United States: Delaware Bankruptcy Court Limits Credit Bidding in Fisker Automotive

Credit bidding has been a source of lively controversy in recent years.  In In re Fisker Automotive Holdings, Inc., Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware ruled that a secured creditor with a partially disputed claim would only be allowed to credit bid its claim in an amount equal to the purchase price it had paid for it.1

The court's ruling, which was upheld on appeal to the District Court, reopens the uncertainty about whether secured creditors will be able to credit bid. The Bankruptcy Court found that limiting the secured creditor's right to credit bid would lead to an active auction for the debtor's assets, but that allowing the secured party to credit bid the full amount of its claim would prevent such an auction. Accordingly, it found that the interest of the debtor's estate in promoting an active auction was sufficient cause to limit the right of the secured creditor to credit bid its claim.

Prior to the Supreme Court's RadLAX decision in April 2012, several circuits had held that a debtor could confirm a plan of reorganization over a secured creditor's objection without giving the secured creditor the right to credit bid.2 But many practitioners believed that the issue was resolved when the Supreme Court ruled that a secured creditor had the right to credit bid in connection with a plan of reorganization.3 Although Fisker involved a section 363 sale, and not a plan of reorganization, the decision nevertheless appears to reopen that controversy, at least for 363 sales.

Fisker Automotive Holdings, Inc. ("Fisker") was a company founded in 2007 to develop and produce hybrid plug-in electric vehicles. Its largest lender was the United States Department of Energy (the "DOE"), which had made pre-petition loans to Fisker of approximately $168 million, secured by Fisker's assets.  When Fisker's business stumbled, it defaulted on its loans, and the DOE conducted a public auction of its debt, which was acquired by Hybrid Tech Holdings, LLC ("Hybrid") for $25 million.  Hybrid's plan was to acquire Fisker's assets in a section 363 sale for a credit bid of $75 million.  Fisker filed for chapter 11 on November 22, 2013, and sought approval of the sale to Hybrid for January 10, 2014. 

The official creditors committee (the "Committee") objected to the sale, arguing that it had located an alternative buyer that was prepared to make an all-cash bid, but only if Hybrid was precluded from making a $75 million credit bid.  In its objection to the proposed sale to Hybrid, the Committee raised three primary arguments: (a) the sale process was being unduly rushed -- the proposed sale date was only 45 business days after the chapter 11 filing date; (b) there were disputes about the extent and validity of Hybrid's security interest in the assets of Fisker; (c) if Hybrid's ability to credit bid was limited, there would be an auction, and conversely, if Hybrid was allowed to credit bid, there would be no auction.

The right of a secured creditor to credit bid is governed by section 363(k) of the Bankruptcy Code, which provides: "At a sale under subsection (b) of this section of property that is subject to a lien that secures an allowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale."4

The Bankruptcy Court ruled that cause existed because barring credit bidding would promote a more robust auction for Fisker's assets. Although the Bankruptcy Court reasoned that its decision was based on the "cause" language of section 363(k), it cited no authority for the proposition that fostering a competitive bidding environment was the type of cause contemplated by the statute. Similarly, the Bankruptcy Court cited no authority for limiting the credit bid to the amount paid by Hybrid, and that aspect of the decision alone is controversial.

Although debtors have previously attempted to limit claims buyers to the amount they paid, absent lender or buyer misconduct, those efforts had failed and courts had allowed buyers to enforce the full amount of the claims they purchased.5 Although he did not cite to or distinguish any of those cases, Judge Gross ruled that cause to limit credit bidding required no finding of improper conduct.

Judge Gross was clearly bothered by the tactics of the debtor and Hybrid in seeking expedited approval of the sale to Hybrid. He noted in his opinion the short interval between the chapter 11 filing and the proposed sale date, and said that he had been given no good explanation for the need for such a shortened sale process in the case.  He pointedly stated that "Hybrid's rush to purchase...is inconsistent with the notions of fairness in the bankruptcy process."  

Hybrid sought to appeal the Bankruptcy Court's decision to the District Court, which denied the requested appeal, thus upholding the decision below. While the District Court ruled narrowly that the Bankruptcy Court order was not a final order for appeal purposes, and that it would exercise its discretion not to entertain the appeal on an interlocutory basis, the District Court went further and adopted the Bankruptcy Court's reasoning on the meaning of cause for purposes of limiting credit bidding.

It would be comforting if the decisions in Fisker could be limited to their particular facts.  Fisker was a case where the presence of a true third-party buyer was likely to lead to a better result for unsecured creditors than a credit bid by the secured creditor.  Those cases are not common; but it may not be so easy to put the genie back in the bottle.  Creditors' committees and other junior creditors are likely to point to Fisker as authority for slowing the pace of proposed section 363 transactions, limiting the right to credit bid, and perhaps most perniciously, reviving the idea that a claims buyer should only be able to enforce a claim to the amount of its purchase price.

Fisker is a recent decision, so its impact is unclear.  But reopening the question of a secured creditor's right to credit bid could have a significant effect on bankruptcy cases.  It could chill the market for trading claims, particularly secured claims. That uncertainty may also make it more difficult for secured creditors to reach agreement on restructuring troubled debtors because pre-petition "loan-to-own" transactions may come under greater scrutiny, as they did in Fisker.

1 In re Fisker Automotive Holdings, Inc., Case No. 13-13087(KG), ECF #435.

2 In re Philadelphia Newspapers, LLC, 599 F.3d 298 (5th Cir. 2010);  Bank of N.Y. Trust Co., NA v. Official Unsecured Creditors' Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir.2009).

3 RadLAX Gateway Hotel, LLC v. Amalgamated Bank,  ___ US ___, 132 S. Ct. 2065 (2012)

4 11 U.S.C. §363(k).

5 Manufacturers Trust Co. v. Becker, 338 U.S. 304 (1949)(Bankruptcy Act case stating the general rule).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions