Three months ago, the U.S. District Court in Delaware upheld the bankruptcy court’s decision in In re Fisker Auto. Holdings, Inc., which limited, for “cause,” the amount that the purchaser of a secured lender’s claim could credit bid in connection with an asset sale under section 363 of the Bankruptcy Code. Last month, another bankruptcy court – this time in Virginia – followed suit under closely analogous circumstances.
In In re The Free Lance-Star Publishing Co. of Fredericksburg, VA et al., the debtors sought to sell substantially all of their assets, which included not only business assets related to four radio stations, printing and newspaper businesses, but also certain parcels of real property on which radio towers existed and all of the permits, licenses and contracts related thereto (together, the “Tower Assets”).
In 2006, the debtors borrowed approximately $50.8 million from Branch Banking & Trust, and granted the bank security interests that did not include a lien on the Tower Assets. In early 2009, the debtors defaulted on the loan and restructuring efforts failed. Last summer, BB&T sold the loan to Sandton Capital Partners for an unknown amount, and Sandton attempted to effectuate a pre-packaged restructuring that involved a section 363 bankruptcy sale of the debtors’ assets, including the Tower Assets, to an affiliate called DSP Acquisition pursuant to a $39 million credit bid.
As part of the pre-bankruptcy negotiations, DSP requested that the debtors execute three new deeds of trust to encumber the Tower Assets. While these discussions were pending, DSP unilaterally filed UCC fixture financing statements that purported to cover the Tower Assets. Approximately 90 days later, DSP renewed pressure on the debtors to quickly file for bankruptcy and argued against marketing of the debtors’ assets. DSP insisted on a six-week sale process, resisted the debtors’ efforts to market the assets to other prospective purchasers, and made an offer to provide the debtors with postpetition financing that was rejected. All plan negotiations between the parties then ceased. In the week before the bankruptcy filing, DSP recorded additional financing statements with respect to the Tower Assets without providing any notice to the debtors.
After the commencement of the debtors’ chapter 11 cases, DSP objected to the debtors’ request to use cash collateral and sought adequate protection in the form of liens on the Tower Assets without disclosing to the bankruptcy court that it had, pre-petition, recorded financing statements on these assets without a grant of a security interest from the debtors. The bankruptcy court denied DSP’s request, and approved bidding procedures that granted DSP the right to credit bid its claim in an amount either (i) agreed to by the parties or (ii) as determined by the court at a subsequent hearing.
After a three-day evidentiary hearing, Bankruptcy Judge Kevin Huennekens, relying on Fisker, concluded that DSP’s credit bid should be capped at $1.2 million for assets related to the debtors’ radio business and $12.7 million for assets related to the debtors’ newspaper and printing business – limiting DSP’s credit bid right to only those assets on which it held valid, undisputed and properly perfected liens. Judge Huennekens found that DSP did not have a lien on the Tower Assets, disapprovingly citing DSP’s prepetition and postpetition conduct and its negative impact on the auction process.
Last week, the U.S. District Court denied DSP’s emergency motion to expedite consideration of its motion for certification and for leave to appeal, concluding that there is no risk of irreparable harm if the credit bid issues are not resolved before the auction (scheduled for May 15, 2014), since the bankruptcy court “will determine who receives the sale proceeds (and how much) after the sale.” It will be interesting to see if the capping of DSP’s credit bid will have the intended effect of fostering a robust auction and driving the sale price up beyond DSP’s proposed $39 million. Regardless, the court’s opinion serves to bolster Fisker’s main holding—namely that bankruptcy courts can restrict the credit bid rights of secured creditors whose liens do not encompass all assets for sale, particularly in cases in which the secured creditor is guilty of inequitable conduct.