I. Fisker Background and Sale Procedure
Intending to become a leading manufacturer of high-end plug-in hybrid electric vehicles, Fisker Automotive Holdings, Inc. was founded in 2007. In April of 2010, Fisker entered into a loan agreement with the United States Department of Energy (“DOE”) under which it borrowed $168 million. In June of 2011, DOE froze Fisker’s credit line.1 In October 2013, DOE auctioned off the Fisker loan, ultimately selling it to Hybrid Tech Holdings, LLC (“Hybrid”) for $25 million. When Fisker filed its Chapter 11 petition on November 22, 2013 in Delaware, Hybrid had “for all practicable purposes, succeeded to DOE’s position as the Debtors’ senior secured lender.”2
A. The Bankruptcy Court’s Ruling
On the Petition Date, Fisker filed a motion to approve a private sale to Hybrid of substantially all of Fisker’s assets in exchange for a credit bid of $75 million and other consideration.3 The Committee of Unsecured Creditors opposed the sale motion, instead supporting an auction involving another potential buyer, Wanxiang America Corp (“Wanxiang”). The Committee argued that the bankruptcy court should prohibit or limit Hybrid from credit bidding. The bankruptcy court found that if Hybrid was permitted to credit bid more than $25 million at an auction, “Wanxiang will not participate—and there will be no auction.”4 Additionally, Fisker and the Committee stipulated that there was at least some dispute whether Hybrid’s liens unavoidably encumbered all of the assets subject to the sale.5
On January 17, 2014, Judge Gross entered his Credit Bid Opinion. After noting that “it is beyond peradventure that a secured creditor is entitled to credit bid its allowed claim,” he held that Hybrid would be permitted to credit bid for Fisker’s assets, but only to the extent of $25 million. The court invoked the “for-cause” exception to a secured creditor’s credit bid right:
(k) At a sale under subsection (b) of this section 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 purchase such property, such holder may offset such claim against the purchase price of such property.6
The bankruptcy court found cause to limit Hybrid’s credit bid right because there would be no competitive bidding in the absence of a cap: “Thus, the ‘for cause’ basis upon which the Court is limiting Hybrid’s credit bid is that bidding will not only be chilled without the cap; bidding will be frozen.”7 Judge Gross did not overtly state that Hybrid’s discounted purchase of the DOE loan contributed to his finding of “cause,” but he did make a specific finding that Hybrid paid $25 million for its claim.8
B. The District Court’s Rulings.
Hybrid immediately sought appellate review of the Credit Bid Opinion. It filed a motion for leave to take an interlocutory appeal pursuant to Fed. Bankr. P. 80039 and a motion for direct appeal to the United States Court of Appeals for the Third Circuit pursuant to Fed. Bankr. P. 8001(f).10 These filings gave the district court two separate occasions to weigh in on the credit bid issue and the “for-cause” exception invoked by Judge Gross.
On February 7, 2014, the district court denied Hybrid’s motion for leave to take an interlocutory appeal.11 It held that the Credit Bid Opinion was not a final order because the bankruptcy court could change its mind (i.e., “the Bankruptcy Court could decide after the auction that Hybrid’s credit bid should not have been capped”), and that Hybrid was not left without a remedy because it was free to bid cash in excess of the cap (“Hybrid has not offered any reason why it could not … credit bid up to $25 million at an auction … and supplement with cash any additional amount that it seeks to bid”).12 Further, the district court held that interlocutory appeal was not warranted because there was no “substantial grounds for difference of opinion” as to whether cause existed to cap the credit bid. Specifically, the district court held that the cause identified by the bankruptcy court—“to foster a competitive bidding environment”—was recognized and authorized by the Third Circuit in In re Philadelphia Newspapers, LLC, 599 F.3d 298, 316 n.14 (3d Cir. 2010).13
Five days later, the district court entered a written opinion denying Hybrid’s motion to certify a direct appeal.14 Hybrid contended that direct appeal was warranted because there was no “controlling authority directly addressing the issue of a bankruptcy court’s authority to limit or deny a secured creditor’s right to credit bid for the purposes of fostering a competitive auction.”15 Hybrid argued that the Third Circuit’s discussion of section 363(k) in Philadelphia Newspapers was dicta, but the district court disagreed, finding that “the court’s reasoning regarding the [for-cause] exception to credit bidding was essential to its holding and was a majority ruling.”16
