Fisker Automotive’s chapter 11 case began in what has become a depressingly familiar fashion – a fast-tracked sale to a secured lender. However, two rulings by Judge Kevin Gross of the U.S. Bankruptcy Court for the District of Delaware have made this a fascinating case to follow. Judge Gross has directed Fisker to proceed with an auction in which two bidders have been granted “stalking horse” status on the same assets. He is also limiting the ability of one of the bidders to credit bid its secured debt, a determination that could give rise to a new controversy on an issue that appeared to have been resolved two years ago with the Supreme Court’s RadLax decision.
Back in 2010, Fisker obtained capital from the U.S. Department of Energy (“DOE”) in the form of secured debt to support its development of electric automobiles. In October 2013, Hybrid Tech Holdings LLC (“Hybrid”) bought the outstanding DOE debt, paying only $25 million for DOE’s position of $165 million. In late November, Fisker filed its chapter 11 case for the purpose of effecting a quick sale of its assets to Hybrid in exchange for a credit bid of Hybrid’s recently-acquired secured debt. Fisker’s creditors’ committee objected to the sale and located another potential bidder, Wanxiang America Corporation (“Wanxiang”). The committee also objected to Hybrid’s right to credit bid.
Credit bidding in bankruptcy protects the expectations of secured creditors under non-bankruptcy law to be able to look to their collateral in the event of a default. The Bankruptcy Code has always permitted courts to limit the right to credit bid “for cause”, a term not defined but generally viewed as being narrow in scope, such as a creditor’s bad faith or misconduct. A controversy arose a few years ago when the U.S. Court of Appeals for the Third Circuit unexpectedly limited a secured creditors right to credit bid in the absence of “cause” in the Philadelphia Newspapers case. That decision was effectively overruled by the Supreme Court’s ruling in RadLax.
In Fisker, Judge Gross agreed with the committee’s contention that “cause” exists to limit Hybrid’s credit bid to the $25 million that it paid for the DOE secured debt. However, the basis for his ruling is not entirely clear. There appears to be a bona fide dispute as to the extent of Hybrid’s liens on Fisker’s assets; at least a portion of the assets that will be sold may not be encumbered by Hybrid’s liens. If that is the case, then Hybrid should not be able to use its debt to pay for such unencumbered assets, and Judge Gross’s decision would be unremarkable.
But Judge Gross also stated that he found “cause” to limit Hybrid’s right to credit bid because “bidding will not only be chilled without the cap; bidding will be frozen.” Finding “cause” to limit credit bidding on that basis would be a much broader reading of the term. Credit bidding can nearly always be said to “chill” competing offers. In one sense, that is its very purpose – to protect a secured creditor from being forced to accept a cash payment that is below that value the secured creditor believes the collateral has. Forcing a secured creditor to pay cash for an asset on which it already has a valid lien is a somewhat superfluous exercise, since if the secured creditor wins the auction it would be writing a check to itself.
In another unusual decision, Judge Gross has ruled that both Hybrid, which has changed its bid to $30 million in cash in addition to its $25 million credit bid, and Wanxiang, which is offering $35 million in cash plus 20% of the equity in the reorganized debtor, are entitled to have stalking horse status. This means that they will each receive a break-up fee of $750,000 if a third party comes in with a topping bid.
Even as Hybrid is participating in the auction with its revised offer, it is seeking an immediate appeal of Judge Gross’s decision that “cause” exists to limit its right to credit bid. What makes this case all the more interesting is the possibility that Hybrid’s appeal will at some point be heard by the Third Circuit Court of Appeals, the same court that issued the Philadelphia Newspapers decision.