Restructuring

Contributed by Nelly Almeida.
Whether or not you believe that Fisker set a new standard for what constitutes cause sufficient to abrogate a lender’s right to credit bid, we can all agree that the question has become a “hot topic” in the bankruptcy community, meriting numerous blog entries. We now have two more post-Fisker decisions to add to the analysis: (i) a district court’s opinion denying a lender’s request for an expedited appeal of a recent credit bidding decision and (ii) a bankruptcy court’s ruling allowing a lender to credit bid subject to certain limitations. Although the judges in both cases referenced Fisker in their opinions, neither case clarifies whether or not Fisker actually redefined what constitutes cause to deny or limit credit bidding.
The Free Lance-Star Appeal
Last month we blogged about Judge Huennekens’ decision to deny DSP Acquisition, LLC’s (DSP) right to credit bid in a sale of substantially all of Free Lance-Star’s assets. Following the decision, DSP filed, among other things, an emergency motion for certification and leave to appeal requesting that the district court consider Judge Huennekens’ ruling before the proposed auction date—May 15, 2014. On May 7, 2014, Judge Hudson of the United States District Court for the Eastern District of Virginia denied DSP’s motion, relying heavily on the United State District Court for the District of Delaware’s refusal to consider Hybrid Tech Holdings’ appeal of the Fisker credit bidding decision.
In response to DSP’s argument that it would suffer “irreparable harm” if the credit bidding issues are not resolved before the sale of Free Lance-Star’s assets, Judge Hudson noted that, similar to the situation in Fisker, there is “no risk of irreparable harm if the issues are not resolved before the auction because there are no pending issues regarding the assets . . . and the Bankruptcy Court will determine who receives the proceeds (and how much) after the sale.” Further, Judge Hudson found that the bankruptcy court’s decision was not final because “[w]ho has liens, the amount of those liens, the full extent of DSP’s liens, and other issues remain to be determined.”
In addressing whether it is appropriate to grant leave for an interlocutory appeal, Judge Hudson explained that the bankruptcy court’s decision in Free Lance-Star did not involve a controlling question of law for which there is substantial grounds for a difference of opinion. Judge Hudson cited to the Fisker district court decision in noting that a bankruptcy court may deny a lender’s right to credit bid to foster a competitive bidding environment. Judge Hudson then explained that in Free Lance-Star, the court not only sought a “robust and competitive bidding environment,” but also a “preliminary resolution of the extent of some of DSP’s liens.” Judge Hudson found that if he granted an interlocutory appeal of the Free Lance-Star decision, there “would be neither material advancement of the ultimate termination of the litigation nor savings of judicial or estate resources.” Moreover, DSP did not show that there were “exceptional circumstances” justifying an interlocutory appeal in the case.
In re Charles Street AME Church
While Fisker made a prominent appearance in the Free Lance-Star appeal (and underlying decision), it only played a minor role in the credit bidding decision issued in the chapter 11 case of Charles Street African Methodist Episcopal Church of Boston (CSAME).
CSAME is the owner of two adjoining parcels of real property. Following denial of its first proposed plan of reorganization, CSAME filed a motion requesting (i) authority to sell all of its assets free and clear of all liens to a stalking horse bidder (ABCD), and (ii) an order either (x) barring one of its creditors, OneUnited, from submitting a credit bid at the sale of CSAME’s assets, or (y) to the extent the court permitted credit bidding, requiring OneUnited to submit at least $210,000 in cash as a deposit to pay ABCD’s break-up fee. CSAME also filed an objection to OneUnited’s proof of claim, which was based on a loan to CSAME secured by CSAME’s assets. In its claim objection, CSAME asserted three setoff counterclaims against OneUnited that, if successful, would have eliminated OneUnited’s claim.
CSAME argued that its claim objection evidenced that OneUnited’s claim is subject to a bona fide dispute and, therefore, created sufficient cause to deny OneUnited’s right to credit bid under the case law interpreting section 363(k). The bankruptcy court acknowledged that the existence of a bona fide dispute often constitutes cause to deny credit bidding, but found that the counterclaims asserted in CSAME’s objection “[did] not amount to cause to prohibit credit bidding.” The court explained that “CSAME does not dispute the validity of the underlying loan agreements, the validity, perfection or priority of OneUnited’s mortgages, the amounts claimed to be due, or anything intrinsic to either of OneUnited’s claims. Nor does CSAME allege that the mortgages or loan agreements may be avoided.” Because the court determined that there was no dispute about the “validity or extent of OneUnited’s secured claims,” it permitted OneUnited to credit bid. With respect to the break-up fee, the court agreed that the need to fund the break-up fee constituted cause to limit (but not deny) OneUnited’s right to credit bid. Thus, the court required OneUnited to include $50,000 in cash with any bid (not $210,000). Notably, in its opinion the court stated that because CSAME “expressly disavow[ed] any reliance on [Fisker] and its rationale,” it did not need to address the “types of ‘cause’” at issue in Fisker.
What Does it All Mean?
In denying DSP’s request for immediate appeal, Judge Hudson relied heavily on the district court’s opinion in Fisker and noted that the cases were “strikingly similar.” Judge Hudson even cited to Fisker for the proposition that credit bidding can be denied to promote a competitive bidding environment but, notably, did not address whether the presence of other factors (such as a lien dispute) would be necessary. The In re Charles Street AME decision, on the other hand, reads much more like the pre-Fisker line of cases where credit bidding was only limited or denied when there was a genuine dispute as to the validity or extent of a lender’s lien. Still, the court expressly stated that it was not addressing the “types of ‘cause’” at issue in Fisker, leaving open the question of whether Fisker created additional “types of cause” to deny credit bidding.
Interestingly, in both Free Lance-Star and Fisker, the creditors were engaged in a loan-to-own strategy and were found to have participated in “inequitable conduct” by trying to either rush a private sale (Fisker) or improperly expand its lien on the debtor’s assets (Free Lance-Star). We are left to wonder: What is the significance of those factors? Should investors who purchase secured debt at a discount in the secondary market for the purpose of credit bidding be concerned? Or is more than just a loan-to-own strategy needed for a court to find cause?
Unfortunately, despite the recent case law on credit bidding, we still don’t have answers to many of our questions. Some commentators have predicted that, in light of these open issues, another credit bidding decision may make its way to the Supreme Court. We will continue to monitor the case law and keep you posted!