Last Friday, Judge Sleet of the U.S. District Court for the District of Delaware denied Hybrid Tech Holdings LLC’s appeal of the Delaware bankruptcy court’s decision in In re Fisker Automotive Holdings, Inc. et al, to (i) cap Hybrid Tech’s credit bid for Fisker Automotive’s assets, and (ii) require that the assets be sold via a public auction rather than directly to Hybrid Tech in a private sale. The denial of the appeal gave the green light for the auction and sale hearing to proceed. The bankruptcy court’s decision to cap Hybrid Tech’s credit bid sheds light on when a bankruptcy court may limit a secured lender’s right to credit bid “for cause” under section 363(k) of the Bankruptcy Code.
Fisker Automotive, a manufacturer of premium hybrid electric vehicles, filed for chapter 11 on November 22, 2013, citing a number of operational set-backs and a subsequent default under a secured loan facility provided by the U.S. Department of Energy. In the month prior to the bankruptcy filing, Hybrid Tech purchased the DOE’s secured claim for $25 million – a price equal to approximately 15% of the $168.5 million then outstanding under the DOE facility. Hybrid Tech then entered into an asset purchase agreement with Fisker through which Hybrid Tech sought to acquire Fisker’s assets via a $75 million credit bid of the DOE loan in a private sale conducted in connection with Fisker’s chapter 11 case. The Official Committee of Unsecured Creditors objected to the sale and requested that a public auction be held, and noted the emergence of an alternative bidder for Fisker’s assets, automotive parts manufacturer Wanxiang America Corp.
Historically, section 363(k) of the Bankruptcy Code has been interpreted to empower that secured creditors to credit bid the total face value of their “allowed” claims, including both secured and unsecured portions, regardless of the value of the collateral at the time of the sale. See, e.g., Cohen v. KB Mezzanine Fund II (In re Submicron Sys. Corp.), 432 F.3d 448 (3d Cir. 2006). A bankruptcy court may rein-in such credit bids “for cause” — which is exactly what the Bankruptcy Court did to Hybrid Tech. The Bankruptcy Court determined that there was cause to cap Hybrid Tech’s credit bid at $25 million –what Hybrid Tech paid for the DOE loan – and to order an auction for Fisker’s assets in order to foster a competitive bidding environment. Bankruptcy Judge Gross based his decision on three factors: (i) Wanxiang’s assertion that it would not participate in the auction unless Hybrid Tech’s credit bid was capped; (ii) Fisker’s rushed sale timeline, which provided a mere 24 business days (during the holiday season to boot) for parties to challenge the proposed sale process, was inconsistent with the notions of fairness in the bankruptcy process and would chill bidding in excess of Hybrid Tech’s original credit bid; and (iii) Hybrid Tech’s claim was partially secured, partially unsecured, and partially of uncertain status.
The implications of the Fisker decision, which is supposedly non-precedential, may be limited due to the rather unique factual circumstances of this case. Nonetheless, Fisker may very well encourage other bankruptcy courts to limit credit bidding “for cause,” when a potential purchaser seeks to chill the bidding in a section 363 sale by lodging an outsize credit bid for assets after acquiring the secured claim for well under par shortly prior to the commencement of the case.