The right to credit-bid is one of the most valuable rights afforded to secured creditors under the Bankruptcy Code. Credit-bidding is the process by which a secured creditor places a bid at a sale of the collateral to which its lien is attached, using the debt owed to it to offset the purchase price.[1] Section 363(k) of the Bankruptcy Code allows secured creditors to credit-bid when a debtor conducts a sale of assets outside the ordinary course of business.[2] Under the Bankruptcy Code, secured creditors are also afforded the right to credit bid in situations where there is a sale of a debtor’s assets, including the collateral securing the creditor’s claim, pursuant to a chapter 11 plan of reorganization.[3]
Credit-bidding is a valuable right for secured creditors for a number of reasons. For example, it may permit secured creditors to purchase property without spending additional capital.[4] Also, credit-bidding allows a secured creditor to protect the collateral securing its lien from being sold at a depreciated value.[5]
In a sale of collateral under the Bankruptcy Code, a secured creditor may credit-bid up to the amount of its entire claim, notwithstanding any valuation of the collateral pursuant to § 506(a) of the Bankruptcy Code,[6] which may have bifurcated the secured creditor’s claim into a secured and unsecured claim. However, recent decisions from the U.S. Supreme Court and the District of Delaware Bankruptcy Court have impacted a secured creditor’s right to credit-bid. The Supreme Court’s May 2012 decision in RadLAX Gateway Hotel LLC v. Amalgamated Bank[7] addressed the issue of whether a debtor can confirm a chapter 11 plan proposing to sell assets, including a secured creditor’s collateral, over the objections of a secured class of creditors without providing a secured creditor the right to credit-bid. The Delaware Bankruptcy Court’s January 2014 decision in In re Fisker Automotive Holdings Inc.[8] addressed the issue of whether a credit-bid can be capped for “cause” under § 363(k). Both of these decisions, and their impact on a secured party’s right to credit-bid, are discussed below.
The RadLAX Decision
RadLAX involved two corporate debtors, RadLAX Gateway Hotel LLC and RadLAX Gateway Deck, LLC, who financed the purchase of commercial real estate in Los Angeles in 2007 with a $140 million loan from Amalgamated Bank that was secured by a lien on all of the debtors’ assets.[9] The debtors eventually ran into difficulties in making payments on the loan, and after negotiations failed, the debtors filed for chapter 11 bankruptcy protection in 2009.[10] The debtors’ chapter 11 plan, which was filed in June 2010, provided for a sale of substantially all of the debtors’ assets.[11] The debtors also filed a motion to approve bid procedures and the asset sale, which would occur via an auction of the debtors’ assets to the highest bidder.[12] However, the sale procedures would not permit Amalgamated Bank to credit-bid at the auction, instead requiring it to submit a full cash bid.[13]
The debtors sought to confirm their plan over Amalgamated Bank’s objection using the “cramdown” provision in § 1129(b)(2)(A) of the Code, which allows a debtor to confirm a plan over the objection of secured creditors if the debtor’s plan either: (1) allows a secured creditor to retain its lien on the collateral and receive deferred cash payments totaling the allowed amount of such claim as of the plan’s effective date; (2) sells the property subject to a secured creditor’s lien, pursuant to § 363(k); or (3) provides the secured creditor with the “indubitable equivalent” of its claim.[14] The debtors argued that their plan could be confirmed over the objection because it would provide Amalgamated Bank with the “indubitable equivalent” of its claim in the form of cash generated by the sale of Amalgamated Bank’s collateral.[15]
The lower court, the U.S. Bankruptcy Court for the Northern District of Illinois, denied the debtors’ sale and bid procedures motion, noting that if the debtors desired to sell Amalgamated Bank’s collateral free and clear of liens, it would have to meet the requirements of § 1129(b)(2)(A)(ii), which requires the secured creditor be allowed to credit-bid at the sale.[16] The Seventh Circuit affirmed the bankruptcy court’s ruling. The Supreme Court affirmed the Seventh Circuit’s decision, holding that a plan that provides for the sale of collateral free and clear of liens cannot be confirmed over the objection of secured creditors without affording the secured creditors the opportunity to credit bid.[17]
The Fisker Decision
