Restructuring

Contributed by Nelly Almeida.
We previously blogged about the Supreme Court’s 2012 decision upholding a secured lender’s general right to credit bid in a plan sale—a unanimous decision resolving a split among the Third, Fifth, and Seventh Circuits.  Judge Gross’ recent ruling in In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del. Jan. 17, 2014) [Docket Nos. 482–83] may, however, revive the credit bidding debate with a focus on when a court can limit a lender’s statutory right to credit bid “for cause.”
Credit Bidding – A Brief Overview
A secured lender’s ability to credit bid its claim when its collateral is sold in a bankruptcy case is a fundamental right provided by section 363(k) of the Bankruptcy Code that not only reduces a lender’s need for liquidity at the time of the sale, but ensures that the collateral pledged to the lender is not sold for less than the amount of such lender’s secured claim.  Nevertheless, section 363(k) of the Bankruptcy Code also provides that a court may abrogate a lender’s right to credit bid “for cause.”  What constitutes cause is not defined in the Bankruptcy Code and is thus left for courts to determine on a case-by-case basis.
Some courts have found cause exists to deny credit bidding when there is a formal dispute as to the validity or the amount of a creditor’s claim or lien or when a rapid sale of the assets is necessary to preserve value.  Under similar conditions, other courts have preferred to allow credit bidding subject to certain limitations intended to protect the estate in the event that a creditor’s secured claim or lien turns out to be invalid.  Some of these limitations have included directing a creditor to (i) place cash in the amount of all or part of the bid in an escrow account; (ii) furnish an irrevocable letter of credit equal to the disputed amount; or (iii) post a bond equal to the disputed amount.  In deciding whether to impose conditions on credit bidding, courts have considered (i) the effect credit bidding will have on the estate; (ii) whether other claimants will be harmed should a lender’s disputed claim later be disallowed; and (iii) the practical effect that such conditions will have on the secured creditor.
Still, although denying and/or limiting a secured lender’s right to credit bid is not uncommon, Judge Gross’ recent decision to cap a credit bid in In re Fisker at the amount the secured lender paid for the claim on the secondary market came as a surprise to many observers.
The Fisker Decision
Prior to filing for protection under chapter 11 in November of 2013, the debtors in In re Fisker were equipment manufacturers of plug-in hybrid electric vehicles.  In 2010, the United States Department of Energy (DOE) extended to the debtors a secured loan, $168 million of which remained outstanding when the DOE sold the loan to Hybrid Tech Holdings, LLC (Hybrid) for $25 million in October 2013.  Following the DOE auction, the debtors agreed to sell all of their assets to Hybrid in exchange for a credit bid of $75 million.  To that end, the debtors filed a sale motion seeking court approval of the private sale to Hybrid and arguing that the cost and delay that would result from an auction process would be unlikely to increase value for the debtors’ estates.
The recently-appointed Official Committee of Unsecured Creditors immediately opposed the motion and proposed, instead, a competitive auction, noting that Wanxiang America Corporation (Wanxiang) had already expressed interest in Fisker.  Because Wanxiang had recently purchased certain assets of A123 Systems, a seller of lithium ion batteries (a primary component of Fisker cars), the Committee argued that Wanxiang had a genuine interest in purchasing Fisker and, more importantly, that its offer would encourage competitive bidding.
Importantly, at the January 10, 2014 hearing on the disputed sale motion, the debtors and the Committee announced several stipulated agreements to limit the areas for dispute, including, among other things, that:  (i) if Hybrid’s credit bid was capped or denied, there would be a strong likelihood of an auction that would create substantial value for the estates; (ii) if Hybrid’s credit bid was not capped or denied, Wanxiang would not place a bid and there would be no realistic possibility of a competitive auction; (iii) the highest and best value for the estates would be achieved only through the sale of all of the debtors’ assets as an entirety; and (iv) a material portion of the assets being sold were not subject to a property perfected lien in favor of Hybrid or were subject to a lien in favor of Hybrid that is in bona fide dispute.
Judge Gross ultimately limited Hybrid’s credit bid to what Hybrid paid for the DOE loan—$25 million—and ordered an auction of the debtors’ assets.  He provided three bases for his ruling.  First, Judge Gross emphasized that if he did not limit Hybrid’s credit bid, the auction process would not only be chilled, but it would likely not occur at all, which would undermine the importance of promoting a competitive bidding environment.  Second, he noted that because Hybrid’s claim is partially secured, partially unsecured, and partially of uncertain status, it would not be unprecedented to limit credit bidding in this case.  Third, in issuing his decision, Judge Gross criticized the timing of the proposed sale, noting that the debtors provided a mere 24 business days for parties-in-interest to challenge the sale motion and even less time for the Committee (given its late appointment).  The court highlighted that neither the debtors nor Hybrid were able to provide a satisfactory reason for why the sale of a non-operating debtor required such haste.  Indeed, Judge Gross stated that “it is now clear that Hybrid’s ‘drop dead’ date . . . was pure fabrication” and found that the proposed sale timing on which Hybrid insisted was “inconsistent with the notions of fairness in the bankruptcy process.”
The decision to cap the bid has been criticized by some (including Hybrid) as being in direct conflict with Third Circuit law allowing secured creditors to bid the full amount of their claim.  Following the ruling (and before the court’s order was entered), Hybrid filed an emergency motion seeking leave to appeal and a motion for expedited consideration of the foregoing arguing, among other things, that the court’s opinion “attempts to sidestep recent Supreme Court precedent reiterating the significant role of credit bidding.”  Hybrid also asserted that the court issued its decision based on “no facts whatsoever” regarding the legitimacy of Hybrid’s claim and that neither the Supreme Court nor the Third Circuit has addressed whether a bankruptcy court can limit a credit bid to the purchase price of the claim.  The court has yet to rule on Hybrid’s appeal.
Consistent with its opinion, on January 23, 2014, the court entered an order establishing February 7, 2014 as the deadline to submit bids for the debtors’ assets and February 12, 2014 as the auction date.  A hearing to consider the sale is set to take place on February 14, 2014.  As of the date hereof, news reports indicate that, in addition to its credit bid, Hybrid is willing to offer $30 million in cash, for a total bid of $55 million, which exceeds Wanxiang’s current reported bid of $37.5 million. Of course, we do not know what bids have been offered but not yet reported.
The Fisker decision, if not overturned, could have serious implications for future auctions and for the claims trading market in general.  Indeed, at the hearing Judge Gross stated that the bankruptcy auction would, among other things, help determine whether the price paid for the DOE loan was in fact “fair and reasonable and in the best interests of the debtors’ estates.”  It is unclear whether under the Fisker decision, the interest of promoting a fair auction is by itself sufficient cause to limit credit bidding without the additional factors of liens being in dispute and the secured creditor’s insistence on an unfair process.  Would two of the three factors be sufficient?  The wheels will be turning as bankruptcy practitioners test the limits of the ruling, and we will be watching to see how this plays out in Fisker and future cases.