Just When Secured Creditors Thought it Was Safe to Credit Bid Again . . . .

by Bond Schoeneck & King PLLC
Contact

The ability of a secured creditor to credit bid at a bankruptcy sale was recently called into question (again) in a January 17, 2014 decision by Bankruptcy Judge Kevin Gross in the In re Fisker Automotive Holdings, Inc. chapter 11 liquidation cases (“In re Fisker”) in Delaware.

Fisker Automotive, Inc. (“Fisker”) was founded in 2007 to manufacture plug-in hybrid electric cars.  The U.S. Dep’t of Energy (“DOE”) had provided approximately $169 million in secured financing to Fisker.  The company subsequently faced several significant problems, including safety recalls and extensive inventory loss caused by Hurricane Sandy in 2012.

Hybrid Tech Holdings, LLC (“Hybrid”) purchased the $169 million in Fisker’s debt to the DOE for $25 million at auction in October, 2013. Shortly thereafter, Fisker filed its chapter 11 cases on November 22, 2013, with the goal of Hybrid acquiring its assets at a private section 363 sale.  Unsurprisingly, Hybrid planned to credit bid at least $75 million of the face value of the former DOE debt.

The Creditors’ Committee (“Committee”), however, submitted its own Bidding Procedures Motion (the “Bidding Procedures Motion”), which provided for an auction, to include another bidder, Wanxiang America Corp. (“Wanxiang”).  Wanxiang had recently spent $300 million to purchase the operations of a company which manufactured lithium ion batteries, the “engine” of Fisker’s electric cars.

In its Bidding Procedures Motion, the Committee argued that Hybrid should not be able to credit bid, or, in the alternative, not be able to credit bid more than the $25 million price at which Hybrid purchased the former DOE debt.

Of course, the credit bidding debate is not new; much has been written about the relatively recent rulings on this topic from the Third Circuit in In re Philadelphia Newspapers, LLC, the Seventh Circuit in In re River Road Hotel Partners, LLC, and the U.S. Supreme Court in Radlax Gateway Hotel, LLC v. Amalgamated Bank.  Each of these decisions, of course, involved sales under a plan, and turned on, among other things, the courts’ interpretations of section 1129(b)(2)(A).  The proposed sale in In re Fisker did not involve a plan, and as a result there was no argument regarding section 1129(b)(2)(A).

Although not granting in full the relief requested in the Committee’s Bidding Procedures Motion, Judge Gross believed that “cause” existed to limit Hybrid’s credit bid to $25 million, the price it paid for the former DOE debt.  The court found the facts constituting such “cause” to be: (i) that Wanxiang would not participate in an auction if Hybrid were permitted to credit bid $75 million of its debt; and (ii) that there was some question as to the exact amount of Hybrid’s secured claim due to perfection, or lien validity, issues.

InIn re Fisker, Judge Gross reasoned that if Hybrid were permitted to credit bid based on the face, or nominal, amount of its debt, bidding would not only be chilled, but would actually be frozen, precluding the possibility of any public auction at all.  As a result, the court relied on section 363(k), which allows credit bidding “unless the court for cause orders otherwise . . . .”

Arguably, the centerpiece of the In re Fisker decision is its reliance upon a footnote contained in the Third Circuit’s Philadelphia Newspapers case, which Judge Gross quoted in its entirety:

The lenders argue that the ‘for cause’ exemption under § 363(k) is limited to situations in which a secured creditor has engaged in inequitable conduct.  That argument has no basis in the statute.  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.

Philadelphia Newspapers, LLC, 599 F.3d 298, 315-16, n. 14 (3d Cir. 2010) (internal citation omitted) (emphasis added).

Clearly Judge Gross believed that the more competitive bidding environment which would result from having Wanxiang participate in an auction for the Debtors’ assets was sufficient to constitute “cause” under section 363(k) to limit Hybrid’s ability to credit bid.

As recently noted by a prominent bankruptcy scholar in an article analyzing the recent flurry of credit bidding jurisprudence, “the litigation now will focus more on what constitutes ‘cause’ [under section 363(k)].”  Charles J. Tabb, Credit Bidding, Security, and the Obsolescence of Chapter 11, 2013 U. Ill. L. Rev. 103, 139.

The timing of the proposed sale may also have played a role in this decision; the court noted that Fisker filed its Chapter 11 cases only 3 business days before Thanksgiving, and insisted that the sale motion and confirmation hearings take place no later than January 3, just after the New Year’s holiday.  This allowed only 24 business days for parties to challenge the sale motion, and even less time for the Committee, not appointed until December 5, to perform its duties.  Judge Gross expressly noted in his decision that a satisfactory answer to the question as to why the proposed transaction required such an accelerated schedule was never provided; in fact, Judge Gross opined that Hybrid’s rush to purchase the Debtors’ assets on such an accelerated schedule was “inconsistent with the notions of fairness in the bankruptcy process.”  This could not have helped the Debtors’ and Hybrid’s request that Hybrid be permitted to credit bid $75 million of the face amount of its debt.

Hybrid immediately appealed Judge Gross’ decision to the District court, but that appeal was denied on February 7, 2014.  The District court held that the Bankruptcy court’s order was interlocutory, and that Hybrid had not demonstrated any of the factors governing whether the court should grant leave for interlocutory appeal under 28 U.S.C. § 158(a)(3).

Thus, the Supreme Court’s ruling on credit bidding in Radlax Gateway Hotel, LLC v. Amalgamated Bank is by no means the last word in the credit bidding debate.

Judge Gross appears to have perceived “cause” in the facts of In re Fisker; it remains to be seen whether his approach will be followed by other courts.  Judge Gross may well have had doubts of his own; although not contained in the written decision, while ruling from the bench exactly one week before his decision was released, the Judge mentioned the Third Circuit’s procedure for issuing non-precedential opinions, and suggested that his credit bidding decision in the In re Fisker case might be an appropriate candidate for such non-precedential status.

The story of the unusual, perhaps Solomonic, approach the Court took to handling the two competing bidders in In re Fisker will be addressed in a follow-up post.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bond Schoeneck & King PLLC | Attorney Advertising

Written by:

Bond Schoeneck & King PLLC
Contact
more
less

Bond Schoeneck & King PLLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.