The Fisker case also involved two debtors, Fisker Automotive Holdings Inc. and Fisker Automotive Inc., which produced premium plug-in hybrid cars in the United States.[18] The debtors faced operational difficulties and filed their chapter 11 petition in November 2013 to facilitate the sale of all of their assets to Hybrid Tech Holdings Inc. (Hybrid).[19] The debtors’ senior secured creditor was the U.S. Department of Energy (DOE), which was owed approximately $168 million.[20]
In October 2013, approximately a month before the debtors filed for bankruptcy, Hybrid purchased the DOE’s position for $25 million, effectively becoming the debtors’ senior secured creditor.[21] After the purchase, the debtors and Hybrid entered into an agreement whereby Hybrid would purchase all of the debtors’ assets for $75 million in the form of a credit-bid via a private sale, which was disclosed to the court for approval in a sale motion.[22] The creditors’ committee objected to the sale motion and particularly Hybrid’s right to credit-bid, arguing that allowing Hybrid to credit-bid the value of its entire claim would effectively prevent any other party, including a potential buyer located by the creditors’ committee, from participating in the sale process.[23]
The bankruptcy court noted that it was “beyond peradventure” that a secured creditor has a right to credit-bid its allowed claim.[24] However, the bankruptcy court also noted that it is “equally clear” under the Bankruptcy Code that a secured party has a right to credit-bid “unless the court for cause orders otherwise.”[25] The bankruptcy court held that “cause” existed to limit Hybrid’s credit-bid to $25 million, the amount it paid for the DOE’s $168 million claim, finding that “bidding will not only be chilled without the cap; it will be frozen.”[26] The bankruptcy court specifically mentioned that without a cap on Hybrid’s credit-bid, the creditors’ committee’s buyer, which was “a highly attractive and capable participant,” would not be able to participate in the sale process, effectively forcing a private sale of the debtors’ assets to Hybrid.[27] Finally, the bankruptcy court noted that authorizing an uncapped credit bid in this situation would be “unprecedented and unacceptable.”[28]
The Impact of the RadLAX and Fisker Decisions Going Forward
RadLAX and Fisker have both impacted a secured creditor’s right to credit-bid. RadLAX makes it the “law of the land” that any chapter 11 plan that provides for a sale of collateral free and clear of liens cannot be confirmed over the objections of a secured creditor unless the plan permits that secured creditor to credit-bid at such a sale. This powerful holding limits the options available to a debtor in attempting to confirm a chapter 11 plan via a cramdown.
Fisker, a decision from the well-respected Delaware Bankruptcy Court, has broad persuasive authority. If the right to credit-bid can be limited to the purchase amount of a secured party’s claim, parties may be less likely to engage in claims trading because a purchaser of a secured claim will no longer be guaranteed the ability to credit-bid the entire amount of the purchased claim.
[1] See RadLAX Gateway Hotel LLC v. Amalgamated Bank, 132 S. Ct. 2065, 2069 (2012); see also River Road Hotel Partners LLC v. Amalgamated Bank, 651 F.3d 642, 645 (7th Cir. 2011).
[2] See 4 Collier on Bankruptcy ¶ P 363.09 (16th ed. 2013).
[3] See id.; see also 11 U.S.C. §§ 1123(a)(5)(D).
[4] See 4 Collier on Bankruptcy ¶ P 363.09 (16th ed. 2013).
[5] See id.; see also RadLAX, 132 S. Ct. at 2070 n.2.; Beal Bank S.S.B. v. Waters Edge Ltd. P’ship, 248 B.R. 668, 680 (D. Mass. 2000).
[6] See 4 Collier on Bankruptcy ¶ P 363.09 (16th ed. 2013).
[7] 132 S. Ct. 2065 (2012).
[8] No. 13-13087(KG), 2014 Bankr. LEXIS 230 (Bankr. D. Del. Jan. 17, 2014).
[9] See RadLAX, 123 S. Ct. at 2068.
[10] See id. at 2068-69.
[11] See id. at 2069; see, e.g., River Road Hotel Partners, 651 F.3d at 645.
[12] See RadLAX, 123 S. Ct. at 2069; see also River Road Hotel Partners, 651 F.3d at 645.
[13] See RadLAX, 123 S. Ct. at 2069.
[14] See id. at 2069–70; see also 11 U.S.C. § 1129(b)(2)(A)(i)-(iii).
[15] See RadLAX, 123 S. Ct. at 2070.
[16] Id.; see also In re River Road Hotel Partners, No. 09-B-30029, 2010 WL 6634603 at * 1 (Bankr. N.D. Ill. Oct. 5, 2010).
[17] See RadLAX, 123 S. Ct. at 2073; see also River Road Hotel Partners, 651 F.3d at 653.
[18] Fisker, 2014 Bankr. LEXIS 2030 at *2.
[19] Id. at *3.
[20] See id. at * 3-4.
[21] Id. at *5.
[22] See id.
[23] See id. at *5-6.
[24] Fisker, 2014 Bankr. LEXIS 2030 at *10-11.
[25] See id. at *11-12; see also 11 U.S.C. § 363(k).
[26] Fisker, 2014 Bankr. LEXIS 2030 at *15, 16.
[27] See id. at *13-14.
[28] Id. at *16-17.