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Tuesday, March 11, 2014
Recent Decision Caps Secured Creditor’s Credit Bid in §363 Sale to Purchase Price of Acquired Debt
A ruling with far reaching consequences that has not attracted much attention....
It is well-settled that secured creditors are ordinarily entitled to credit bid their allowed secured claim in a sale pursuant to § 363 of the Bankruptcy Code (the “Code”). In Radlax Gateway Hotel, LLC v. Amalgamated Bank, 132 S.Ct. 205 (2012), the Supreme Court acknowledged that bankruptcy courts have the power to prohibit a secured creditor from credit bidding “for cause.” However, because “cause” is undefined in the Code, courts have substantial discretion when making this determination.
Recently, a case out of the District of Delaware, In re Fisker Auto. Holdings, Inc., 13-13087(KG), 2014 WL 210593 (Bankr. D. Del. 2014), produced a surprising opinion on the issue of what constitutes “cause.” In Fisker, Hybrid, a secured creditor, purchased from the Department of Energy $168.5 million in outstanding debt for $25 million. Prior to the Debtor filing bankruptcy, Hybrid and the Debtor negotiated an asset purchase agreement (the “Agreement”) in which Hybrid would purchase a majority of Debtor’s assets for a credit bid of $75 million. The Agreement provided for $500,000 to be distributed to Fisker’s unsecured creditors in a soon-to-be filed bankruptcy case.
Soon thereafter, the Debtor filed bankruptcy under Chapter 11 of the Code and quickly sought to enforce the Agreement through a Sale Motion. The Creditors’ Committee opposed the Sale Motion and filed a Motion for Bidding Procedures, arguing that Hybrid should not be allowed a credit bid. A Stipulated Agreement between the Debtor and the Creditors’ Committee, provided that if the Court allowed Hybrid to credit bid more than the $25 million purchase price, then Wanxiang, a competing bidder, would not participate in the auction.
The issues before the Court were (i) whether Hybrid could credit bid its claim, and (ii) if so, could the Court cap the amount of Hybrid’s credit bid. The Court quickly answered the first question in the affirmative, finding that Hybrid purchased the claim, and thus, was entitled to credit bid pursuant to §363(k) of the Code. Turning to the second issue, the Court found it troubling that Wanxiang would refuse to bid at the auction if Hybrid were allowed to credit bid more than $25 million. The Court determined it had “cause” to limit Hybrid’s credit bid because failure to do so would not only chill, but rather freeze the bidding process. Additionally, the Court stated that the speed in which Debtor and Hybrid attempted to finalize the Sale Motion did not comport with the notions of fairness in bankruptcy.
The Fisker decision should cause great concern for secured lenders in the business of purchasing distressed assets. It is important to continue to monitor this area of bankruptcy law to see whether cases subsequent to Fiskerexpand or narrow the meaning of “for cause.” Creditors attempting to credit bid should try to diminish the relevance of Fisker by seeking to illicit multiple bids in anticipation of any §363 auction. Furthermore, secured lenders should do whatever it takes to show that the bidding procedures are fair to all parties.
 Debtor filed its bankruptcy case three business days before Thanksgiving and insisted that the Sale Motion and confirmation hearings occur on or before January 3, 2014. This left only 24 business days for parties to challenge the Sale Motion.