If the amount of its claim is disputed, the creditor may not credit bid. In Fisker Automotive Holdings, Inc. Del, Jan. Both courts capped the credit bids, primarily, to encourage competitive bidding. How other courts interpret Fisker and Free Lance may have significant repercussions for distressed debt buyers and for asset-based lenders. Fisker manufactured electric cars, until it slammed on the brakes and went bankrupt.
Fisker and related debtors filed their bankruptcies for the purpose of selling substantially all of their assets to Hybrid Tech Holdings before liquidating. To save time and money, the debtors initially proposed to sell their assets to Hybrid at a private sale. The official committee of unsecured creditors committee opposed the private sale. Instead, the committee pressed for an auction with Wanxiang America Corporation.
At a hearing regarding the sale, the debtors and the committee agreed to stipulations that framed the issue for the bankruptcy court. In its decision, the Fisker court acknowledged that a secured creditor is entitled to credit bid its allowed claim.
Therefore, Hybrid would be permitted to credit bid. The only question was: in what dollar amount? First, it ruled that this would encourage Wanxiang to bid. Neither the debtors nor Hybrid explained why the sale of non-operating debtors required inordinate speed. This behavior displeased the court. Over the course of a five-day trial, the Debtors attempted to paint a picture of egregious conduct by Sycamore and its affiliates that ultimately led to the bankruptcy of the Debtors. The bankruptcy court overruled both arguments.
In other words, the standard is not standardless. The [c]ourt does not find such conduct here. Instead, the totality of the credible evidence at trial demonstrates that [Sycamore] did not take actions beyond what was proper to protect their interests. Based on its findings, the court permitted Sycamore to credit bid the full amount of its claim. Importantly, the court was clear that the potential chilling effect of a credit bid, in and of itself, is not sufficient for a court to find cause to preclude or limit a credit bid under Section k of the Bankruptcy Code.
As we have previously advised, secured lenders and purchasers of loans on the secondary market should continue to take steps to protect themselves in the event of a potential bankruptcy by i ensuring that their liens remain valid and perfected, ii being proactive in a Section Sale process by offering non-credit bidding considerations i.
The republished article is posted with permission. Authors Laura Appleby and Michael Friedman discussed the issues raised in this article in a podcast interview with Debtwire Radio.