In In re Fisker Automotive Holdings, Inc., 2014 WL 210593 (Bankr. D. Del. January 17, 2014), a Delaware bankruptcy court issued a noteworthy Memorandum Opinion that limited a secured creditor’s ability to credit bid in a sale of a debtor’s assets under Section 363(k) of the Bankruptcy Code. While the decision may have turned on the unique circumstances of the case, the case should at least serve as a reminder that the Code does not necessarily provide secured creditors with an unfettered right to credit bid in a sale of their collateral.
The Fisker debtors, who manufactured luxury plug-in hybrid vehicles, filed their chapter 11 bankruptcy cases in November 2013 in response to battery pack safety recalls and the destruction of a material portion of their inventory during Superstorm Sandy. Also, one month prior to the bankruptcy, the debtors’ lending facility with the U.S. Department of Energy, in the outstanding principal amount of $168.5 million, had been auctioned to Hybrid Tech Holdings, LLC for $25 million. Indeed, Hybrid acquired the DOE loan for the express purpose of consummating a purchase of the debtors’ assets as part of a chapter 11 liquidation. Immediately after filing for bankruptcy, the debtors sought approval of a private sale of their assets to Hybrid free and clear of all liens under Section 363(f) of the Bankruptcy Code. Hybrid’s purchase offer consisted of $75 million in the form of a credit bid and a partial release of the debtors’ liability on DIP financing already extended by Hybrid. Importantly, Hybrid did not propose to pay the debtors any cash as part of its purchase offer. The debtors sought to close the sale without a competitive auction and argued that an auction would not lead to a better outcome than a private sale to Hybrid.
The Committee of Unsecured Creditors objected to the proposed sale to Hybrid and moved for a public auction of the debtors’ assets anchored by a bid from Wanxiang America Corporation. Further, as part of the proposed auction, the Committee requested that the Court bar or limit Hybrid’s ability to credit bid for the debtors’ assets pursuant to Section 363(k) of the Bankruptcy Code. Generally, Section 363(k) of the Code permits a secured creditor to bid at a sale of its collateral and offset its allowed claim against the purchase price, a practice commonly called credit bidding. However, the statute expressly permits a court to modify a creditor’s right to credit bid for “cause.”
The Committee argued that “cause” existed to restrict Hybrid’s credit bidding rights for a variety of reasons. The Committee’s first and primary argument was that without a cap or bar on a credit bid from Hybrid in an auction of the debtors’ assets, no auction participant, including Wanxiang, would make a bid in excess of the $168 million owing to Hybrid on the DOE loan. Second, since assets not subject to Hybrid’s lien were to be included in the sale, the Committee asserted that Hybrid should pay cash for these unencumbered assets. Third, the Committee argued that Hybrid’s credit bid should be capped or barred because the validity, amount and extent of Hybrid’s secured claim and lien were in dispute. Fourth, the Committee contended that the sale process was being rushed through the Court and that the sale amounted to an insider transaction because a former Fisker director who actively negotiated the sale to Hybrid resigned to become an officer and manager of Hybrid on the day the Purchase Agreement was signed. In an effort to narrow the issues before the Court prior to the sale procedures hearing, the debtors and the Committee stipulated that: (1) the assets to be sold included assets subject to Hybrid’s perfected liens, unencumbered assets and assets subject to a bona fide dispute as to whether Hybrid’s liens were perfected; and (2) no auction participant would bid unless Hybrid’s credit bid was capped at $25 million.
The Fisker Court agreed with the primary argument of the Committee and limited Hybrid’s credit bid to $25 million. Noting the Third Circuit Court of Appeals’s statement in In re Philadelphia Newspapers, LLC, 599 F.3d 298, 316 n.14 (3d Cir.2010), 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,”1 the Fisker Court was particularly swayed by the stipulation that there would be no auction bidders at all if Hybrid’s credit bid was not capped at $25 million. The Court was also influenced by its perception that the originally proposed sale to Hybrid had been rushed through the bankruptcy process in a way that was “inconsistent with the notions of fairness in the bankruptcy process.” In conclusion, the Court distinguished In re Submicron Systems Corp., 432 F.3d 448 (3d Cir. 2006), in which an undersecured creditor was permitted to credit bid its entire allowed claim, by pointing out that the dispute in Submicron concerned the value of the collateral to be sold and not whether the security interest in the collateral was duly perfected, which was at issue in the Fisker case.
Importantly, the Fisker Court did not state in its Opinion that it set Hybrid’s credit bid cap at $25 million because Hybrid paid $25 million for the DOE loan. The fact that Hybrid purchased the claim at the DOE auction for $25 million may have lent credibility, though, to the stipulation between the debtors and the Committee that no one would bid at an auction if Hybrid’s credit bid was not limited to $25 million. Also, it is possible that the Court was influenced by the fact that Hybrid’s “investment” was only $25 million, but the Court did not state this either. Further, the Court did not appear to consider that unlike many secured creditors, who credit bid only to prevent a low auction price, Hybrid was truly interested in purchasing the debtors’ assets and was not participating in the auction only to guard against a low sales price for its collateral. Setting these suppositions aside, however, no part of the Opinion provides legal support for a per se limitation of a credit bid to the amount paid for the underlying debt.
After the Court approved the Committee’s auction procedures, including the $25 million credit bid cap for Hybrid, an auction was held, in which only Hybrid and Wanxiang participated. Over the course of three days and 19 rounds of bidding, Wanxiang emerged as prevailing bidder. The debtors and the Committee valued the winning purchase offer from Wanxiang at $149.2 million, which consisted of cash in the amount of $126.2 million, $8 million in assumed liabilities and an equity contribution in a designated affiliate. During the course of the auction, Wanxiang increased its offer by over $81 million in cash, so while it may be true that Wanxiang would not have participated in the auction if Hybrid’s credit bid was not subject to a cap, it is less clear in hindsight whether the cap was appropriately set at $25 million rather than a higher figure.
Though the Court’s Opinion has caught the attention of secured lenders nationwide, the Fisker decision should be viewed as standing for the limited, but well-settled, principal that a court can limit a secured creditor’s credit bid for “cause” if doing so promotes a competitive sale process. As bankruptcy courts address the issue in cases to come, the rationale and method for limiting a secured creditor’s credit bid will hopefully become more clear and predictable. Until that time, however, strategic buyers and holders of secured debt should be wary when attempting to gain control of a debtor’s assets through a credit bid if doing so could discourage otherwise willing buyers from making cash bids for the same assets.
1 After the Bankruptcy Court approved the public auction process and the $25 million credit bid cap, Hybrid filed two emergency motions with the District Court for leave to appeal, but both were promptly denied. The District Court’s opinions, although not rulings on the merits, seemed to concur with the Bankruptcy Court’s reasoning that the decision to limit Hybrid’s credit bid was permissible under both Section 363(k) of the Code and existing Third Circuit precedent. See In re Fisker Automotive Holdings, Inc., 2014 WL 546036 (D. Del. Feb. 7, 2014); In re Fisker Automotive Holdings, Inc., 2014 WL 576370 (D. Del. Feb. 12, 2014).