The ability of a secured creditor to credit bid at a bankruptcy sale was recently called into question (again) in a January 17, 2014 decision by Bankruptcy Judge Kevin Gross in the In re Fisker Automotive Holdings, Inc. chapter 11 liquidation cases (“In re Fisker”) in Delaware.

Fisker Automotive, Inc. (“Fisker”) was founded in 2007 to manufacture plug-in hybrid electric cars.  The U.S. Dep’t of Energy (“DOE”) had provided approximately $169 million in secured financing to Fisker.  The company subsequently faced several significant problems, including safety recalls and extensive inventory loss caused by Hurricane Sandy in 2012.

Hybrid Tech Holdings, LLC (“Hybrid”) purchased the $169 million in Fisker’s debt to the DOE for $25 million at auction in October, 2013. Shortly thereafter, Fisker filed its chapter 11 cases on November 22, 2013, with the goal of Hybrid acquiring its assets at a private section 363 sale.  Unsurprisingly, Hybrid planned to credit bid at least $75 million of the face value of the former DOE debt.

The Creditors’ Committee (“Committee”), however, submitted its own Bidding Procedures Motion (the “Bidding Procedures Motion”), which provided for an auction, to include another bidder, Wanxiang America Corp. (“Wanxiang”).  Wanxiang had recently spent $300 million to purchase the operations of a company which manufactured lithium ion batteries, the “engine” of Fisker’s electric cars.

In its Bidding Procedures Motion, the Committee argued that Hybrid should not be able to credit bid, or, in the alternative, not be able to credit bid more than the $25 million price at which Hybrid purchased the former DOE debt.

Of course, the credit bidding debate is not new; much has been written about the relatively recent rulings on this topic from the Third Circuit in In re Philadelphia Newspapers, LLC, the Seventh Circuit in In re River Road Hotel Partners, LLC, and the U.S. Supreme Court in Radlax Gateway Hotel, LLC v. Amalgamated Bank.  Each of these decisions, of course, involved sales under a plan, and turned on, among other things, the courts’ interpretations of section 1129(b)(2)(A).  The proposed sale in In re Fisker did not involve a plan, and as a result there was no argument regarding section 1129(b)(2)(A).

Although not granting in full the relief requested in the Committee’s Bidding Procedures Motion, Judge Gross believed that “cause” existed to limit Hybrid’s credit bid to $25 million, the price it paid for the former DOE debt.  The court found the facts constituting such “cause” to be: (i) that Wanxiang would not participate in an auction if Hybrid were permitted to credit bid $75 million of its debt; and (ii) that there was some question as to the exact amount of Hybrid’s secured claim due to perfection, or lien validity, issues.

InIn re Fisker, Judge Gross reasoned that if Hybrid were permitted to credit bid based on the face, or nominal, amount of its debt, bidding would not only be chilled, but would actually be frozen, precluding the possibility of any public auction at all.  As a result, the court relied on section 363(k), which allows credit bidding “unless the court for cause orders otherwise . . . .”

Arguably, the centerpiece of the In re Fisker decision is its reliance upon a footnote contained in the Third Circuit’s Philadelphia Newspapers case, which Judge Gross quoted in its entirety:

The lenders argue that the ‘for cause’ exemption under § 363(k) is limited to situations in which a secured creditor has engaged in inequitable conduct.  That argument has no basis in the statute.  A court may deny a lender the right to credit bid in the interest of any policy advanced by the Code, such as to ensure the success of the reorganization or to foster a competitive bidding environment.

Philadelphia Newspapers, LLC, 599 F.3d 298, 315-16, n. 14 (3d Cir. 2010) (internal citation omitted) (emphasis added).

Clearly Judge Gross believed that the more competitive bidding environment which would result from having Wanxiang participate in an auction for the Debtors’ assets was sufficient to constitute “cause” under section 363(k) to limit Hybrid’s ability to credit bid.

As recently noted by a prominent bankruptcy scholar in an article analyzing the recent flurry of credit bidding jurisprudence, “the litigation now will focus more on what constitutes ‘cause’ [under section 363(k)].”  Charles J. Tabb, Credit Bidding, Security, and the Obsolescence of Chapter 11, 2013 U. Ill. L. Rev. 103, 139.

The timing of the proposed sale may also have played a role in this decision; the court noted that Fisker filed its Chapter 11 cases only 3 business days before Thanksgiving, and insisted that the sale motion and confirmation hearings take place no later than January 3, just after the New Year’s holiday.  This allowed only 24 business days for parties to challenge the sale motion, and even less time for the Committee, not appointed until December 5, to perform its duties.  Judge Gross expressly noted in his decision that a satisfactory answer to the question as to why the proposed transaction required such an accelerated schedule was never provided; in fact, Judge Gross opined that Hybrid’s rush to purchase the Debtors’ assets on such an accelerated schedule was “inconsistent with the notions of fairness in the bankruptcy process.”  This could not have helped the Debtors’ and Hybrid’s request that Hybrid be permitted to credit bid $75 million of the face amount of its debt.

Hybrid immediately appealed Judge Gross’ decision to the District court, but that appeal was denied on February 7, 2014.  The District court held that the Bankruptcy court’s order was interlocutory, and that Hybrid had not demonstrated any of the factors governing whether the court should grant leave for interlocutory appeal under 28 U.S.C. § 158(a)(3).

Thus, the Supreme Court’s ruling on credit bidding in Radlax Gateway Hotel, LLC v. Amalgamated Bank is by no means the last word in the credit bidding debate.

Judge Gross appears to have perceived “cause” in the facts of In re Fisker; it remains to be seen whether his approach will be followed by other courts.  Judge Gross may well have had doubts of his own; although not contained in the written decision, while ruling from the bench exactly one week before his decision was released, the Judge mentioned the Third Circuit’s procedure for issuing non-precedential opinions, and suggested that his credit bidding decision in the In re Fisker case might be an appropriate candidate for such non-precedential status.

The story of the unusual, perhaps Solomonic, approach the Court took to handling the two competing bidders in In re Fisker will be addressed in a follow-up post.