Vol 11 (2014) - Issue 3

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Claimholder’s Right to Credit Bid: The Fisker Decision and its Implications

Following the United States Supreme Court’s unanimous decision in RadLAX Gateway Hotel, LLC v Amalgamated Bank, upholding the right of a secured claimholder to 'credit bid' its claim at a bankruptcy auction, one could hardly blame the U.S. distressed community if it thought the uncertainty involving credit bidding was largely sidelined. A recent decision from the Bankruptcy Court for the District of Delaware (the 'Court') in the Fisker chapter 11 case, however, has renewed the debate. This time, the issue wasn’t whether a secured claimholder would be denied the opportunity to credit bid (as it was in RadLAX), but rather how much of the claim could be credit bid. By its decision, the Court limited the amount a secured creditor could credit bid to the price it paid for the claim, which was roughly 15% of the principal amount. Not surprisingly, the decision has been highly controversial and oft-criticized. As explained below, however, this reaction may be overblown, as Fisker involved a unique set of circumstances that should have limited application in other cases.

Background
Founded in 2007, Fisker Automotive Holdings, Inc. and Fisker Automotive, Inc. (collectively, 'Fisker') designed and manufactured luxury hybrid electric vehicles. In 2010, the United States government, through the Department of Energy ('DOE'), provided a loan to Fisker for the development, production, sale, and marketing of two specific prototype vehicles. Despite having such a high-profile backer, Fisker’s business suffered. In addition to losing a material portion of its inventory in Hurricane Sandy, Fisker had to institute safety recalls related to battery packs supplied by a third-party vendor. Eventually, the DOE decided to exit the Fisker loan and, in October 2013, DOE held a public auction at which it sold the loan to Hybrid Tech Holdings, LLC ('Hybrid') for USD 25 million, even though the secured loan had an outstanding principal amount of USD 168.5 million.
With the loss of its funding source, Fisker and Hybrid began discussions over the terms of a sale of Fisker’s assets to Hybrid through a credit bid of the newly purchased secured claims. These discussions culminated in an agreement in which Hybrid would credit bid up to USD 75 million of the USD 168.5 million principal amount of the loan in exchange for substantially all of Fisker’s assets. Having determined that a sale process was unlikely to elicit higher or better bids than the Hybrid credit bid, Fisker then filed a chapter 11 case in November 2013 for the sole purpose of consummating this private sale to Hybrid. Notably, the private sale to Hybrid was scheduled on an accelerated and truncated timeline, providing only 24 business days for parties to challenge the sale.
Fisker’s assumption that no other bidder would emerge proved to be incorrect. Wanxiang American Corporation ('Wanxiang') expressed interest in acquiring Fisker and found a champion in the statutory creditors’ committee (the 'Committee'). The Committee opposed the private sale to Hybrid and instead advocated for a sales process that would provide Wanxiang with an opportunity to participate. But there was a catch – Wanxiang made it clear it would only bid if Hybrid’s ability to credit bid was curtailed. As a result, the Committee asked the Court to both approve an auction process and limit Hybrid’s credit bid. To support this relief, the Committee argued alternatively that: (i) certain of Hybrid’s liens were either unperfected or subject to bona fide dispute; (ii) limiting Hybrid’s ability to bid would make the sales process more competitive; and (iii) the sale would include both encumbered and unencumbered assets and credit bidding is impermissible for the latter assets.