Credit Bidding as Agent for the Bank Group: Dealing with the Issue of Unanimity

With a substantially increasing number of chapter 11 cases filed ending up in a sale pursuant to Bankruptcy Code §363, bankruptcy practitioners are now essentially required to develop an understanding of the parameters of credit bidding under §363. One specific situation arising in many §363 sales involves a secured lender “credit bidding” its debt, thereby attempting to become the owner of the collateral or, at the very least, serve as the stalking-horse bidder.  

 

In this situation, the secured lender is generally not a single lender, but is rather a group of lenders. The bank group will have spread the risk of the loan by syndicating the debt, appointing an agent bank and dividing the credit among a group of banks that often, have purchased the debt from the initial participants to the syndicated loan. Working usually with a thick credit agreement and hundreds of collateral agreements, the agent represents the bank group, sometimes with unanimous approval from the group, and other times with only majority support. 

 

The agent representing the bank group faces a number of issues when the borrower files chapter 11. One issue of great sensitivity is whether to credit bid for the debtor’s assets pursuant to §363(f) and (k). The decision to credit bid is complicated because, among other things, the credit bid has the potential to transform the bank group from being a lender to an owner. 

 

Leading the bank group through a credit bid process is made even more difficult when one member of the group does not want to participate. Several questions are raised in such a predicament, namely:

An unpublished opinion in the GWLS Holdings Inc. (Case No. 08-12430 (Bankr. D. Del.) (PJW) (Memorandum Opinion dated Feb. 23, 2009)) discusses both of these points, and is analyzed in this article.

 

On Oct. 20, 2008 (the petition date), GWLS Holdings Inc. and its affiliates, including Greatwide Logistics Services Inc. (GLSI) (the debtors), filed for chapter 11 with the U.S. Bankruptcy Court for the District of Delaware. The debtors were in the business of trucking logistics and had their headquarters in Dallas. 

 

On Dec. 19, 2006, GLSI entered into a $370 million first-lien credit agreement with certain lenders (the first-lien lenders) and parties that included: UBS AG, Stamford Branch as administrative agent, collateral agent and issuing lender (the agent); Bear Stearns & Co. Inc. as syndication agent; and General Electric Capital Corporation (GECC) as documentation agent. In consideration for the loan, the debtors granted the first-lien lenders a first lien and security interest in and to all of the debtors’ assets. As of the petition date, the debtors owed $366 million to the first-lien lenders under the credit agreement. 

 

Also on Dec. 19, 2006, GLSI entered into a $117 million second-lien credit agreement with certain lenders (the second-lien lenders). UBS, Bear Stearns and GECC acted in the same capacity under the second-lien credit agreement and, as part of the second-lien credit agreement, the debtors granted a second lien and security interest to the second-lien lenders. As of the petition date, the debtors owed approximately $117 million to the second-lien lenders. 

 

On the petition date, Grace Bay Holdings LLC and Grace Bay Holdings II LLC (collectively, Grace Bay) held $1 million of the first-lien debt. After the petition date, Grace Bay acquired an additional $31 million in first-lien debt. 

 

Immediately after the petition date, the debtors submitted a motion seeking approval of bidding procedures and sale of substantially all of their assets (Bid Procedures Motion). As Exhibit A to the Bid Procedures Motion, the debtors attached a notice of the first-lien holders’ stalking-horse asset-purchase agreement, under which the agent sought to credit bid the first-lien holders’ debt in return for the debtors’ assets (the first lien APA). Grace Bay appeared at the hearing on approval of the Bid Procedures Motion, but did not oppose entry of the order approving the Bid Procedures Motion (the Bid Procedures Order). The bankruptcy court entered the Bid Procedures Order in November 2008, which established Jan. 6, 2009, as the bid deadline.  Grace Bay did not appeal or seek a motion for reconsideration of the Bid Procedures Order. 

