Asset-based lenders take heed — especially those who loan money or purchase debt as part of a “loan-to-own” strategy: They may have to start bidding cash (a lot more cash) if a debtor tries to auction their collateral.
That is not what a secured lender typically expects. Instead of bidding cash for its collateral at a bankruptcy auction, an asset-based lender ordinarily can “credit bid” up to the amount of its secured claim as an off-set against the purchase price. Bidding up the purchase price in this fashion is one method of ensuring that any other successful bidder pays fair value for the secured creditor’s collateral. A secured creditor’s right to credit bid is contained in §363(k) of title 11:
At a sale under [§363(b) of title 11] 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, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property.
Credit bidding is a powerful tool, but it is not absolute. For example, only a secured creditor whose claim is “allowed” can credit bid. If the amount of its claim is disputed, the creditor may not credit bid. Likewise, a secured creditor may not credit bid if “the court for cause orders otherwise.” The statute does not define what “cause” means, but courts have limited credit bidding if (among other reasons) the validity of a creditor’s lien is at issue or if its lien does not encumber all of the assets that the debtor or its trustee propose to sell.
Two recent bankruptcy court decisions raise new questions about this “for cause” limit on credit bidding. In Fisker Automotive Holdings, Inc., 2014 Westlaw 210593 (Bankr. D. Del, Jan. 17, 2014), the court decided that (at an auction of the debtors’ assets) a purchaser of someone else’s secured debt could only credit bid an amount that, as it happens, equaled what the purchaser had paid to acquire that secured debt — not the much larger face amount. And in The Free Lance-Star Publishing Co. of Fredericksburg, Va., Case No. 14-30315-KRH (Bankr. E.D. Va. April 14, 2014), the court (relying in part upon Fisker) capped a secured lender’s credit bid at less than 36% of its total secured claim. Both courts capped the credit bids, primarily, to encourage competitive bidding. How other courts interpret Fisker and Free Lance may have significant repercussions for distressed debt buyers and for asset-based lenders.
Fisker manufactured electric cars, until it slammed on the brakes and went bankrupt. Fisker and related debtors filed their bankruptcies for the purpose of selling substantially all of their assets to Hybrid Tech Holdings before liquidating. Pre-bankruptcy, the Department of Energy held a senior secured position for $168.5 million. About five weeks before the bankruptcies, Hybrid purchased DOE’s position for $25 million. The debtors then negotiated with Hybrid to acquire the debtors’ assets for a “credit bid” of $75 million. Fisker thus was a “loan-to-own” situation; Hybrid bought senior secured debt so it would be in the best position to buy the assets (via the credit bid). To save time and money, the debtors initially proposed to sell their assets to Hybrid at a private sale. The official committee of unsecured creditors (committee) opposed the private sale. Instead, the committee pressed for an auction with Wanxiang America Corporation.
At a hearing regarding the sale, the debtors and the committee agreed to stipulations that framed the issue for the bankruptcy court. Among other things, they stipulated that (i) “if at any auction Hybrid either would have no right to credit bid or its credit bidding were capped at $25 million, there is a strong likelihood that there would be an auction that has a material chance of creating material value for the estate over and above the present Hybrid bid”; (ii) if Hybrid’s ability to credit bid is not capped, an auction would not occur because no one would bid more than Hybrid’s asserted secured claims; (iii) limiting Hybrid’s ability to credit bid would “foster … a competitive bidding environment”; and (iv) the sale included material assets that were not subject to Hybrid’s liens or on which the validity of Hybrid’s liens was disputed. Based on these stipulations, the bankruptcy court found that if Hybrid was permitted to credit bid more than $25 million, Wanxiang would not participate and no auction would take place.
Having stipulated to these and other points, the debtors and committee then asked the bankruptcy court to decide whether Hybrid’s ability to credit bid should be limited based solely on three arguments the committee advanced: First, that credit bidding should not be permitted at all because Hybrid did not have or might not have valid liens on all of the assets that were to be sold as an entirety; second, that “cause” existed to cap Hybrid’s credit bid because Hybrid did not have a lien on all of the assets; and third, that “cause” existed to cap its credit bid because “limiting the credit bid will facilitate an open and fully competitive cash auction.”
In its decision, the Fisker court acknowledged that a secured creditor is entitled to credit bid its allowed claim. Therefore, Hybrid would be permitted to credit bid. The only question was: in what dollar amount? The court’s answer: Hybrid’s credit bid should be capped at $25 million — the amount Hybrid paid to buy the debt.
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