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On January 17, 2014 the Bankruptcy Court for the District of Delaware issued a ruling in Fisker Automotive Holdings, Inc., et. al., Case No. 13-13087 (KG), which highlights potential risks to both secured creditors and purchasers of claims in bankruptcy section 363 sales. The facts in Fisker are straightforward. Fisker was founded in 2007 to make high-end electric cars and was financed principally with federal and state government loans secured by some, but not all, of Fisker’s assets. The Fisker endeavor was unsuccessful and a little over one month prior to Fisker’s Chapter 11 filing, Hybrid Tech Holdings, LLC purchased the $168.5 million secured claim of the United States Department of Energy for $25 million. Thereafter, an agreement was reached between Fisker and Hybrid to sell substantially all of the Fisker assets to Hybrid in a bankruptcy "Section 363" sale for consideration which included a $75 million credit bid.

Fisker then filed its Chapter 11 bankruptcy case and its sale motion on November 22, 2013 to facilitate the sale to Hybrid. Because Fisker had determined that the cost and delay typically associated with a competitive auction process would not increase the value to the estate, primarily due to Hybrid’s intent to credit bid, the sale motion detailed Fisker’s decision to seek approval of the sale to Hybrid through a private sale. The Hybrid agreement also provided a “drop dead” hearing date on the sale motion of January 3, 2014.

The creditors’ committee opposed Fisker’s sale motion and filed its own bidding procedures motion seeking (i) a competitive auction process, and (ii) opposing Hybrid’s right to credit bid. The committee contended that if a competitive auction process were to be held, another interested bidder, Wanxiang America Corporation, would likely bid more than the current Hybrid offer and that Wanxiang would not participate in an auction if Hybrid were permitted to credit bid more than $25 million at the auction. The committee suggested that Hybrid either be prohibited from credit bidding or that its credit bid be limited to the $25 million it paid for the claim.

Fisker and the committee stipulated that: (1) a competitive auction would likely create material value above the Hybrid bid, (2) unless Hybrid’s credit bid was capped, there would be no realistic possibility of an auction, (3) limiting Hybrid’s ability to credit bid would likely foster and facilitate a competitive bidding environment, (4) the highest and best value for the assets would only be achieved in a sale of all of Fisker’s assets as an entirety, and (5) within the entirety of Fisker’s assets (i) a material group of assets is subject to Hybrid’s liens, (ii) a material group of assets is not subject to Hybrid’s liens, (iii) a material group of assets is subject to a bona fide dispute as to whether such assets are subject to Hybrid’s liens, and (iv) the bona fide dispute and the allocation of value between the above three groups of assets will not likely be subject to a quick or easy resolution.

The proposed Section 363 sale is subject to Section 363(k) of the Bankruptcy Code, which provides for credit bidding “unless the court for cause orders otherwise.” Noting that Wanxiang was a credible bidder which had previously purchased at a bankruptcy auction A123 Systems, the battery maker for Fisker cars, the court concluded that Hybrid’s credit bid should be limited to $25 million “for cause” since in the absence of a cap on credit bidding by Hybrid the bidding would be “frozen.” The court seemed influenced by the “fabrication” of a sale deadline by Fisker and Hybrid in addition to the fact that Hybrid did not have a perfected lien on a material group of assets and Hybrid’s lien on another material group of assets was subject to a bona fide dispute.

The court distinguished the Third Circuit decision in Submicron Systems Corp., 432 F3d 448 from theFisker situation. In Submicron, the secured creditor was allowed to credit bid the full amount of its claim, even though it was completely under water and its liens had no economic value, because the lender had a lien on the assets, although valueless, while in Fisker, it was not yet known which assets were subject to the lien.

Limiting the secured creditor’s credit bid under the Fisker facts opens the door to the very type of logic that was apparently rejected by the Supreme Court in Radlax Gateway Hotel, LLC v Amalgamated Bank, 132 S. Ct. 2065 (2012) where the court attempted to restrict credit bidding in a sale conducted pursuant to a plan of reorganization. Objecting parties can often claim that credit bidding chills or eliminates the willingness of other bidders to participate and can now point to Fisker to support restrictions on credit bidding. The ruling in Fisker may significantly restrict not only the ability of secured creditors to credit bid, but the marketability of loans where the full extent of the collateral is in dispute. Although the Court did not specify why it limited Hybrid’s credit bid to $25 million, the Court’s ruling will nonetheless give distressed acquirers pause and be used as precedent in attempts to limit the claims of distressed debt buyers to the amount they paid for the claim

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