Source: https://www.stites.com/resources/articles/fisker-i-hardly-knew-her-the-end-of-credit-bidding
Timestamp: 2019-04-25 22:34:37+00:00

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Fisker? I Hardly Knew Her! The End of Credit Bidding?
B. The District Court’s Rulings.
Hybrid immediately sought appellate review of the Credit Bid Opinion. It filed a motion for leave to take an interlocutory appeal pursuant to Fed. Bankr. P. 80039 and a motion for direct appeal to the United States Court of Appeals for the Third Circuit pursuant to Fed. Bankr. P. 8001(f).10 These filings gave the district court two separate occasions to weigh in on the credit bid issue and the “for-cause” exception invoked by Judge Gross.
II. “Fostering Competitive Bidding” Is Insufficient Cause To Limit Credit Bidding.
While the $25 million cap in Fisker was the same amount that Hybrid paid to acquire the debt at the DOE auction, the fact that the debt had been sold appears not to be the explicit basis for either the bankruptcy or the district court’s rulings that the “for-cause” exception applied. In other words, the good news for secured creditors is that Fisker should not stand for the proposition that purchasing distressed debt inherently increases the likelihood of successful “for-cause” limitation of the right to credit bid. None of the opinions overtly state that the existence of the note sale was a reason, let alone the reason, for invoking the exception.
The bad news for secured creditors, of course, is that the actual rule of decision—that “fostering competitive bidding” constitutes “cause”—is extremely broad, and probably cannot be limited to note-sale situations. The concept of “fostering competitive bidding” is so broad, in fact, that it is probably present in every case in which a secured creditor could make a credit bid if the for-cause exception were not invoked. This exception is at least bad policy, if not bad law.
A. A Broad For-Cause Exception is Legally Questionable.
The extremely broad for-cause exception embraced by Fisker will unjustifiably force secured creditors to raise and risk additional capital simply to protect the important rights described in Radford. Many secured creditors are simply incapable of protecting their interests without the ability to credit bid because they lack authority or resources to bid additional cash: think bond trustees, commercial mortgage-backed securities servicers, and as illustrated in the Radlax footnote quoted above, governmental units.
It is not clear that the Fisker courts’ heavy reliance on the section 363(k) for-cause discussion in Philadelphia Newspapers was warranted. First, there is at least an ambiguity whether Section III(C) of the opinion—the section containing the for-cause discussion—actually commanded a majority of the panel. Judge Smith prefaced his concurrence with the following sentence: “I join [Judge Fisher’s] opinion without reservation save for section III(C).” Second, it is unclear whether Judge Fisher’s for-cause discussion constitutes holding or dicta. While the Fisker district court interpreted the discussion as “essential to its holding,” no party in Philadelphia Newspapers actually invoked the for-cause exception to the right to credit bid.
Finally, the cases cited in Section III(C) of Philadelphia Newspapers to support a broad for-cause exception are all much narrower than the decision admits, and in each, the proposed purchaser had done some less-than-admirable act or acted improperly. In In re Aloha Airlines, No. 08-00337, 2009 WL 1371950, at *8 (Bankr. D. Haw. May 14, 2009), the court refused the right to credit bid when a purchaser did not adequately disclose that an entity guilty of past misconduct would be a co-purchaser of the assets. In Greenblatt v. Steinberg, 339 B.R. 458 (N.D. Ill. 2006), the court denied the right to credit bid when the party failed to abide by a sales procedure order to advance objections to senior liens in the same assets. In In re Anataeus Tech. Servs., Inc., 345 B.R. 556, 565 (Bankr. W.D. Va. 2005), the secured lender had contractually released its claim (and therefore its right to credit bid) by failing to timely exercise provisions in a court-approved settlement agreement. In In re Theroux, 169 B.R. 498, 499 n.3 (Bankr. D.R.I. 1994), the proposed sales price to the secured creditor was so low compared to the market value, “the Trustee should probably have abandoned his interest therein long ago.” Moreover, in Theroux, the court did not actually permit a sale to a third party while denying the secured creditor the right to bid; it simply refused to approve the proposed sale altogether.
Philadelphia Newspapers contains broad language that could be read to authorize the use of the for-cause exception solely to “foster competitive bidding” even in the absence of creditor misbehavior, but Fisker appears to be the first case to actually do so. This radical expansion of the for-cause exception is a policy mistake that other courts should strive to avoid.
