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S4 | MONDAY, JUNE 23, 2014 | Corporate Restructuring And Bankruptcy
| NYLJ.COM

rights of secured creditors in bankruptcy It is worth noting that the court seems

sales, these decisions have the potential to to have been at least partly motivated by
have a dramatic and deleterious impact on the more traditional factors used to limit
the market for secured claims.
credit bidding for cause. The court wrote
that Hybrid had “insisted on an unfair [sale]
The Right to Credit Bid
process, i.e., a hurried process,” and that “the
validity of its secured status had not been
Section 363(k) of the Bankruptcy Code pro- determined.”14 However, the thrust of the SECURED
vides secured creditors the right to “credit court’s ruling emphasized the effects of an
bid” the value of their debt in certain auc- uncapped credit bid on the auction process— CREDITOR

tions or sales of their collateral—effectively a rationale that, standing alone, had not been
exchanging all or a portion of the secured used before by a court to restrict a credit bid.
creditors’ debt for the assets securing it.3 Recently, a second bankruptcy court adopt-
Credit bidding provides protection to a ed in part Fisker’s rationale in limiting a credit
secured creditor against the sale of the credi- bid. On Jan. 23, 2014, Free Lance-Star Publish-
tor’s collateral at a depressed price without ing Company iled for Chapter 11 protection
the need to commit additional cash.4 Impor- with the intent of selling substantially all of its
tantly, regardless of the value of the collateral, assets in a §363 sale. Free Lance-Star argued

a secured creditor is empowered “to bid the that its secured creditor, DSP Acquisition,
total face amount of [its] claim.”5
should have its credit bidding rights restrict-
Section 363(k) includes a safety valve, ed for three reasons: (1) DSP did not have a
whereby a court may limit or disallow credit valid lien on all of the property being sold,
bids “for cause.” This exception has only been (2) DSP had engaged in inequitable conduct
discussed in a handful of reported decisions, that had “damped interest in the auction” and
and in previous cases suficient cause was (3) restricting DSP’s credit bid would “restore
usually limited to a bona ide dispute over enthusiasm for the sale and foster a robust
the validity of the relevant claim or lien6 or bidding process.”15 Free Lance-Star’s irst two

misconduct by the secured creditor.7 Oth- rationales are in line with the historic standards
erwise, courts have described the right to for limiting a credit bid, but the third rationale
credit bid as “fundamental”8 and, while not follows Fisker’s expansion of those standards.
absolute, near absolute.9
The bankruptcy court relied upon all three
rationales to limit DSP’s credit bid, inding a
Expanding the ‘For Cause’ Limitation
“perfect storm, requiring the curtailment of
DSP’s credit bidding rights.”16 According to
On Nov. 13, 2013, Fisker Automotive iled for the court, DSP pressured the debtor for a
Chapter 11 protection in the U.S. Bankruptcy “speedy bankruptcy iling,” objected to the

Court for the District of Delaware. Prior to the debtor’s hiring of a inancial advisor to mar-
bankruptcy iling, Hybrid Tech Holdings had ket the assets, and insisted that any market-
purchased a $168.5 million senior secured ing materials contain “on the front page, in CK
claim against Fisker from the U.S. Department bold font, a statement that DSP had a right STO
of Energy for $25 million. Hybrid then negoti- to a $39 million credit bid.”17 Moreover, the BIG
ated with Fisker to buy substantially all of its court found that DSP had secretly recorded
assets in a bankruptcy sale for a $75 million inancing statements with respect to assets
credit bid. The oficial committee of unsecured over which DSP knew it did not have liens.18
Two New Cases Cast
creditors (the Creditors’ Committee) appoint- After an evidentiary hearing, the court con-
ed in Fisker’s case objected to the sale, arguing cluded that DSP’s credit bid should be capped
that Hybrid’s credit bid should be capped at at a total of $13.9 million. It is not clear from
the $25 million Hybrid paid for the claim.10
the ruling or the record of the hearing (which
A Shadow Over The Creditors’ Committee’s argument was partially conducted under seal) how the
hinged on the appearance of a competing cap was determined. The court noted merely
potential purchaser, Wanxiang America that it relied on Free Lance-Star’s inancial
Corporation, which would participate in an advisor, which “eliminated the unencumbered
Credit Bidding
auction for Fisker’s assets only if Hybrid’s assets . and applied a market analysis to

credit bid were limited. Importantly, Fisker develop an appropriate case for a credit bid
and the Creditors’ Committee stipulated that that would foster a competitive auction pro-
if Hybrid’s credit bid were capped at $25 mil- 19
cess.” DSP ended up as the winning bidder
lion, “there [would be] a strong likelihood for Free Lance-Star’s assets, but instead of a
that there would be an auction that has a $39 million credit bid, it paid $16.3 million in
material chance of creating material value for cash on top of its $13.9 million credit bid.20
the estate over and above the present Hybrid these decisions may ultimately affect credit
bid” and that if Hybrid’s credit bid were not BY DAMIAN S. SCHAIBLE bidding rights in a broad swath of cases.
capped, “there [would be] no realistic pos- Takeaways
Whereas courts have historically found
AND DARREN S. KLEIN
sibility of an auction.”11
It is too early to tell if other courts will T “cause” to limit credit bidding in the limited
Relying largely on this stipulation, the bank- adopt Fisker’s expanded rationale for restrict- wo recent bankruptcy court decisions circumstances where there is a bona ide
ruptcy court held that a “court may deny a ing credit bidding, but secured creditors of have increased uncertainty over the dispute regarding the extent or validity of a
lender the right to credit bid in the interest distressed companies have reason to be right of secured creditors to credit bid
secured claim or egregious conduct on the
of any policy advanced by the [Bankruptcy] concerned. Viewed most expansively, Fisker in sales of debtors’ assets. Relying on and part of a secured creditor, recent decisions in
Code, such as to ensure the success of the stands for the proposition that a credit bid expanding a rarely used “for cause” limita- Fisker Automotive Holdings1 and Free Lance-
reorganization or to foster a competitive bid- can be restricted absent any indication of tion on a secured creditor’s right to credit Star Publishing2 have suggested that merely
ding environment.”12 Finding that permitting misconduct or challenges to the creditor’s bid under §363(k) of the Bankruptcy Code,
the furtherance of general bankruptcy goals,

Hybrid to credit bid $75 million would not liens or claims.
such as the desire to foster a competitive bid-
just chill bidding, but “freeze bidding,” the Importantly, the facts of both Fisker and ding environment, might constitute “cause”
court capped Hybrid’s credit bid at $25 mil- Free Lance-Star may have exhibited the his- DAMIAN S. SCHAIBLE is a partner at Davis Polk & suficient to limit credit bidding rights.
lion. Wanxiang ended up as the successful toric bases for inding cause to limit a credit Wardwell. DARREN S. KLEIN is an associate of the It remains to be seen whether these cases
bidder at the auction for Fisker’s assets with bid. The court in Fisker found that the sale irm. Summer associate ANDREW IMBER assisted in will be followed or narrowly interpreted. But
a $149.2 million cash bid.13
process Hybrid imposed was » Page S11
the preparation of this article.
by increasing uncertainty with respect to the