C. The Auction.
Fisker conducted the auction from February 12 through February 14, 2014. Reports indicate that Hybrid increased its bid to $55 million, which included its $25 million credit bid.17 However, concluding that Wanxiang’s bid of $149.2 million was the highest and best often, on February 14, Fisker filed a Notice of Successful Bidder seeking to approve the sale to Wanxiang.18 A hearing to approve the sale was conducted on February 18, 2014, and on February 19, Judge Gross entered an order approving the sale to Wanxiang.19 Hybrid has advised the Bankruptcy Court that it “will not seek further review of the credit bid decision.”20
II. “Fostering Competitive Bidding” Is Insufficient Cause To Limit Credit Bidding.
While the $25 million cap in Fisker was the same amount that Hybrid paid to acquire the debt at the DOE auction, the fact that the debt had been sold appears not to be the explicit basis for either the bankruptcy or the district court’s rulings that the “for-cause” exception applied. In other words, the good news for secured creditors is that Fisker should not stand for the proposition that purchasing distressed debt inherently increases the likelihood of successful “for-cause” limitation of the right to credit bid. None of the opinions overtly state that the existence of the note sale was a reason, let alone the reason, for invoking the exception.
The bad news for secured creditors, of course, is that the actual rule of decision—that “fostering competitive bidding” constitutes “cause”—is extremely broad, and probably cannot be limited to note-sale situations. The concept of “fostering competitive bidding” is so broad, in fact, that it is probably present in every case in which a secured creditor could make a credit bid if the for-cause exception were not invoked. This exception is at least bad policy, if not bad law.
A. A Broad For-Cause Exception is Legally Questionable.
The upshot of the Fisker rulings is that, unless Hybrid attended the auction armed with $125 million cash (in addition to the $25 million it had paid for the DOE loan) and a willingness to risk it, the courts effectively precluded Hybrid from emerging with either its collateral or full payment of the $168 million that it was owed. Divesting a secured creditor of its collateral in the absence of full payment raises significant constitutional issues.21 Indeed, in 1935, the United States Supreme Court struck down as unconstitutional the Frazier-Lemke Act, a 1934 amendment to the Bankruptcy Act of 1898, part of which compelled a mortgagee to release its lien for less than full payment.22
Sections 361 and 363 of the Bankruptcy Code are grounded in the constitutionally-mandated protection of a secured creditor’s rights in specific property. Section 363(e) provides:
Notwithstanding any other provision of this section, at any time, on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest.23
The legislative history of “adequate protection” is illuminating:
The concept of [adequate protection] is derived from the fifth amendment protection of property interests. See Wright v. Union Central Life Ins. Co., 311 U.S. 273, 85 L. Ed. 184, 61 S.Ct. 196 (1940); Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 79 L.Ed. 1593, 55 S. Ct. 854 (1935)…. It is not intended to be confined strictly to the constitutional protection required, however. The section, and the concept of adequate protection, is based as much on policy grounds as on constitutional grounds. Secured creditors should not be deprived of the benefit of their bargain. 24
The credit-bid is an essential mechanism by which secured creditors are provided adequate protection in context of a section 363 sale As the United States Supreme Court noted recently:
The ability to credit bid helps to protect a creditor against the risk that its collateral will be sold at a depressed price. It enables the creditor to purchase the collateral for what it considers the fair market price (up to the amount of its security interest) without committing additional cash to protect the loan. That right is particularly important for the Federal Government, which is frequently a secured creditor in bankruptcy and which often lacks appropriations authority to throw good money after bad in a cash-only bankruptcy auction.25
The extremely broad for-cause exception embraced by Fisker will unjustifiably force secured creditors to raise and risk additional capital simply to protect the important rights described in Radford. Many secured creditors are simply incapable of protecting their interests without the ability to credit bid because they lack authority or resources to bid additional cash: think bond trustees, commercial mortgage-backed securities servicers, and as illustrated in the Radlax footnote quoted above, governmental units.
