Credit Bidding Rights Stalled: In re Fisker Automotive By George Klidonas* A secured creditor with a properly perfected lien on a debtor's property has certain rights against the debtor and the property in bankruptcy cases. One of those rights is the creditor's right to credit bid the amount of its al- lowed claim in any sale of its collateral. Thus, in a debtor's attempt to sell property in which a secured creditor holds a security interest, the secured creditor is allowed to bid the amount of its debt as a credit bid, as opposed to a cash bid. The right to credit bid exists both under state law, as well as sec- tion 363(k) of the Bankruptcy Code. The question that courts are faced with when interpreting section 363(k), however, is whether the right to credit bid is limitless. The Bankruptcy Court for the District of Delaware, in In re Fisker Auto- motive, held that a secured creditor's right to “credit bid” is not absolute and can be limited.1 This Article discusses the background of section 363(k), the In re Fisker Automotive case and the justication for the court's conclusion, as well as subsequent decisions that have interpreted In re Fisker. In addi- tion, this Article compares the In re Fisker Automotive decision to RadLAX Gateway Hotel, LLC v. Amalgamated Bank and provides some insight to secured creditors (or holders of secured debt) moving forward. Specically, the decision in In re Fisker Automotive is seemingly at odds with the Supreme Court's decision in in RadLAX Gateway Hotel, LLC v. Amalgam- ated Bank, which held that a secured creditor has an absolute right to credit bid under a plan of reorganization.2 I. What is Section 363(k)? Section 363(b) of the Bankruptcy Code allows a debtor, with court author- ity, to sell property of the estate outside of the ordinary course of business.3 Such sales have become increasingly common in recent years and more and more chapter 11 lings have taken place with this purpose in mind.4 In the event, however, the debtor attempts to sell property that is encumbered by a secured creditor's security interest, section 363(k) of the Bankruptcy Code allows that secured creditor to “credit bid” up to the amount of its claim. The following example is illustrative: Creditor Bank is owed $1 million by Debtor XYZ, secured by a valid and perfected lien on the debtor's prop- erty worth $500,000. Once Debtor XYZ les for bankruptcy, it decides to * The views expressed herein are solely those of the authors. George Klidonas is an as- sociate at BakerHostetler in New York, with a primary focus on bankruptcy, corporate re- structuring, and creditors' rights. He is also the Coordinating Editor for the ABI Journal Practice and Procedure Column, and co-chair of the ABI Taxation Committee. 174 © 2015 Thomson Reuters, Norton Journal of Bankruptcy Law and Practice, Vol. 24 No. 2 Credit Bidding Rights Stalled: In re Fisker Automotive sell the property under section 363(b) by undertaking an auction process. Creditor Bank generally has the ability to credit bid up to the full $1 million face value of its claim without the need to provide for additional cash or other consideration. It is irrelevant that the value of the property is $500,000. Credit bidding allows secured creditors to purchase the property compris- ing its collateral if cash bidders prefer not to pay sucient value or the secured creditor prefers to possess the collateral in lieu of payment. The downside to credit bidding from the debtor's perspective is that it “chills” the auction process, meaning cash bidders are reluctant to compete with secured creditors' bids because a secured creditor, to be the winning bidder, does not have to oer any cash, except for the amount of liens that are senior to the secured creditor's lien. A prime example of how credit bidding could chill the auction process is by reviewing the above example. If Property Buyer in Debtor XYZ's bankruptcy oered to pay the value of the property, it would have to bid $500,000, while Creditor Bank would not need to provide any cash because it would bid its credit up to$1 million and, thus, be successful. Thus, Property Buyer would have to bid something over $500,000 on property worth $500,000 in order to outbid Creditor Bank's credit bid. Nonetheless, credit bidding has traditionally been viewed as an inherent right of secured creditors under state law, but bankruptcy law has set limitations. Section 363(k) provides: “At a sale under subsection (b) of this section of property that is subject to a lien that secures an allowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may oset such claim against the purchase price of such property.”5 Al- though section 363(k) allows a secured creditor to credit bid, it also eliminates that