March 21, 2014 - In considering a Section 363 asset sale in In re Fisker Automotive Holdings, Inc., the United States Bankruptcy Court for the District of Delaware used its “for cause” power under Section 363(k) to limit the proposed purchaser’s credit bid and trigger a competitive cash auction for the debtor’s assets. 2014 WL 210593 (Bankr. D. Del. Jan. 17, 2014). The decision demonstrates that courts considering the limitation or denial of credit bidding will consider factors both intrinsic to the proposed credit bid (the validity of the secured status asserted had not yet been determined) and extrinsic (perceived unfair process by the proposed sale purchaser, and the potential benefits of a competitive auction).
Bankruptcy Code section 363(k) authorizes a creditor with a security interest in an asset being sold to discount its successful bid by the value of the lien. So called “credit bidding” can give secured creditors a substantial advantage in section 363 asset sales, especially when the value of the lien approaches or exceeds the market value of the sale asset. There is no absolute right to credit bid; section 363(k) provides that the court may, for good cause, limit or deny credit bidding.
The would-be purchaser in In re Fisker, Hybrid Tech Holdings, LLC, purchased its $168.5 million claim, the largest by far against Fisker, from the Department of Energy for $25 million. Hybrid then offered to purchase substantially all of Fisker’s assets in a private sale for consideration including $75 million in the form of a credit bid. The Official Committee of Unsecured Creditors objected to the private sale, arguing that a competitive auction would return more value to the estate, and objected to the size of the credit bid, arguing that Hybrid should be precluded from entering any credit bid, or at least, not greater than the $25 million Hybrid actually paid to obtain the claim. The rival bidder, Wanxiang America Corporation, made clear that there should be no auction unless Hybrid’s credit bid were limited to $25 million.
Although it rejected Hybrid’s $75 million credit bid and limited it to a $25 million credit bid in the anticipated auction, the court did not hold that credit bidding by the purchaser of a claim should always be limited to the amount actually paid to obtain the claim. Instead, the court imposed this limit because the extent to which Hybrid’s claim was secured by a perfected lien was still in dispute, and it appeared that Hybrid was trying to rush the sale, freeze out other buyers, and prevent an auction. The amount of $25 million was the maximum possible without foreclosing the auction all together.
In re Fisker does not indicate whether each of these justifications would be independently sufficient to establish “good cause” under section 363(k). What the court’s ruling does demonstrate is the scrutiny that proposed credit bids will face, particularly private sales premised on credit bidding, to ensure that they are in the best interest of the estate.