It is not clear that the Fisker courts’ heavy reliance on the section 363(k) for-cause discussion in Philadelphia Newspapers was warranted. First, there is at least an ambiguity whether Section III(C) of the opinion—the section containing the for-cause discussion—actually commanded a majority of the panel. Judge Smith prefaced his concurrence with the following sentence: “I join [Judge Fisher’s] opinion without reservation save for section III(C).” Second, it is unclear whether Judge Fisher’s for-cause discussion constitutes holding or dicta. While the Fisker district court interpreted the discussion as “essential to its holding,” no party in Philadelphia Newspapers actually invoked the for-cause exception to the right to credit bid.
Finally, the cases cited in Section III(C) of Philadelphia Newspapers to support a broad for-cause exception are all much narrower than the decision admits, and in each, the proposed purchaser had done some less-than-admirable act or acted improperly. In In re Aloha Airlines, No. 08-00337, 2009 WL 1371950, at *8 (Bankr. D. Haw. May 14, 2009), the court refused the right to credit bid when a purchaser did not adequately disclose that an entity guilty of past misconduct would be a co-purchaser of the assets. In Greenblatt v. Steinberg, 339 B.R. 458 (N.D. Ill. 2006), the court denied the right to credit bid when the party failed to abide by a sales procedure order to advance objections to senior liens in the same assets. In In re Anataeus Tech. Servs., Inc., 345 B.R. 556, 565 (Bankr. W.D. Va. 2005), the secured lender had contractually released its claim (and therefore its right to credit bid) by failing to timely exercise provisions in a court-approved settlement agreement. In In re Theroux, 169 B.R. 498, 499 n.3 (Bankr. D.R.I. 1994), the proposed sales price to the secured creditor was so low compared to the market value, “the Trustee should probably have abandoned his interest therein long ago.” Moreover, in Theroux, the court did not actually permit a sale to a third party while denying the secured creditor the right to bid; it simply refused to approve the proposed sale altogether.
Philadelphia Newspapers contains broad language that could be read to authorize the use of the for-cause exception solely to “foster competitive bidding” even in the absence of creditor misbehavior, but Fisker appears to be the first case to actually do so. This radical expansion of the for-cause exception is a policy mistake that other courts should strive to avoid.
B. A Broad For-Cause Exception is Bad Policy
Accepting the premise that permitting a credit bid will dissuade competitive cash bidding—the Fisker approach—threatens to swallow the rule with its exception. If credit bidding keeps other cash bidders away, why shouldn’t courts limit credit bidding in every case? At least when a secured creditor is greatly undersecured, a credit bid gives that secured creditor the choice to make a bid that is by definition larger than anyone else will pay. If the rest of the potential bidding universe knows this, it would understandably chill the inclination of other bidders to participate in a cash auction.
This rationale, if sufficient to constitute cause, is likely to exist in almost every case. This raises more questions than it answers. Is it now the fiduciary duty of creditors’ committees to oppose a secured creditor’s credit bid right in every case? What evidence is relevant and sufficient to invoke the exception? Will we now see an affidavit from every Committee financial advisor saying that, “on information and belief, more cash bidders will show up if the Court limits the secured creditor’s credit bid right?” How should a bankruptcy judge select an appropriate cap?
If, instead, the lesson of Fisker is that the for-cause exception should only be invoked when the debt is sold, the news is not much better. As noted above, this was not explicitly part of the Fisker courts’ for-cause reasoning, but the $25 million cap is probably not sheer coincidence. It is hard to imagine that the courts would have imposed a $25 million credit bid cap on the DOE if the $168 million loan had not been sold.
If courts limit the credit bids of debt buyers to the sale price, the impact on the secondary debt market may be hard to overstate. That impact would certainly diminish the ability of secured creditors to utilize a discounted debt sale as a re-capitalization mechanism and workout alternative with adverse consequences on the general availability of credit. Strategic debt purchasers certainly (and understandably) expect to be able to credit bid the face value of the purchased debt, which they buy at considerable risk—after all, section 363(k) provides that this is the default rule. But post-Fisker, this will be in question, and the market for debt sales will likely be shallower, or at least stingier. As counsel for Fisker wisely (but unsuccessfully) argued to Judge Gross:
I think it’s fair to ask whether the United States government would have been able to realize the $25 million that it did if there was a cloud over [the credit bid right] or if any participant had to wonder whether, at the end of the day, its credit bid could be disallowed if there’s the prospect of higher and better recoveries for unsecured creditors.20
In order for a secured creditor’s credit bid right to continue to have meaning, Courts should exercise restraint in applying the for-cause exception. The goal of “fostering competitive bidding,” while laudable in theory, is too over-inclusive in practice to warrant denial of a secured creditor’s credit bid right in the absence of creditor misbehavior.