Accepting the premise that permitting a credit bid will dissuade competitive cash bidding—the Fisker approach—threatens to swallow the rule with its exception. If credit bidding keeps other cash bidders away, why shouldn’t courts limit credit bidding in every case? At least when a secured creditor is greatly undersecured, a credit bid gives that secured creditor the choice to make a bid that is by definition larger than anyone else will pay. If the rest of the potential bidding universe knows this, it would understandably chill the inclination of other bidders to participate in a cash auction.
This rationale, if sufficient to constitute cause, is likely to exist in almost every case. This raises more questions than it answers. Is it now the fiduciary duty of creditors’ committees to oppose a secured creditor’s credit bid right in every case? What evidence is relevant and sufficient to invoke the exception? Will we now see an affidavit from every Committee financial advisor saying that, “on information and belief, more cash bidders will show up if the Court limits the secured creditor’s credit bid right?” How should a bankruptcy judge select an appropriate cap?
If, instead, the lesson of Fisker is that the for-cause exception should only be invoked when the debt is sold, the news is not much better. As noted above, this was not explicitly part of the Fisker courts’ for-cause reasoning, but the $25 million cap is probably not sheer coincidence. It is hard to imagine that the courts would have imposed a $25 million credit bid cap on the DOE if the $168 million loan had not been sold.
In order for a secured creditor’s credit bid right to continue to have meaning, Courts should exercise restraint in applying the for-cause exception. The goal of “fostering competitive bidding,” while laudable in theory, is too over-inclusive in practice to warrant denial of a secured creditor’s credit bid right in the absence of creditor misbehavior.
2In re Fisker Automotive Holdings, Inc., No. 13-13087 (KG) (Bankr. D. Del. Jan. 17, 2014) (Dkt. No. 483) (the “Credit Bid Opinion”).
4See Credit Bid Opinion at 2014 WL 210593, at *4.
5See Credit Bid Opinion, 2014 WL 210593, at *3 (perfection dispute “not likely subject to quick or easy resolution”).
7See Credit Bid Opinion, 2014 WL 210593, at *5.
8See Credit Bid Opinion, 2014 WL 210593, at *20.
11Hybrid Tech Holdings, LLC v. Committee of Unsecured Creditors, No. 14-CV-99, 2014 WL 546036 (D. Del. Feb. 7, 2014) (the “8003 Opinion”).
128003 Opinion, 2014 WL 546036, at *3.
13In re Philadelphia Newspapers, LLC, 599 F.3d 298, 316 n. 14 (3d Cir. 2010).
14Hybrid Tech Holdings, LLC v. Committee of Unsecured Creditors, No. 14-CV-99, 2014 WL 576370 (D. Del. Feb. 12, 2014) (the “8001(f) Opinion”).
158001(f) Opinion, 2014 WL 576370, at *2.
168001(f) Opinion, 2014 WL 576370, at *2.
18In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del. Feb 2, 2014), ECF No. 628.
19In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del. Feb. 19, 2014), ECF No. 653.
20In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del. Feb. 16, 2014), ECF No. 630.
21The balancing of constitutional rights and bankruptcy polices was discussed in Robert C. Goodrich, Jr., Preserving the Credit Bid: A Balancing of Interests, 4 Norton Bankr. L. Adviser 1 (2012).
22Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 579-80, 55 S. Ct. 854, 79 L. Ed. 1593 (1935) ("[T]his right of the mortgagee to insist upon full payment before giving up his security has been deemed the essences of a mortgage.").
2311 U.S.C.A. § 363(e) (emphasis added).
24H.R. Rep. No. 95-595, 6295 (footnotes omitted).
26In re Philadelphia Newspapers, LLC, 599 F.3d at 318 (Smith, J., concurring) (emphasis added).
28Greenblatt v. Steinberg, 339 B.R. 458 (N.D. Ill. 2006).
29In re Anataeus Tech Servs., Inc., 345 B.R. 556, 565 (Bankr. W.D. Va. 2005).
30In re Theroux, 169 B.R. 498, 499 n.3 (Bankr. D.R.I. 1994).
31In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del. Jan. 14 2014), ECF Nos. 442 & 444..
This article is reprinted with the permission of Norton Bankruptcy Law Adviser, ©2014 Thomson Reuters.

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