In Brief: Debt Purchaser’s Credit Bid Limited Post-Fisker
In the March/April 2014 edition of the Business Restructuring Review, we discussed an important ruling from a Delaware bankruptcy court restricting a creditor's right to credit bid an acquired claim in a bankruptcy sale of the underlying collateral. In In re Fisker Automotive Holdings, Inc., 2014 BL 13998 (Bankr. D. Del. Jan. 17, 2014), leave to app. denied, 2014 BL 33749 (D. Del. Feb. 7, 2014), certification denied, 2014 BL 37766 (D. Del. Feb. 12, 2014), the bankruptcy court limited the amount of the credit bid to the discounted purchase price actually paid for the debt.
In concluding that the right to credit bid under section 363(k) of the Bankruptcy Code is not absolute and may be limited "for cause," the court relied on a controversial ruling handed down in 2010 by the Third Circuit Court of Appeals. In In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010), the Third Circuit observed in a footnote that imposing a limit on credit bidding "for cause" does not require the secured creditor to "engage in inequitable conduct." On the contrary, according to the Third Circuit, "[a] court may deny a lender the right to credit bid in the interest of any policy advanced by the Code, such as to ensure the success of the reorganization or to foster a competitive bidding environment."
In Fisker, the bankruptcy court held that limiting the amount of the credit bid was warranted because an unrestricted credit bid would chill bidding and because the full scope of the underlying lien was as yet undetermined. The court also expressed concern as to the expedited nature of the proposed sale under section 363(b) of the Bankruptcy Code, which in the court's view was never satisfactorily explained. As a postscript, although the debt purchaser was outbid at the ensuing auction of Fisker's assets, the losing bidder and Fisker's other creditors reached a settlement in mid-April whereby the loser will receive as much as $90 million of the $149.2 million sale proceeds—a significant return on its $25 million investment to acquire the debt from the U.S. government.
Given the importance of credit bidding as a distressed acquisition tool, along with the court's ruling limiting the credit bid to the amount paid for the debt, distressed debt purchasers have kept a close watch on the way subsequent courts have interpreted and applied Fisker.
A Virginia bankruptcy court, in a published April ruling, was apparently the first to do so. In In re The Free Lance-Star Publishing Co. of Fredericksburg, Va., 2014 BL 103869 (Bankr. E.D. Va. Apr. 14, 2014), leave to appeal denied, 2014 BL 130156 (E.D. Va. May 7, 2014), the court found "cause" under section 363(k) to limit a credit bid by an entity that purchased $39 million in face amount of debt with the intention of acquiring ownership of the debtors, which owned various radio stations and newspapers.
The court limited the credit bid in connection with a sale of the debtors' assets under section 363(b) on the basis of its findings that: (i) the creditor's liens on a portion of the assets to be sold had been improperly perfected; (ii) the creditor engaged in inequitable conduct by forcing the debtor into bankruptcy and an expedited section 363 sale process in pursuing its clearly identified "loan to own" strategy; and (iii) the creditor actively "frustrate[d] the competitive bidding process" and attempted "to depress the sales price of the Debtors' assets." The court accordingly limited the debt purchaser's credit bid to $14 million. Although the capped amount appears to correspond to the approximate value of the collateral that was subject to the creditor's valid and perfected liens, the court stated at a March 25, 2014, hearing that it "wishes it had more information with regard to the amount . . . that the lender paid . . . for the loan." Transcript of Mar. 25, 2014, Hearing at 197:1‒198:10 (quoted in Doc. No. 177).
On May 8, 2014, a Virginia district court denied the creditor's motion for leave to appeal the interlocutory ruling. See DSP Acquisition, LLC v. Free Lance-Star Publishing Co. of Fredericksburg, VA, 2014 BL 130156 (E.D. Va. May 7, 2014). In its motion, the creditor argued that the credit-bidding issue is at the heart of the sale process and an anticipated May 15, 2014, auction and that the issue must therefore be resolved prior to the auction. It also contended that, absent immediate appellate review, the integrity of the sale process would be jeopardized.
Relying on the Delaware district court's ruling denying a motion for leave to appeal the credit bid limitation in Fisker, the district court rejected the creditor's arguments:
[T]here is no risk of irreparable harm if the issues are not resolved before the auction because there is no pending issue regarding the assets subject to sale and the Bankruptcy Court will determine who receives the proceeds (and how much) after the sale. Thus, if the Bankruptcy Court determines that the amount of [the] credit bid was incorrect, it can accordingly adjust the payment to [the creditor] at a later stage of the proceedings.
Id. at *2.
Most recently, the bankruptcy court in In re Charles Street African Methodist Episcopal Church of Boston, 2014 BL 134241 (Bankr. D. Mass. May 14, 2014), denied in part a chapter 11 debtor's motion to limit a credit bid on the basis that the secured creditor's claims were subject to bona fide dispute because the debtor had filed counterclaims against the creditor which, by way of setoff, could have reduced the amount of the claims to zero. The debtor, in an attempt to auction its assets, had sought an expedited "up or down" decision on credit-bidding rights without the need for an evidentiary hearing. It explicitly disavowed reliance on Fisker and the alternative theories limiting credit bids articulated in the ruling (e.g., bid chilling and bidding for an improper purpose or with an ulterior motive).
In finding that "cause" was lacking under section 363(k) to limit the credit bid, the court explained that: (i) despite the debtor's counterclaims, which did not relate to the validity of the secured creditor's claims or liens, the claims were "allowed" (a designation that the debtor did not dispute); and (ii) the claims were not likely to be consumed entirely in a credit bid for the assets.
The court rejected the debtor's argument that "credit risk" associated with collecting on its counterclaims was a valid reason under the circumstances to limit credit-bidding rights. According to the court, "[The debtor] would be using a denial of credit bidding as, in essence, a form of prejudgment security, a purpose that I doubt it was intended to serve." Id. at *7.
However, the court ruled that, because the terms of the auction included the payment of a $50,000 breakup fee if the stalking-horse bidder did not prevail, the secured creditor was required to include at least $50,000 in cash as part of its bid. Thus, the court did partially limit the credit bid.