One of the most controversial bankruptcy court cases of the past year was Fisker Automotive Holdings, Inc. ("Fisker") decided in Delaware. Many investors have feared the Fisker decision would forever change the market for the strategic acquisition of secured debt. However, Fisker should only be read in the context of the particular facts and circumstances of that case. Bankruptcy Courts always had, and will continue to have, the power to restrict credit bids for cause under section 363(k) of the Bankruptcy Code, if the facts and circumstances warrant such limitation. In Fisker, the Bankruptcy Court limited the secured creditor's ability to credit bid for several reasons – its liens did not encompass all assets for sale, the expedited sale process, collusion, and possibly inequitable conduct – which all may constitute "cause" under 363(k).
As you learned from prior blog articles, credit bidding is the right of a secured creditor to bid the value of its claim in a bankruptcy sale. Such credit bidding allows secured creditors to control the sale of their collateral. Thus, when collateral secured by a lien is proposed to be sold at a bankruptcy auction, the secured creditor or creditors have the right to bid the amount of their debt as a credit bid, as opposed to being limited to a cash bid. This allows secured creditors to compete with cash bidders who are interested in obtaining their collateral.
The ability to credit bid has been a driving factor in the market for the acquisition of secured debt, often purchased at a discount. Parties interested in obtaining certain assets can strategically purchase the secured debt from the current lender or debt holder which would allow the purchaser to exercise all the rights the original secured creditor had. As a purchaser of secured debt, it is very important to conduct due diligence and to confirm that the liens encumber all the assets the liens purport to encumber, have been properly perfected in accordance with applicable law and that the liens are senior to any other debt on the assets and therefore must be paid first.
By way of background, Fisker, and its affiliates, made premium hybrid electric vehicles in the United States. In 2011, the United States Department of Energy (the "DOE") advised them it would cease funding and not permit further disbursements under its $168.5 million senior secured loan facility. In October 2013, Hybrid Tech Holdings, LLC ("Hybrid") bought at auction the DOE's $168.5 million loan for $25 million. Shortly thereafter, Hybrid and the Fisker entities entered into an asset purchase agreement for the private sale of substantially all of the Fisker assets to Hybrid for $75 million in the form of a credit bid.
On November 22, 2013, Fisker and its affiliates, filed chapter 11 and requested court approval to sell substantially all of their assets to Hybrid on an expedited basis and without an auction process. The Creditors' Committee ("Committee") opposed the sale and Hybrid's right to credit bid or, alternatively, to limit the credit bid at $25 million. Another bidder – Wanxiang America Corp. - was prepared to offer a higher bid at auction.
At the sale hearing, the Committee and Fisker stipulated to several issues, including: (i) a competitive auction would take place if Hybrid's right to credit bid was limited and it was highly unlikely an auction would take place if Hybrid were allowed to credit bid the full amount of its claim; (b) limiting Hybrid's ability to credit bid would foster and facilitate competitive bidding; and (c) certain assets to be sold were not encumbered by Hybrid's liens and the validity of Hybrid's liens on other assets was in dispute.
The Bankruptcy Court concluded that although Hybrid could credit bid its claim such credit bid amount would be capped at $25 million. The Bankruptcy Court held that "cause" existed to limit Hybrid's credit bid because bidding would be frozen without the cap; another attractive bidder was ready, willing and able to purchase the assets; and not only was the expedited timeframe unjustified but the validity of Hybrid's secured status had not been determined. As a result, the Bankruptcy Court limited for cause Hybrid's credit bid to $25 million without justifying why it chose to limit the amount to the $25 million.
SIGNIFICANCE OF FISKER
The significance of Fisker should be limited. Fisker is a fact specific case and should not be read to limit an investor's ability to credit bid when it purchases secured debt at a discount. Further, until Hybrid's appeal is decided or other courts rule on the issues, it is difficult to say with any certainty what effect, if any, the Fisker case will have on future credit bidding by a purchaser of secured debt. The objections raised in Fisker could be raised in any bankruptcy sale context which includes a collusive, expedited, private sale process with a credit bid by a creditor whose lien is not secured against all of the assets.
While the bankruptcy court limited Hybrid's credit bid to the price it paid for the debt secured by certain of the debtor's assets, in many instances no parties in a bankruptcy case would even know what the investor paid for the debt. Such information is rarely disclosed absent a court order compelling disclosure.
The significance and effect Fisker should have on the distressed sales market is to stress the importance of pre-purchase planning. Any investor seeking to purchase secured debt should perform its due diligence, in consultation with experienced bankruptcy counsel, to develop a plan to try to minimize the potential application of Fisker or any issue which could constitute cause under section 363(k) of the Bankruptcy Code, such as understanding the scope of collateral securing debt and not trying to force an expedited sale process which may only offend the court and other creditors.
This article appeared on the August 9th, 2015 inforuptcy blog. Inforuptcy is a comprehensive resource for bankruptcy case information, bankruptcy assets for sale and leading bankruptcy news.
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