Article courtesy of Margaret G. Parker-Yavuz (Akin Gump)
POLK 33 Lending, LLC v. THL Corp. Fin., Inc. (In re Areogroup Int’l, Inc., 2020 U.S. Dist. LEXIS 155442 (D. Del. August 27, 2020)
This case concerns a dispute between two secured lenders regarding the allocation of proceeds from a sale of Aerogroup’s assets in a §363 auction, and the question of whether a secured lender may be allocated more than the amount it credit bids if its bid ultimately is not the successful bid and the assets are sold to another bidder for a higher price. The district court upheld the bankruptcy court’s finding that a creditor’s secured claim is not capped by a credit bid that is subsequently exceeded by a higher bid.
Aerogroup International, Inc. and its affiliates (“Aerogroup”) were a leading manufacturer and retailer of women’s footwear which filed for bankruptcy under Chapter 11 on September 15, 2017. Aerogroup’s indebtedness included secured term loans owing under a facility in which THL Corporate Finance, Inc. (“THL”) was the administrative agent, and a secured debtor-in-possession financing (“DIP”) facility provided by Polk 33 Lending, LLC (“Polk”). THL held a lien on Aerogroup’s intellectual property, goodwill and proceeds therefrom, and Polk held a first priority lien on Aerogroup’s inventory, working capital and proceeds therefrom. In February 2018, Aerogroup auctioned substantially all of their assets. Halfway through the auction, THL submitted a credit bid for Aerogroup’s intellectual property alone for $12,209,519; THL’s bid was for less than the full face amount of its claim, which was more than $24,000,000. The auction was then paused, and Aerogroup asked THL to refrain from bidding for a period of time to allow other potential bidders interested in placing bids for all of the assets to gain momentum. When the auction resumed, other bidders continued bidding and Aerogroup’s assets were sold to another bidder for $26,175,000.
In April 2018, THL filed a motion with the bankruptcy court seeking determination of the value of THL and Polk’s secured claims for purposes of determining how the proceeds of the asset sale should be allocated between them. Polk objected to the motion and moved for summary judgment, arguing that THL’s credit bid at the auction set the value of its secured claim because the bid was THL’s “final” bid. The bankruptcy court denied Polk’s motion and ultimately allocated to THL an amount exceeding the amount of its credit bid. The bankruptcy court noted that Polk’s argument relied on language from Third Circuit decisions (In re SubMicron Sys., Corp. and In re Philadelphia Newspapers, LLC) that was taken out of context and did not support its position. The bankruptcy court found that it is the highest bid which sets the assets’ value in an auction, regardless of who makes the bid.
On appeal, the district court upheld the bankruptcy court’s decision, holding that a creditor’s secured claim is not capped by a credit bid that is subsequently exceeded by a higher bid, and found that SubMicron and Philadelphia Newspapers do not support Polk’s argument.