 11 on November
22, 2013, and sought approval of the sale to Hybrid for January 10,
2014.
The official creditors committee (the "Committee")
objected to the sale, arguing that it had located an alternative
buyer that was prepared to make an all-cash bid, but only if Hybrid
was precluded from making a $75 million credit bid. In its
objection to the proposed sale to Hybrid, the Committee raised
three primary arguments: (a) the sale process was being unduly
rushed -- the proposed sale date was only 45 business days after
the chapter 11 filing date; (b) there were disputes about the
extent and validity of Hybrid's security interest in the assets
of Fisker; (c) if Hybrid's ability to credit bid was limited,
there would be an auction, and conversely, if Hybrid was allowed to
credit bid, there would be no auction.
The right of a secured creditor to credit bid is governed by
section 363(k) of the Bankruptcy Code, which provides: "At a
sale under subsection (b) of this section of property that is
subject to a lien that secures an allowed claim, unless the court
for cause orders otherwise the holder of such claim may bid at such
sale."4
The Bankruptcy Court ruled that cause existed because barring
credit bidding would promote a more robust auction for Fisker's
assets. Although the Bankruptcy Court reasoned that its decision
was based on the "cause" language of section 363(k), it
cited no authority for the proposition that fostering a competitive
bidding environment was the type of cause contemplated by the
statute. Similarly, the Bankruptcy Court cited no authority for
limiting the credit bid to the amount paid by Hybrid, and that
aspect of the decision alone is controversial.
Although debtors have previously attempted to limit claims buyers
to the amount they paid, absent lender or buyer misconduct, those
efforts had failed and courts had allowed buyers to enforce the
full amount of the claims they purchased.5 Although he
did not cite to or distinguish any of those cases, Judge Gross
ruled that cause to limit credit bidding required no finding of
improper conduct.
Judge Gross was clearly bothered by the tactics of the debtor and
Hybrid in seeking expedited approval of the sale to Hybrid. He
noted in his opinion the short interval between the chapter 11
filing and the proposed sale date, and said that he had been given
no good explanation for the need for such a shortened sale process
in the case. He pointedly stated that "Hybrid's rush
to purchase...is inconsistent with the notions of fairness in the
bankruptcy process."
Hybrid sought to appeal the Bankruptcy Court's decision to the
District Court, which denied the requested appeal, thus upholding
the decision below. While the District Court ruled narrowly that
the Bankruptcy Court order was not a final order for appeal
purposes, and that it would exercise its discretion not to
entertain the appeal on an interlocutory basis, the District Court
went further and adopted the Bankruptcy Court's reasoning on
the meaning of cause for purposes of limiting credit bidding.
It would be comforting if the decisions in Fisker could be
limited to their particular facts. Fisker was a case
where the presence of a true third-party buyer was likely to lead
to a better result for unsecured creditors than a credit bid by the
secured creditor. Those cases are not common; but it may not
be so easy to put the genie back in the bottle.
Creditors' committees and other junior creditors are likely to
point to Fisker as authority for slowing the pace of
proposed section 363 transactions, limiting the right to credit
bid, and perhaps most perniciously, reviving the idea that a claims
buyer should only be able to enforce a claim to the amount of its
purchase price.
Fisker is a recent decision, so its impact is
unclear. But reopening the question of a secured
creditor's right to credit bid could have a significant effect
on bankruptcy cases. It could chill the market for trading
claims, particularly secured claims. That uncertainty may also
make it more difficult for secured creditors to reach
agreement on restructuring troubled debtors because pre-petition
"loan-to-own" transactions may come under greater
scrutiny, as they did in Fisker.
1 In re Fisker Automotive Holdings, Inc., Case No. 13-13087(KG), ECF #435.
2 In re Philadelphia Newspapers, LLC, 599 F.3d 298 (5th Cir. 2010); Bank of N.Y. Trust Co., NA v. Official Unsecured Creditors' Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir.2009).
3 RadLAX Gateway Hotel, LLC v. Amalgamated Bank, ___ US ___, 132 S. Ct. 2065 (2012)
4 11 U.S.C. §363(k).
5 Manufacturers Trust Co. v. Becker, 338 U.S. 304 (1949)(Bankruptcy Act case stating the general rule).
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