Bankruptcy Court Decision
Fisker Automotive Holdings Inc. (the “Debtor” or “Fisker”) filed for bankruptcy in November 2013 hoping to have a preplanned sale of substantially all its assets to its principal secured lender, Hybrid Tech Holdings LLC (“Hybrid”), approved within just two short months. The asset purchase agreement provided that Hybrid would credit bid $75 million to purchase substantially all the Debtor’s assets in a private sale. The Official Committee of Unsecured Creditors (the “Committee”) opposed the private sale to Hybrid. The Committee instead secured an alternative bidder, Wanxiang America Corporation (“Wanxiang”), and proposed an open auction. Both the Committee and the Debtor questioned the extent and validity of Hybrid’s secured claim.
Just a month before Fisker filed for bankruptcy, Hybrid purchased $168.5 million of Fisker’s debt from the U.S. Department of Energy for $25 million. As a result of this purchase, Hybrid became the Debtor’s senior secured lender. Acquiring this new position gave Hybrid new rights; in particular, Hybrid had the right to credit bid if Fisker were to enter bankruptcy. A right to credit bid allows a secured creditor to bid up to the amount it is owed at the sale of its collateral.
Prior to the hearing, the Debtor and the Committee reached several stipulated agreements. Importantly, the parties agreed that Hybrid’s credit bid claim should be capped at $25 million for several reasons. First, Wanxiang would bid at the auction only if Hybrid’s bid were prohibited or capped at $25 million. Further, it was unclear to what extent the Debtor’s assets were subject to Hybrid’s security interest. In that same vein, the parties agreed that the resolution of the extent and validity of Hybrid’s lien would be a lengthy endeavor.
Bankruptcy Court Decision
On Jan. 17, 2014, the court, relying on Philadelphia Newspapers, found that “cause” existed to limit Hybrid’s right to credit bid. First, the expedited sale process implemented by the Debtor and Hybrid was “inconsistent with the notions of fairness in the bankruptcy process.” Second, there was a question as to the validity of Hybrid’s lien. Third, Wanxiang made it clear that it would not participate in the auction if Hybrid’s credit bid were not limited. Therefore, Hybrid’s proposed $75 million credit bid would not only chill bidding, but that bidding would also be “frozen.”
Denial of Appeal
Immediately following the bankruptcy court’s order, Hybrid filed a request for leave to appeal. Hybrid argued that the bankruptcy court’s ruling was in conflict with Supreme Court precedent. Specifically, Hybrid argued that the bankruptcy court violated the pronouncements made in RadLAX Gateway Hotel, LLC v. Amalgamated Bank. The Committee opposed the request for appeal on the basis that: (1) the bankruptcy court’s decision was not a final order and (2) the requirements for an interlocutory appeal had not been met. The district court agreed with the Committee and denied the appeal. However, the court did not deny the appeal without first opining about the “for cause” exception to section 363(k). The district court declared that a lender may be denied the right to credit bid in order to “foster a competitive bidding environment.”
Fisker conducted a three-day auction a week after Hybrid’s appeal was denied. Both Wanxiang and Hybrid participated. Wanxiang prevailed with a total offer of $149.2 million, which included $126.2 million in cash plus equity and $8 million in assumed liabilities.
The question remains — what effect will Fisker have on credit bidding? Although the opinion is fact-specific and the decision is non-precedential, the decision may serve as support for debtors and committees looking to oppose a secured lender’s credit bid. Fisker supports the notion that if the lien is disputed, then the credit bid should be denied or limited instead of undergoing lengthy valuation proceedings. Further, secured creditors that, like Hybrid, acquire the debt immediately prior to the bankruptcy at a discount may face new obstacles to credit bid.
The bankruptcy court focused on the need to prevent a chilled bidding atmosphere. However, a competitive bidding atmosphere is not expressly required by either section 363(k) or Philadelphia Newspapers. Creditors have a strong argument that the goal of a sale in bankruptcy is to generate the greatest recovery for the bankruptcy estate. A cash bidder that bids higher than the secured lender’s credit bid will still win. In Fisker, the asset purchase agreement proposed that Hybrid would credit bid $75 million. Wanxiang’s final bid was higher and probably would have prevailed regardless of Hybrid’s credit bid. There is an argument that the alleged chilled bidding in Fisker was manufactured by Wanxiang’s outright refusal to participate if Hybrid were permitted to credit bid. Perhaps potential bidders should not be given that much power. Even so, it is likely that in future cases, potential bidders will try to mimic the pressure created by Wanxiang in negotiating terms for a § 363 sale.
Creditors should be wary of an aggressive approach to a sale at certain stages in the bankruptcy. It was clear from the Fisker opinion that the bankruptcy court neither appreciated nor condoned the need for the abbreviated sale schedule sought by Hybrid. Importantly, secured lenders should work with debtors early in a bankruptcy case or before the filing to avoid potential attacks. Lenders can protect themselves by developing an expedited process to resolve disputes regarding lien validity or lien valuation. Further, creditors should be more cautious when purchasing a large amount of debt at a steep discount immediately prior to a bankruptcy filing.