by George Klidonas ’07
The Bankruptcy Court for the District of Delaware recently decided, in In re Fisker Automotive, that a secured creditor’s right to “credit bid” is not absolute and can be limited.1 But its conclusion is seemingly at odds with the Supreme Court’s decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, which held that a secured creditor has an absolute right to credit bid under a plan of reorganization.2 The chief factual difference between the two cases, however, is that the secured creditor sought to credit bid under a plan of reorganization in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, while the secured creditor in In re Fisker Automotive requested to credit bid under a section 363 sale. This Article discusses the In re Fisker Automotive case and the justification for the court’s conclusion. In addition, this article compares the In re Fisker Automotive decision to RadLAX Gateway Hotel, LLC v. Amalgamated Bank.
In Chapter 11 bankruptcy cases, debtors have the option of selling some or all of their assets even before a plan of reorganization is proposed and confirmed. Section 363(b) of the Bankruptcy Code specifically allows a debtor to sell property of the estate outside of the ordinary course of business.3 Such sales have become increasingly common in recent years and more and more Chapter 11 filings have taken place with this purpose in mind.4 In the event, however, the debtor attempts to sell property that is encumbered by a secured creditor’s security interest, section 363(k) of the Bankruptcy Code allows that secured creditor to “credit bid” up to the amount of its claim. In other words, a secured creditor can use its owed “credit” to “bid” in the sale of the debtor’s property.
Although section 363(k) allows a secured creditor to credit bid, it also eliminates that right if the court finds that “cause” exists.5 The bankruptcy court in In re Fisker Automotive shed light on what constitutes “cause” under section 363(k) of the Bankruptcy Code.6 In that case, the bankruptcy court concluded that the secured creditor did not have an absolute right to credit bid and that, generally, a court may deny a lender the right to credit bid in the interest of any policy advanced by the Bankruptcy Code.7
Factual and Procedural Background
Fisker Automotive Holdings, Inc. and Fisker Automotive, Inc. (collectively, the “Debtors” or “Fisker”) were founded in 2007 and designed, assembled, and manufactured premium plug-in hybrid electric vehicles in the United States. Fisker, however, faced many challenges. It encountered safety recalls in connection with battery packs supplied by a third-party vendor. In addition, it was affected by Hurricane Sandy by sustaining a material loss of its unsold vehicle inventory. Moreover, and most importantly, Fisker lost its lending facility provided through the United States Department of Energy.8 As a result of these challenges, the Debtors filed for Chapter 11 bankruptcy relief in order to sell substantially all of its assets under section 363(b) of the Bankruptcy Code.
At the time of its petition filing, November 22, 2013, Fisker had approximately $203.2 million in debt, $168.5 million of which was owed to the Department of Energy. Hybrid Tech Holdings, LLC (hereinafter “Hybrid”) purchased the Department of Energy’s position of outstanding principal for $25 million (approximately $.15 on the dollar). As a result, Hybrid succeeded to the Department of Energy’s position as the senior secured lender. Fisker and Hybrid discussed the latter’s potential acquisition of the former’s assets through a credit bid. Debtors agreed that Hybrid could credit bid up to $75 million.9
An Official Committee of Unsecured Creditors (the “Committee”) was appointed on December 5, 2013. The Committee opposed Fisker’s motion to sell its assets to Hybrid. Debtors’ position was that a sale to a third party was not reasonably likely to generate greater value than Debtors’ proposed sale transaction. In addition, the cost and delay of finding another potential buyer would be reasonably unlikely to increase value for the estates. The Committee, on the other hand, proposed that an auction take place, especially in light of another potential purchaser’s interest in Fisker’s assets, Wanxiang America Corporation (hereinafter “Wanxiang”). Wanxiang made it clear that it was willing to increase its bid if there was auction.10
Legal Analysis of Hybrid’s Ability to Credit Bid
The bankruptcy court found that Hybrid paid $25 million for its claim and was, therefore, entitled to credit bid under section 363(k) of the Bankruptcy Code. The question, however, was to what extent Hybrid was allowed to credit bid. The court cited to the Third Circuit decision in In re Philadelphia Newspapers, LLC, explaining that the right to credit bid under section 363(k) “is not absolute.”11 Although secured creditors have historically argued that the “for cause” exemption is reserved for those situations where a secured creditor has engaged in inequitable conduct, the Third Circuit, as well as the In re Fisker court rejected that position.12 Instead, “[a] court may deny a lender the right to credit bid in the interest of any policy advanced by the [Bankruptcy] Code, such as to ensure the success of the reorganization or to foster a competitive bidding environment.”13
In this case, the bankruptcy court concluded that there was “cause” to limit Hybrid’s ability credit bid: “bidding will not only be chilled without the cap; bidding will be frozen.”14 Wanxiang had expressed interest in participating in Fisker’s auction. Moreover, the court found that it was a “highly attractive and capable participant.”15 Specifically, Wanxiang evinced that it had a “vested interest” in purchasing Fisker, primarily due to its recent $300 million purchase of certain assets of A123 Systems, which included its lithium ion battery.