1Deepa Seetharaman & Ayesra Rascoe, Floundering Fisker Faces Grilling Over U.S. Government Loan, April 4, 2013, http://www.reuters.com/article/2013/04/24/us-fisker-doe-idUSBRE93N0ZR20130424
2In re Fisker Automotive Holdings, Inc., No. 13-13087 (KG) (Bankr. D. Del. Jan. 17, 2014) (Dkt. No. 483) (the “Credit Bid Opinion”).
3In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del., Nov. 22, 2013), ECF No. 13
4See Credit Bid Opinion at 2014 WL 210593, at *4.
5See Credit Bid Opinion, 2014 WL 210593, at *3 (perfection dispute “not likely subject to quick or easy resolution”).
611 U.S.C.A. § 363(k) (emphasis added)
7See Credit Bid Opinion, 2014 WL 210593, at *5.
8See Credit Bid Opinion, 2014 WL 210593, at *20.
9In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del. Jan. 14, 2014), ECF Nos. 445 & 447
10Hybrid Tech Holdings, LLC v. Committee of Unsecured Creditors, No. 14-CV-99 (D. Del. Jan. 27, 2014) ECF No. 9
11Hybrid Tech Holdings, LLC v. Committee of Unsecured Creditors, No. 14-CV-99, 2014 WL 546036 (D. Del. Feb. 7, 2014) (the “8003 Opinion”).
128003 Opinion, 2014 WL 546036, at *3.
13In re Philadelphia Newspapers, LLC, 599 F.3d 298, 316 n. 14 (3d Cir. 2010).
14Hybrid Tech Holdings, LLC v. Committee of Unsecured Creditors, No. 14-CV-99, 2014 WL 576370 (D. Del. Feb. 12, 2014) (the “8001(f) Opinion”).
158001(f) Opinion, 2014 WL 576370, at *2.
168001(f) Opinion, 2014 WL 576370, at *2.
17Steven Church and Dawn McCarty, Wanxiang wins Fisker Asset Auction Motion $149 Million Bid, February 15, 2014, http://www.bloomberg.com/news/2014-02-14/Wanxiang-149-million-fisker-bid-tops-hybrid-tech-in-auction.html
18In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del. Feb 2, 2014), ECF No. 628.
19In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del. Feb. 19, 2014), ECF No. 653.
20In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del. Feb. 16, 2014), ECF No. 630.
21The balancing of constitutional rights and bankruptcy polices was discussed in Robert C. Goodrich, Jr., Preserving the Credit Bid: A Balancing of Interests, 4 Norton Bankr. L. Adviser 1 (2012).
22Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 579-80, 55 S. Ct. 854, 79 L. Ed. 1593 (1935) ("[T]his right of the mortgagee to insist upon full payment before giving up his security has been deemed the essences of a mortgage.").
2311 U.S.C.A. § 363(e) (emphasis added).
24H.R. Rep. No. 95-595, 6295 (footnotes omitted).
25Radlax Gateway Hotel, LLC v. Amalgamated Bank, _____ U.S. ____, 132 S. Ct. 2065, 2070 n. 2, 182 L. Ed. 2d 967 (2012)
26In re Philadelphia Newspapers, LLC, 599 F.3d at 318 (Smith, J., concurring) (emphasis added).
27In re Aloha Airlines, Inc., No. 08-00337, 2009 WL 1371950, at *8 (Bankr. D. Haw. May 14, 2009
28Greenblatt v. Steinberg, 339 B.R. 458 (N.D. Ill. 2006).
29In re Anataeus Tech Servs., Inc., 345 B.R. 556, 565 (Bankr. W.D. Va. 2005).
30In re Theroux, 169 B.R. 498, 499 n.3 (Bankr. D.R.I. 1994).
31In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del. Jan. 14 2014), ECF Nos. 442 & 444..
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