Adam Lewis’ e-Bulletin re Fisker Automotive Holdings.

Dear constituency list members of the Insolvency Law Committee, the following is a case update analyzing a recent case of interest:

SUMMARY

In connection with the proposed sale of substantially all of the debtors’ assets free and clear of liens under Bankruptcy Code Section 363(k), the bankruptcy court for the District of Delaware found “cause” within the meaning of Section 363(k) to limit the senior secured creditor’s right to credit bid its secured claim to the discounted amount the secured creditor paid the claim’s original holder of the secured claim to buy the claim.  The case is In re Fisker Automotive Holdings, Inc., 2014 WL 210593 (Bankr. D. Del. Jan. 17, 2014). 

FACTS

Fisker Automotive and its subsidiaries (the “Debtors”), embarked on development of two premium models of hybrid plug-in electric vehicles.  To fund the development, the Debtors arranged lines of credit with Federal Financing Bank (“FFB”) through the Department of Energy (the “DOE”).  The loans were secured by various assets of the Debtors, though it appears that the security did not include some assets and there was a dispute as to whether it extended to some other assets.  A variety of factors led to failure of the business.  In the meantime, Hybrid Tech Holdings, LLC (“Hybrid”) purchased the DOE’s $168 million loan for $25 million.  The Debtors and Hybrid then negotiated a sale of substantially all of the Debtors’ assets to Hybrid for consideration that included a $75 million credit bid.  The bankruptcy court did not describe the other consideration.  The Debtors then filed chapter 11 for the purpose of effectuating the Hybrid sale, with a liquidating plan to follow.

The Debtors filed a simple sale motion, believing that no one else would make a bid higher or more attractive than Hybrid’s bid.  The Creditor’s Committee (the “Committee”), however, filed a motion asking the bankruptcy court to set up an auction with bidding procedures.  In the meantime, Wanxiang America Corp. (“Wanxiang”) made an offer to the Debtors that “was extremely attractive both economically and in its significant non-economic terms.”  Again, the bankruptcy court did not detail the Wanxiang offer. 

The Debtors and Committee then agreed that if Hybrid’s right to credit bid was denied altogether for “cause” under Section 363(k), or appropriately limited, it was likely that there would be a lively auction that would produce better results for the estate than the Hybrid offer.  Without any such limitations, neither Wangxiang nor any other party was likely to participate in an auction. 

At the hearing on the bidding procedures and sale motions, the bankruptcy court capped Hybrid’s right to credit bid at the $25 million it paid for the DOE’s secured claim.

REASONING

The bankruptcy court adopted two rationales for its decision.  First, it held that not only would Hybrid’s right to credit bid the entire claim chill bidding, but the Debtors/Committee stipulation indicated that there would be no bidding at all.  Second, the bankruptcy court pointed to the dispute over just what collateral Hybrid held and, therefore, just what its secured claim really was.  The bankruptcy court also noted that neither the Debtors nor Hybrid explained what the rush was to push through a sale to Hybrid because the Debtors had already shuttered their operations.  The bankruptcy court did not explain why it selected the claim purchase price as the cap, but the decision may be tied to how much Hybrid (as contrasted with the original lender, the DOE) put at risk. 

AUTHOR’S COMMENT

The decision represents a mixed bag of policy considerations.  On the one hand, it is a fair argument that a secured creditor’s right to credit bid always will stifle bidding, if not kill it altogether, particularly if the gap between the value of the collateral and the gross amount of the claim (which is the figure up to which the secured creditor may credit bid) is large.  But that argument, in essence, eats up the Section 363(k) exception since it will virtually always apply.  Section 363(k)’s preservation of the right to credit bid would be meaningless.  The bankruptcy court’s distinction between chilling and killing bidding altogether is an empty one, in the author’s opinion.  Moreover, most secured creditors are not necessarily determined to credit bid their entire gross claim; they want money, not property.  Thus, they will stop bidding when any third party’s cash bid approaches the value they attribute to the collateral.  It can be argued that the bankruptcy court’s decision transformed Section 363(k)’s “cause” exception into what amounts to a “best interests of creditors” test. 

On the other hand, in many situations the attempt to prevent or limit credit bidding protects  against the shifting of value from the secured creditor to a bidder if the secured creditor lacks cash to bid  That shifting frequently benefits an insider who is part of the stalking horse bid (see, e.g., River Road Hotel Partners, LLC v. Amalgamated Bank, 651 F.3d 642, 651 n.6 (7th Cir. 2011), aff’d sub nom. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, ___ U.S. ___, 132 S. Ct. 2065 (2012)).  That is not necessarily the case when the secured creditor purchases the secured claim at a discount from the original secured creditor.  Moreover, since in Fisker it was clear that Hybrid wanted the assets themselves, not just cash like most secured creditors, it is more likely that it would have credit bid well beyond the value of the collateral. 

RadLAX was decided in the context of whether a debtor may propose a plan that includes sale of the secured creditor’s collateral free and clear while denying the right of the creditor to credit bid under Section 363(k) despite Section 1129(b)(2)(A)(ii) (requiring application of Section 363(k) in a plan sale free and clear of liens), on the theory that such a plan is permissible instead under Section 1129(b)(2)(A)(iii) (provision of the “indubitable equivalent”).  There, the Supreme Court decided such a plan was impermissible based upon its view of the plain meaning of Section 1129(b)(2)(A)(ii).  The predictable fallout from RadLAX can be seen in Fisker:  more action on the “cause” exception of Section 363(k) whether in connection with a plan or just a straight sale, an exception that has been little used before.  

The confusion over what collateral Hybrid really held is a concern that has previously invoked the “cause” exception of Section 363(k), but only to require that the secured creditor provide a form of protection for the payment of other secured creditors who might have priority on some of the asset, rather than limiting credit bidding altogether (that is, the bankruptcy court tailored a remedy to suit the situation) while still protecting the secured creditor’s right to credit bid.  See In re Diebart Bancroft, 1993 U.S. Dist. LEXIS 836 at *15 (E.D. La. Jan. 25, 1993); see also In re Daufuskie Island Props., LLC, 441 B.R. 60 (Bankr. D.S.C. 2010) (cited by Fisker court) (creditor whose lien and claim were subject to dispute and equitable subordination proceeding either would be prohibited from bidding or would have to pay senior mortgages). 

The bottom line is that Fisker probably is only the first in a wave of cases newly exploring the limits of “cause” under Section 363(k). 

These materials were written by Adam Lewis of Morrison Foerster, in San Francisco, California (alewis@mofo.com).  Editorial contributions were provided by ILC member Haeji Hong in San Diego, California.  Mr. Lewis is a member of the Insolvency Law Committee.

Thank you for your continued support of the Committee.

Best regards,

Insolvency Law Committee