Recent Decision Caps Secured Creditor’s Credit Bid in §363 Sale to Purchase Price of Acquired Debt

By: J. Ellsworth Summers, Jr. & Armando Nozzolillo

It is well-settled that secured creditors are ordinarily entitled to credit bid their allowed secured claim in a sale pursuant to § 363 of the Bankruptcy Code (the “Code”). In Radlax Gateway Hotel, LLC v. Amalgamated Bank , 132 S.Ct. 205 (2012), the Supreme Court acknowledged that bankruptcy courts have the power to prohibit a secured creditor from credit bidding “for cause.” However, because “cause” is undefined in the Code, courts have substantial discretion when making this determination.

Recently, a case out of the District of Delaware, In re Fisker Auto. Holdings, Inc. , 13-13087(KG), 2014 WL 210593 (Bankr. D. Del. 2014), produced a surprising opinion on the issue of what constitutes “cause.” In Fisker , Hybrid, a secured creditor, purchased from the Department of Energy $168.5 million in outstanding debt for $25 million. Prior to the Debtor filing bankruptcy, Hybrid and the Debtor negotiated an asset purchase agreement (the “Agreement”) in which Hybrid would purchase a majority of Debtor’s assets for a credit bid of $75 million. The Agreement provided for $500,000 to be distributed to Fisker’s unsecured creditors in a soon-to-be filed bankruptcy case.

Soon thereafter, the Debtor filed bankruptcy under Chapter 11 of the Code and quickly sought to enforce the Agreement through a Sale Motion. The Creditors’ Committee opposed the Sale Motion and filed a Motion for Bidding Procedures, arguing that Hybrid should not be allowed a credit bid. A Stipulated Agreement between the Debtor and the Creditors’ Committee, provided that if the Court allowed Hybrid to credit bid more than the $25 million purchase price, then Wanxiang, a competing bidder, would not participate in the auction.