Credit Bids May Be Limited for Cause, Including Encouraging Robust Bidding and Uncertain Secured Status. In re Fisker Automotive Holdings, Inc., 2014 WL 210593 (Bankr. D. Del., Jan. 17, 2014).
Secured creditors, and more particularly loan-to-own investors, rely on their right to credit bid their claims in bankruptcy sales of their collateral, but this right may be limited by the court for “cause” under section 363(k) of the Bankruptcy Code. A recent decision by Judge Gross of the Bankruptcy Court for the District of Delaware capped a secured creditor’s credit bid at only $25 million of its $168 million claim – a cap based on the price paid by the creditor to purchase the claim. The decision took the distressed investing community by surprise by putting a spotlight on the rarely-invoked “for cause” statutory limitation to credit bidding.
Fisker was founded in 2007 to produce plug-in hybrid electric vehicles in the United States. The United States, through the Department of Energy, in 2010 had agreed to fund development of two automobile models by arranging senior secured lending facilities. Fisker faltered due to a combination of factors, including safety recalls relating to battery packs supplied by a third party vendor, a loss of inventory during Hurricane Sandy, and a loss of access to continued lending under the DOE facility.
Fisker explored a number of restructuring options during 2013. In October of 2013, Hybrid Tech Holdings, LLC purchased from the DOE all of its outstanding senior secured loan principal, $168.5 million, for $25 million and in effect succeeded to the DOE’s position as Fisker’s senior secured lender. Hybrid and Fisker subsequently entered into an asset purchase agreement by which Hybrid would acquire Fisker’s assets for a $75 million credit bid. Fisker filed for bankruptcy protection and sought expedited approval of the private sale to Hybrid on the first day, having determined that it was unlikely that any third-party offer would be better than Hybrid’s, and that any delay would endanger estate value.
The Official Committee of Unsecured Creditors opposed the private sale and sought instead a competitive auction to bring in at least Wanxiang America Corporation to bid against Hybrid. (Wanxiang had been an active suitor of Fisker earlier in 2013.) The Committee’s position was that Hybrid was not entitled to credit bid $75 million of its position, since, the Committee argued, a material part of the assets to be sold were not subject to Hybrid’s security interest. The disputed nature of Hybrid’s secured status, together with the value to the estate of a competitive auction, was, the Committee urged, “cause” for the court to limit to $25 million Hybrid’s right to credit bid.
Fisker and the Committee agreed to limit their dispute by stipulating, among other things, to the following: First, capping Hybrid’s credit bid would encourage bidding and likely bring more value to the estate. Second, not capping Hybrid’s credit bid would prevent any effective auction. Third, that the assets to be sold were a mixture of Hybrid collateral, non-collateral and disputed collateral.
Judge Gross relied on each of these stipulations in considering the application of section 363(k) of the Bankruptcy Code, which permits a creditor with security over debtor property to credit bid for that property “unless the court for cause orders otherwise.” Judge Gross found that leaving Hybrid’s bid uncapped would not only chill bidding, but freeze out other bidders entirely. This was made more important to Judge Gross because Wanxiang was an attractive, capable and motivated bidder, having recently acquired the manufacturer of the lithium ion batteries used in Fisker’s electric cars and having offered improved economic and non-economic terms over Hybrid’s original offer.
Judge Gross also took a dim view of what he characterized as the overly aggressive, excessively expedited nature of the private sale process demanded by Hybrid. The original proposal was to hold the sale hearing no later than January 3, 2014, leaving only 24 business days for parties to challenge the process. Judge Gross was unwilling to permit Hybrid to “short-circuit the bankruptcy process” when the interests of so many stakeholders were in the balance.
Judge Gross distinguished the decision of the Third Circuit in In re Submicron Systems Corp., 432 F.3d 448 (3d Cir. 2006), which held that a secured creditor is permitted to credit bid the full face amount of its secured claim even if the secured debt has little or no actual or economic value. In Submicron, the secured debtor had an undisputed, perfected secured claim. By contrast, the judge found that there were legitimate questions as to Hybrid’s security interests, including as to which assets were encumbered.
Judge Gross’s ruling in the Fisker case is in counterpoint to the Supreme Court in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065 (2012), which required a debtor to accord a secured creditor the right to credit bid its claim because “the ability to credit bid helps to protect a creditor against the risk that its collateral will be sold at a depressed price.” Judge Gross did not directly question RadLAX, but relied on case law in the Third Circuit that applied the “for cause” standard to promote a competitive auction or when the validity or extent of a secured lender’s claim is in dispute, notwithstanding the clear underlying right of a secured creditor to credit bid. (After Judge Gross’s ruing, Fisker attempted to obtain an accelerated appeal, in advance of the auction, of Judge Gross’s order capping its credit bid, but this was unsuccessful.)
It will be interesting to see whether other courts will follow this controversial decision, which has been heavily criticized in the investment community, since it is not unusual for credit bids to have a chilling effect on the possibility of competing bids. In the meanwhile, Judge Gross’s decision is a good reminder that uncertainty regarding the scope of a security interest can complicate and, in certain cases, undermine the effectiveness of a credit bid.
