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Credit Bidding Limited For Cause Under Section 363(k)

In re Fisker Automotive Holdings, Inc., et al., No. 13-13087 (KG), 2014 WL 210593 (Bankr. D. Del. Jan. 17, 2014)

In a ruling from the bench that was followed by this Memorandum Opinion, the Bankruptcy Court limited a secured creditor’s entitlement to credit bid for cause pursuant to section 363(k) of the Bankruptcy Code.  More specifically, the $75 million bid of Hybrid Tech Holdings, LLC (“Hybrid”), the debtors’ senior secured lender holding approximately $168.5 in claims, was reduced by the Bankruptcy Court to $25 million, the amount Hybrid purchased its claims from the United States Department of Energy in October 2013.

In Fisker, the debtors sought to move forward with a private sale of substantially all of their assets to Hybrid despite an otherwise “attractive” alternative bid by Wanxiang America Corporation (“Wanxiang“).  There was no dispute that without a limitation on Hybrid’s ability to credit bid there would be no chance of an auction or resulting enhanced value to the estates.  On the other hand, if the Court limited or eliminated Hybrid’s credit bid, the parties did not dispute that an auction would occur and it would likely generate material value to the estates over the existing Hybrid bid.

In deciding to limit Hybrid’s credit bid, the Bankruptcy Court relied upon the Third Circuit’s holding in In re Philadelphia Newspapers, LLC, 599 F.3d 298, 315-16 (3d Cir. 2010), in which the Court made clear that a secured lender does not have an absolute right to credit bid and that such right may be limited if necessary to foster a competitive bidding environment.  The record in Fisker was clear – bidding at an auction would not just be chilled, it would be frozen if the existing credit bid was not limited.  Moreover, the Bankruptcy Court viewed the sale process presented by the debtors and Hybrid as hurried and unfair, and noted the existence of a dispute as to the validity of Hybrid’s secured status.  Taken together, cause existed for the Bankruptcy Court to limit the bid pursuant to section 363(k) of the Bankruptcy Code under the facts and circumstances of the case.