 

Subsequent to the entry of the Bid Procedures Order, Grace Bay expressed an interest in bidding on the debtors’ assets by submitting a letter of interest, and the debtors provided Grace Bay with access permitting Grace Bay to conduct due diligence.  Nevertheless, neither Grace Bay nor any other party submitted a bid prior to the bid deadline. Accordingly, the debtors cancelled the auction and sought bankruptcy court approval of the first lien APA submitted by the first-lien holders. On Jan. 23, 2009, after a contested evidentiary hearing, the bankruptcy court approved the sale of the debtors’ assets to the first-lien holders (the sales order). Grace Bay subsequently objected to the entry of the sales order.

 

In its objection, Grace Bay argued that the agent lacked requisite authority to proceed with the credit bid set forth in the first lien APA because the underlying documents required unanimous approval and, without Grace Bay’s vote, the agent did not have the authority to proceed. To support its argument, Grace Bay first argued that §11.1(a) of the credit agreement required the written consent of all of the first-lien holders in order for the credit agreement to be amended, supplemented, waived or modified with respect to any of the collateral governed thereby. Section 11.1(a) provided that: 

 

[N]o such waiver and no such amendment, supplement or modification shall (i) release all or substantially all of the Collateral or alter the relative priorities of the secured obligations entitled to the Liens of the Security Documents, in each case without the written consent of all Lenders…. (emphasis added). 

 

Grace Bay argued that the sale of the debtors’ assets necessitated a waiver and release of the first-lien lenders’ claims to the collateral securing their claims. Such action, therefore, required the written consent of all of the first-lien lenders and the agent never obtained the requisite unanimity.

Second, Grace Bay argued that, under §3.1(a)(ii) of the intercreditor agreement, the exercise of any remedy, including the right to credit bid, must be made by the “First Lien Collateral Agent” and all “First Lien Secured Parties.” Section 3.1(a)(ii) provided that:

 

(a) So long as the Discharge of First Lien Obligation has not occurred, whether or not any Insolvency or Liquidation Proceeding has been commenced by or against the Borrower or any other Credit Party: 

…

(ii) the First Lien Collateral Agent and the First Lien Secured Parties shall have the exclusive right to enforce rights, exercise remedies (including setoff and the right credit bid debt) and make determinations regarding the release, disposition, or restrictions with respect to the Collateral without any consultation with or the consent of the Second Lien Collateral Agent or any Second Lien Secured Party. 

 

Finally, Grace Bay argued that the credit agreement was unambiguous as it related to decisions requiring unanimous consent versus those decisions that did not. Specifically, §8.5 of the credit agreement provided a list of transactions for which unanimous consent was not required, and this list did not include a sale of assets pursuant to §363.

 

The agent came out swinging in response to Grace Bay’s arguments. First, the agent pointed out that each lender appointed UBS as the agent to “act on its behalf…and authorize[d] such Agents to take such actions on its behalf and to exercise such powers as are delegated to such Agents by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto.” In turn, §6.1(g) of the credit agreement required each lender to execute the collateral agreement as a condition to closing, and under §3 of the collateral agreement, the debtors granted a security interest in the collateral to the agent on behalf of the secured parties. Therefore, the debtors granted the agent—and only the agent—with a lien in the collateral to be exercised for the benefit of the agent and the first-lien lenders. 

 

Second, the agent noted that the collateral agreement granted certain remedial rights to the agent. These

rights included §6.6 of the collateral agreement, which provided that the agent, “on behalf of the other Secured Parties, may exercise…all rights and remedies of a secured party under the New York UCC or any other applicable law.” (emphasis added).

 

Third, the agent asserted that §11.1 of the credit agreement, which prohibited any amendments, supplements, waivers and modifications to the “credit documents” without unanimous consent, did not apply to the first-lien APA and its related documents because, by definition, those documents were not “credit documents.” Moreover, the sales order stipulated that all liens were being released, which implicitly meant that such liens were not being waived, amended, supplemented or modified as provided for in §11.1. Based on this interpretation of §11.1, the agent argued that, regardless of unanimity, §363(k) granted the agent with a right to submit the credit bid as set forth in the first-lien APA. 

