In re Aerogroup: Final Auction Bid, Not Last Credit Bid, Establishes Value of Collateral | Practical Law

In re Aerogroup: Final Auction Bid, Not Last Credit Bid, Establishes Value of Collateral | Practical Law

In In re Aerogroup International, Inc., the US District Court for the District of Delaware affirmed the bankruptcy court decision that a credit bid for a portion of a bankruptcy debtor's assets offered at auction does not cap the bidding creditor's secured claim when its bid is subsequently exceeded by a cash bid for all of the debtor's assets.

In re Aerogroup: Final Auction Bid, Not Last Credit Bid, Establishes Value of Collateral

by Practical Law Bankruptcy & Restructuring
Law stated as of 22 Sep 2020 • USA (National/Federal)
In In re Aerogroup International, Inc., the US District Court for the District of Delaware affirmed the bankruptcy court decision that a credit bid for a portion of a bankruptcy debtor's assets offered at auction does not cap the bidding creditor's secured claim when its bid is subsequently exceeded by a cash bid for all of the debtor's assets.
On August 27, 2020, the US District Court for the District of Delaware affirmed the bankruptcy court decision denying a creditor's motion seeking to cap a second creditor's secured claim at the amount the second creditor unsuccessfully credit bid at auction of the debtor's assets. The moving creditor cited Third Circuit precedent that the bankruptcy and district courts found to be presented out of context, "misleading", and therefore inapplicable ( (D. Del. Aug. 27, 2020)).

The Auction

Aerogroup International, Inc., a manufacturer and retailer of women's footwear, filed for Chapter 11 bankruptcy in the District of Delaware in September 2017. Aerogroup sought DIP financing from Polk 33 Lending LLC. The bankruptcy court's DIP financing order determined that Polk held a first lien on all "DIP priority collateral," which included Aerogroup's inventory and working capital. Another creditor, THL Corporate Finance, Inc., held a lien on all "Term Priority Defined Collateral," which included Aerogroup's intellectual property and goodwill.
In February 2018, Aerogroup held an auction for substantially all of its assets. THL submitted a credit bid of $12 million for the intellectual property alone, which was the minimum bid under the bidding procedures. Another bidder put in a $17 million bid for all of the debtor's assets. Bidding was paused to determine whether the $17 million bid was higher or better than THL's. Before bidding resumed, Aerogroup asked THL to refrain from bidding to allow bids for all of the debtor's assets to build momentum. THL agreed, reserving its rights to resume bidding on the intellectual property if bids on all of the assets were not acceptable. Aerogroup ultimately accepted a cash bid of $26 million for all of the debtor's assets.
THL moved for a determination of how to allocate the winning bid between THL and Polk's respective first lien collateral pools. Polk moved for summary judgment on the grounds that THL's final credit bid at the auction capped the value of THL's secured claim, citing In re SubMicron Systems Corp. (432 F.3d 448 (3rd Cir. 2006)) and In re Philadelphia Newspapers, LLC (418 B.R. 548 (E.D. Pa. 2009), affirmed by 599 F.3d 298 (3rd Cir. 2010)) for the proposition that the value of the secured portion of a creditor's claim is determined by its credit bid.
THL argued that Polk's interpretation of SubMicron and Philadelphia Newspapers was disingenuous. The bankruptcy court agreed, finding that:
  • Polk relied on language taken from SubMicron and Philadelphia Newspapers out of context.
  • THL's credit bid was later exceeded by higher bids.
  • THL's credit bid at auction was not final.
Polk's motion for summary judgment was denied, and the court determined that THL was entitled to $16.8 million of the sale proceeds, and Polk to $7.45 million. Polk requested an appeal directly to the Third Circuit, which was denied, and the appeal was heard in the district court.

The District of Delaware Appeal

On appeal, THL again asserted that a credit bid during an asset auction temporarily sets the value of a secured creditor's collateral, but that greater cash bids then reset that collateral's value and the value of the creditor's secured claim. Polk repeated its argument that any credit bid becomes the cap on the secured portion of a creditor's claim even if the credit bid is not successful.
The district court disagreed, concluding that the value of a creditor's secured claim is determined by the highest bid for the collateral, whether the bid is from the creditor or another bidder. The district court dismantled Polk's argument by noting that:
  • The SubMicron decision cited by Polk stands for the proposition that a creditor is free to credit bid whatever amount of debt it wishes, regardless of the economic value of the collateral, but not that a credit bid caps the value of a secured creditor's claim.
  • The Philadelphia Newspapers language cited by Polk that a credit bid sets the value of a lender's secured interest was explaining that an auction within a plan that did not allow credit bidding, but provided a creditor with the indubitable equivalent of its collateral, was consistent with an auction outside of a plan that allowed credit bidding. Further, the US Supreme Court implicitly overruled Philadelphia Newspapers, holding that the type of plan described was permissible under the plain language of the Bankruptcy Code in RadLAX Gateway Hotel, LLC v. Amalgamated Bank (566 U.S. 639 (2012)).
  • The bankruptcy court's finding that THL's credit bid was not a final bid was not clearly erroneous and there was no basis to overturn its factual finding on appeal. Third circuit law is clear that:
    • when a credit bid is made it temporarily sets the value of a secured creditor's collateral, and any subsequent cash bid that surpasses the credit bid would then set the value of the secured creditor's collateral; and
    • a secured creditor may credit bid up to the entire face amount of its claim when its collateral is being sold at a bankruptcy auction.

Practical Implications

The Aerogroup decision reinforces the unsurprising conclusion that the highest successful bid for assets, regardless of its source, sets the value of collateral and is not capped by a credit bid that is subsequently exceeded by a higher bid. Creditors are free to credit bid in an asset sale under section 363 of the Bankruptcy Code without having to be concerned that their secured claim will be restricted to the value of an unsuccessful credit bid.