The US Bankruptcy Court for the District of Delaware in In re Fisker Automotive Holdings, Inc. held that cause existed to limit a secured creditor's right to bid its claim at the amount it paid to purchase the claim.
On January 17, 2014, the US Bankruptcy Court for the District of Delaware in In re Fisker Automotive Holdings, Inc. held that cause existed to limit a secured creditor's right to credit bid its claim at the amount it paid to purchase the claim (No. 13-13087, (Bankr. D. Del. Jan. 17, 2014)).
Fisker Automotive Holdings, Inc. and Fisker Automotive, Inc. (Debtors) design, assemble and manufacture premium plug-in hybrid electric cars. In 2010, the Debtors obtained a $530 million loan from the Department of Energy (DOE) which was secured by liens on substantially all of the Debtors' assets. After the Debtors defaulted on the loan, the DOE sold the loan in the secondary market through an auction sale. In October 2013, Hybrid Tech Holdings, LLC (Hybrid) purchased the loan for $25 million, of which $168.5 million in principal remained outstanding, and assumed the DOE's position as the Debtors' senior secured lender. Soon after, the Debtors agreed to sell substantially all of their assets to Hybrid in a private sale for $75 million in the form of a credit bid.
In November 2013, the Debtors filed for Chapter 11 bankruptcy relief. The Debtors then filed a motion seeking immediate court approval of the sale to Hybrid, arguing that the cost and delay resulting from a competitive auction process would be unlikely to generate greater value for the Debtors' estate than the proposed sale to Hybrid. The Debtors requested approval of the sale occur no later than January 3, 2014, a mere 45 days after the bankruptcy filing.
The Official Committee of Unsecured Creditors (Committee) objected to the proposed sale to Hybrid, focusing its objection on Hybrid's right to credit bid. The Committee proposed that the Debtors conduct an auction and identified a competing bidder, Wanxiang America Corporation (Wanxiang), who had made an attractive offer but indicated it would not participate in the auction if Hybrid were allowed to credit bid more than $25 million.
At the January 10, 2014 sale hearing, the Debtors and the Committee limited the areas of dispute by agreeing to the following stipulations:
If Hybrid's credit bid was denied or capped at $25 million, there would be a strong likelihood of an auction occurring which would create material value for the estate exceeding Hybrid's bid.
If Hybrid's credit bid was not capped, there would be no realistic possibility of an auction.
Limiting Hybrid's ability to credit bid would likely foster and facilitate competitive bidding.
The highest and best value for the estate would be achieved only through the sale of all of the Debtors' assets as an entirety.
Within the entirety of the assets offered for sale, a material group of assets is:
subject to properly perfected liens in favor of Hybrid;
is not subject to properly perfected liens in favor of Hybrid; and
is subject to a bona fide dispute as to whether Hybrid has a properly perfected lien, which dispute is likely not able to be quickly or easily resolved.
In addition, the parties dispute the allocation of value between the above three groups.
If the Court found no basis to limit Hybrid's ability to credit bid, then it would withdraw all objections to the proposed sale.
Based on the above stipulations, the Debtors and the Committee agree to limit the issues before the Court to whether:
Credit bidding should be permitted, given that a material portion of the assets are not subject to a properly perfected lien or are subject to a lien which is in bona fide dispute, which dispute cannot be quickly and easily resolved; or
"Cause" exists to limit Hybrid's credit bidding right because:
doing so would facilitate a competitive auction; or
the assets to be sold included both encumbered and unencumbered assets.
The Court held that Hybrid was entitled to credit bid, but determined that "cause" existed to limit the credit bid to $25 million, the amount Hybrid paid for its claim.
The Court noted that under section 363(k) of the Bankruptcy Code, secured creditors are granted the right to credit bid to offset, or bid, their allowed secured claims against the purchase price in a sale of their collateral under section 363(b) of the Bankruptcy Code. However, the Court explained that a court may modify or deny this right "for cause" and rejected Hybrid's argument that cause is limited to situations where a secured creditor has engaged in inequitable conduct. Instead, the Court cited to the US Court of Appeals for the Third Circuit's decision in In re Philadelphia Newspapers, LLC, in which it stated in a footnote that "[a] court may deny a lender the right to credit bid in the interest of any policy advanced by the Code, such as to ensure the success of the reorganization or to foster a competitive bidding environment" (599 F.3d 298, 315-16 (3d Cir. 2010)).
The Court found that cause existed to cap Hybrid's credit bid at $25 million because:
Absent a limitation on credit bidding, bidding would not only be chilled, it would be "frozen" because there would be no auction at all.
The timing of the proposed sale was "troublesome." The Court noted that the schedule allowed only 24 business days for parties to object to the sale motion, and even less time for the Committee, given its late appointment. The Court emphasized that neither the Debtors nor Hybrid were able to provide a satisfactory reason justifying the speed of the sale, stating that the proposed timing was "inconsistent with the notions of fairness in the bankruptcy process."
The validity of Hybrid's liens on certain of the Debtors' assets is the subject of an ongoing dispute. Here, the Court distinguished the Third Circuit's decision in In re Submicron Systems Corp., where an undersecured creditor was allowed to credit bid in the full amount of its claim (see 432 F. 3d 448 (3d. Cir. 2006)). The Court explained that in Submicron, where the entire amount of the secured claim was allowed, the issue was the value of the collateral, not the extent of the secured claim. In contrast, here the extent of Hybrid's allowed secured claim is not yet known and "[t]he law leaves no doubt that the holder of a lien the validity of which has not been determined, as here, may not bid its lien."
On February 7, 2014, the Court denied Hybrid's emergency appeal on procedural grounds. A hearing to consider the sale is scheduled for February 14, 2014. Hybrid and Wanxiang are joint stalking horse bidders, pursuant to bidding procedures the Court approved on January 23, 2014. News reports indicate that Hybrid is willing to increase its bid with $30 million in cash, for a total bid $55 million, which exceeds Wanxiang's current reported bid of $37.5 million.
Fisker stands in contrast to the US Supreme Court's recent decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, in which it ruled that creditors must be allowed to credit bid in a sale of collateral under a plan of reorganization (see 132 S. Ct. 2065 (2012) and Legal Update, Supreme Court Finds Debtors Must Allow Credit Bidding). In RadLAX, the US Supreme Court emphasized the importance of a creditor's right to credit bid in promoting the policy of protecting creditors against the risk that their collateral will be sold at a depressed price. However, unlike Fisker, RadLAX did not address a court's ability to limit credit bidding rights "for cause."
Instead, Fisker recalls the Third Circuit's decision in In re Philadelphia Newspapers which noted that section 363(k) of the Bankruptcy Code allows a court to restrict credit bidding rights for cause, such as facilitating a competitive auction or when the priority or extent of a creditor's lien is in dispute (both applicable in Fisker) (see 599 F.3d at n. 14 and Legal Update, US Court of Appeals Affirms Philadelphia News District Court Decision). Fisker serves as a reminder that courts can and do restrict credit bidding rights for these reasons, or in the interest of promoting other policies, such as ensuring the success of the reorganization. Distressed investors who credit bid as part of a loan-to-own strategy can at least minimize some of this risk by undertaking significant legal due diligence on the validity and priority of the liens securing the claims they are purchasing.
If not overturned, this decision could be used in the future to support opponents of credit bidding, who often argue that credit bidding chills the auction process. It could also provide support to those opposing quick asset sales. In addition, distressed investors should be aware that the case may be used as precedent to cap their credit bidding rights to the amount they paid for their claims, which may negatively impact the claims trading markets generally.