 

Fourth, the agent argued that it was meritless for Grace Bay to rely on §3.1 of the intercreditor agreement to support a requirement of unanimity. The agent pointed out that this particular provision was merely intended to ensure that the agent and the first-lien lenders maintained exclusive rights to the collateral versus those rights held by the second-lien collateral agent and the second-lien lenders. Moreover, as claimed by the agent, Grace Bay’s argument—that the right to credit bid must be made by the “first-lien collateral agent” and all of the “first-lien secured parties”—contradicted and conflicted with §10.1 of the credit agreement, under which the first-lien lenders authorized the agent to act on their behalf.

 

On Jan. 14, 2009, the bankruptcy court held a contested hearing on the debtors’ motion to authorize the sale of the assets pursuant to the credit bid of the Agent . Grace Bay objected to the motion, arguing that the credit agreement required unanimous written consent of the first-lien lenders and, because Grace Bay did not consent, the sale could not proceed.

 

The bankruptcy court initially disposed of Grace Bay’s belated argument that the court was not the appropriate forum to address the contract interpretation dispute between the Agent and Grace Bay (and, as Grace Bay further argued, even if it were the appropriate forum, an adversary proceeding was required to adjudicate such an issue). The court held that “Grace Bay did not object to the Court resolving Grace Bay’s objections at the hearing regarding the Sale Order, did not make any reservations regarding the instant contract interpretation issue, and did not file an appeal to the Sale Order. In short, Grace Bay has submitted to this Court’s jurisdiction.” Memorandum Opinion, p. 9. 

 

Relying in large part on §6.6 of the collateral agreement, the bankruptcy court found that the agent did not need unanimous consent to submit the credit bid. Id. at pp. 11-12 (“This comports with §6.6 of the Collateral Agreement, which recites that in addition to the rights and remedies set forth in the Collateral Agreement, the First Lien Agent has ‘all rights and remedies of a secured party under New York UCC or any applicable law’…Any applicable law includes the Bankruptcy Code in general, and §363(k) in particular.”) Moreover, the court found that when interpreting and applying the plain meaning of the credit agreement and the collateral agreement accordingly, and giving effect to all provisions of these agreements, §11.1(a) of the credit agreement did not override the express provisions in the collateral agreement allowing the agent to propose a credit bid on behalf of the first-lien lenders. Id. at p. 12. The bankruptcy court held that the agent could credit bid Grace Bay’s debt, and the debtors’ assets could be sold free and clear of Grace Bay’s first-lien claim.

 

Decide Early Where You Are Going to Fight the Issue

The issue of unanimity and whether the agent can credit bid is largely a two-party dispute between two nondebtors that arises in a bankruptcy court in the context of a chapter 11 case. The parties have the right to seek a determination of this issue outside of the court. In the instant case, Grace Bay chose not to commence a suit in New York state court, and the agent chose not to commence a separate adversary proceeding to determine this critical dispute. However, there are strategic reasons for selecting a forum other than the bankruptcy court to decide this issue. 

 

Most bankruptcy lawyers assume that §363(k) or (f) provides the answer to the issue of unanimity and whether the agent can credit bid. In GWLS, as it will be elsewhere, when such a dispute arises, the issue is actually one more of contract interpretation under applicable law. A determination of this issue is likely to ultimately hinge on the application of relevant contract interpretation principles, which generally include interpretation and enforcement of the contract according to the plain meaning of its unambiguous terms.

 

Although not mentioned by the GWLS court in its Memorandum Opinion,the agent and Grace Bay discussed elsewhere, albeit briefly, that the parties were in a dispute over the post-acquisition governance of the debtors’ assets. In other words, the dispute over the agent’s authority to credit bid the first-lien holders’ debt without “unanimity” was actually only a “warm-up” fight for a bigger dispute between the parties. The GWLS opinion provides readers with valuable insight into the analysis bankruptcy courts are likely to undertake in determining a unanimity and credit bid issue that is certain to arise more often in the future. However, because an adjudication of this issue clearly involves complicated and time-consuming factual analysis, it is important to balance the client’s true motivations before diving into such a dispute.