right if the court nds that “cause” exists.6 “The term cause is not dened in the Bankruptcy Code and is left to the courts to determine on a case-by-case basis.”7 Nonetheless, certain general propositions can be made about when “cause” exists. For example, courts have found that cause exists as a punitive measure. In In re Theroux, the Bankruptcy Court for the District of Rhode Island held that evidence of collusion was enough to prevent a secured creditor from credit bidding.8 On a lower scale of misconduct, courts have restricted a cre- ditor's ability to credit bid where the creditor failed to comply with court orders or procedures.9 Courts have also limited credit bidding to preserve the value of the estate.10 Similar to this last point, the bankruptcy court in In re Fisker Automotive shed light on what constitutes “cause” under section 363(k) of the Bankruptcy Code,11 where the bankruptcy court concluded that the secured creditor did not have an absolute right to credit bid and that, gen- erally, a court may deny a lender the right to credit bid in the interest of any policy advanced by the Bankruptcy Code.12 II. In re Fisker Limits Secured Creditors' Right to Credit Bid A. Factual and Procedural Background Fisker Automotive Holdings, Inc. and Fisker Automotive, Inc. (collec- © 2015 Thomson Reuters, Norton Journal of Bankruptcy Law and Practice, Vol. 24 No. 2 175 Norton Journal of Bankruptcy Law and Practice tively, the “Debtors” or “Fisker”) were founded in 2007 by Henrik Fisker and Bernhard Koehler, and designed, assembled, and manufactured premium plug-in hybrid electric vehicles in the United States. Fisker, however, faced many challenges. It encountered safety recalls in connection with battery packs supplied by a third-party vendor. In addition, Hurricane Sandy af- fected Fisker by causing a material loss of its unsold vehicle inventory. Moreover, and most importantly, Fisker lost its lending facility provided through the United States Department of Energy.13 As a result of these chal- lenges, the Debtors led for chapter 11 bankruptcy relief in order to sell substantially all of its assets under section 363(b) of the Bankruptcy Code. At the time of its petition ling, November 22, 2013, Fisker had ap- proximately $203.2 million in debt, $168.5 million of which was owed to the Department of Energy. Hybrid Tech Holdings, LLC (“Hybrid”) pur- chased the Department of Energy's debt position $25 million (approximately fteen cents on the dollar). As a result, Hybrid succeeded to the Department of Energy's position as the senior secured lender. Fisker and Hybrid discussed the latter's potential acquisition of the former's assets through a credit bid. The Debtors agreed that Hybrid could credit bid up to $75 million.14 The Ocial Committee of Unsecured Creditors (the “Committee”) was appointed on December 5, 2013. The Committee opposed Fisker's motion to sell its assets to Hybrid. The Debtors' position was that a sale to a third party was not reasonably likely to generate greater value than Debtors' proposed sale transaction. In addition, the cost and delay of nding another potential buyer would be reasonably unlikely to increase value for the estates. The Committee, on the other hand, proposed that an auction take place, espe- cially in light of another potential purchaser's interest in Fisker's assets, Wanxiang America Corporation (“Wanxiang”). Wanxiang made it clear that it was willing to increase its bid if there was an auction.15 B. Court Holds that Hybrid's Ability to Credit Bid Was Limited The bankruptcy court found that Hybrid paid $25 million for its claim and was, therefore, entitled to credit bid under section 363(k) of the Bankruptcy Code. The question, however, was to what extent Hybrid would be allowed to credit bid. The court cited to the Third Circuit decision in In re Philadel- phia Newspapers, LLC, explaining that the right to credit bid under section 363(k) “is not absolute.”16 Although secured creditors have historically argued that the “for cause” exception is reserved for those situations where a secured creditor has engaged in inequitable conduct, the Third Circuit, as well as the In re Fisker court, rejected that position.17 Instead, “[a] court may deny a lender the right to credit bid in the interest of any policy advanced by the [Bankruptcy] Code, such as to ensure the success of the reorganization or to foster a competitive bidding environment.”18 In this case, the bankruptcy court concluded that there was “cause” to limit Hybrid's ability to credit bid, stating: “bidding will not only be chilled without the cap; bidding will be frozen.”19 Wanxiang had expressed interest 176 © 2015 Thomson Reuters, Norton Journal of Bankruptcy Law and Practice, Vol.