Delaware Bankruptcy Court Limits Credit Bidding in Fisker AutomotiveApril 2014
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).