The court also raised concerns about the timing of the sale motion, and the amount of Hybrid’s allowed secured claim. First, the court concluded that Hybrid’s “rush” to effectuate the purchase of Fisker’s assets is incongruent with the notions of fairness in the bankruptcy process. Between the time the bankruptcy case began, and the anticipated sale motion, there were only 24 business days for parties to challenge the sale, during a time where there were a number of holidays. There was no satisfactory reason provided to the court for this level of speed. Second, the court concluded that it is unclear how much of Hybrid’s claim is actually secured. The holder of a lien may not bid on its lien if its validity has not been yet determined.16 Because the extent to which Hybrid’s claim is valid has not yet been determined, no one knows how much of its claim is an allowed secured claim. The court concluded that Hybrid was nonetheless allowed to credit bid up to $25 million; “[a] decision to authorize an uncapped credit bid under the facts of this case would be unprecedented and unacceptable.”17
Secured Creditors: Lessons of In re Fisker Automotive
The main take-away from the In re Fisker Automotive case is that a secured creditor’s right to credit bid under section 363(k) of the Bankruptcy Code is not absolute; and if a court determines that credit bidding will chill (or freeze) other bids, the amount could be capped. Although this decision is nonprecedential and arguably fact specific, secured creditors should be aware of its potential implications. Furthermore, distressed investors who purchase secured claims prior to a bankruptcy filing, similar to Hybrid, should be aware of this decision’s repercussions if followed by other courts. What recourse, however, do secured creditors have in preventing a cap on the amount of their credit bid?
Interestingly, the In re Fisker Automotive decision stands in contrast to the United States Supreme Court’s holding in RadLAX Gateway Hotel, LLC v. Amalgamated Bank,18 where the court discussed a secured creditor’s ability to credit bid under a plan of reorganization versus a 363 sale. To confirm a Chapter 11 plan over the objection of a secured creditor, a plan must satisfy one of the three requirements set forth in section 1129(b)(2)(A):
(i) the secured creditor retains its lien on the property and receives deferred cash payments, (ii) the property is sold free and clear of the lien “subject to section 363(k),” and the creditor receives a lien on the proceeds of the sale, or (iii) the secured creditor receives the “indubitable equivalent” of its claim.19
The Supreme Court stated that RadLAX Gateway Hotel, LLC v. Amalgamated Bank was “an easy case” and held that the debtors’ attempt to confirm a plan that did not provide a secured creditor the right to credit bid its claim was in violation of the Bankruptcy Code.20 After the Supreme Court’s decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, secured creditors and distressed investors took comfort in the fact that their ability to credit bid would not be infringed upon. However, following the In re Fisker Automotive decision their level of comfort has likely been diminished. It appears, however, that based on the two decisions, a secured creditor retains its right to credit bid under a plan of reorganization, while having that right limited by certain courts under a 363 sale. It remains to be seen whether courts will follow suit, or take an approach that is more secured creditor friendly.
1 In re Fisker Automotive Holdings, Inc., 2014 WL 210593 (Bankr. D. Del. Jan. 17, 2014).
2 RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065 (2012).
3 11 U.S.C. § 363(b).
4 2 NORTON BANKR. L. & PRAC. 3d § 44:17.
5 11 U.S.C. § 363(k).
6 In re Fisker Automotive Holdings, Inc., 2014 WL 210593, at *4.
7 Id. at *4.
8 Id. at *1.
9 Id. at *1-2.
10 Id. at *3-4.
11 Id. at *4 (quoting In re Philadelphia Newspapers, LLC, 599 F.3d 298, 315-16 (3d Cir. 2010)).
12 In re Fisker Automotive Holdings, Inc., 2014 WL 210593, at *4 (quoting In re Philadelphia Newspapers, LLC, 599 F.3d 298, 315-16 n.14).
13 In re Fisker Automotive Holdings, Inc., 2014 WL 210593, at *4 (emphasis added) (quoting In re Philadelphia Newspapers, LLC, 599 F.3d 298, 315-16 n.14).
14 In re Fisker Automotive Holdings, Inc., 2014 WL 210593, at *5.
16 Id. (citing In re Danfuskie Isl. Props., LLC, 441 B.R. 60 (Bankr. D.S.C. 2010)).
17 In re Fisker Automotive Holdings, Inc., 2014 WL 210593, at *6.
18 132 S. Ct. 2065 (2012).
19 11 U.S.C. § 1129(b)(2)(A).
20 RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. at 2073.
George Klidonas ’07 is an associate at BakerHostetler in New York, with a primary focus on bankruptcy, corporate restructuring, and creditors’ rights. He is also the Coordinating Editor for the ABI Journal “Practice and Procedure” column, and co-chair of the ABI Taxation Committee. The views expressed in this article are solely those of the author.