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FEATURE BANKRUPTCY & COMMERCIAL LAW

FISKER, FIVE

YEARS LATER:

DID WE ALL OVERREACT?

BY T. DANIEL REYNOLDS & MARISSA C. ALFANO

common strategy to acquire compared to purchasing a distressed target’s for no other reason than that the existence of
a distressed company’s assets assets outside of bankruptcy, including the ability their right to credit bid disincentivized others
is to purchase the outstanding to purchase assets “free and clear” of any claims to participate in an auction. Five years later,
secured debt of the target for and encumbrances. It also benefits a potential however, Fisker’s impact would appear to be
A less than face value, have the acquirer more than simply participating in a more limited than some feared.
target file for protection under title 11 of the bankruptcy auction because the acquirer: (a) may
United States Code (the “Bankruptcy Code), and have significant influence over the target’s chapter Credit Bidding
then “credit bid” the face value of the secured 11 case due to its secured claims, especially if the Credit bidding is the colloquial term used to
debt at a bankruptcy auction of the target’s acquirer provides postpetition financing; (b) can describe a secured creditor’s right pursuant to
assets. This strategy has significant benefits have substantial insight regarding the target and section 363(k) of the Bankruptcy Code and
its operations compared to rival bidders; and (c) applicable nonbankruptcy law to bid on property
may be in a position either to acquire the target’s of the debtor’s estate by offsetting the amount of
assets or to profit on the purchase of the target’s its secured claim on such property, rather than
secured debt if a competing bidder is willing to putting cash on the table. Under section 363(k), a
bid enough cash for the target’s assets. secured creditor may exercise this right unless the
The bankruptcy bar’s faith in this strategy was court limits it “for cause.”
tested when the U.S. Bankruptcy Court for the Because the Bankruptcy Code does not
District of Delaware issued its opinion in In re define “cause,” bankruptcy courts must decide
Fisker Auto. Holdings, Inc., 510 B.R. 55 (Bankr. on a case-by-case basis whether cause exists.
D. Del. 2014) (Fisker). In that case, the court In re Aéropostale, Inc., 555 B.R. 369, 414–15
limited a secured lender’s right to credit bid to the (Bankr. S.D.N.Y. 2016). Courts typically
amount the lender paid for the debtor’s secured endeavor to balance the interests of all involved
debt, a difference of $143.5 million. As a result, if parties to maximize the value of the estate and to
the lender wanted to bid an amount greater than ensure equitable distributions to creditors. See
what it paid for the debt, the lender would have In re RML Dev., Inc., 528 B.R. 150, 155 (Bankr.
had to pay that excess amount in cash. Notably, W.D. Tenn. 2014). Although courts are given
the court stated in a footnote that, pursuant considerable discretion to determine whether
to section 363(k) of the Bankruptcy Code, a cause to deny or limit credit bidding exists, that
bankruptcy court “may deny a lender the right to discretion is not limitless. Id. Examples of cause
credit bid in the interest of any policy advanced include, among other things, when a credit
OVER 25 YEARS OF by the [Bankruptcy] Code, such as to ... foster a bid “would benefit an insider, impede or delay
PERSONAL INJURY, competitive bidding environment.” Id. at 60 n.14. a successful reorganization strategy, chill the
MEDICAL MALPRACTICE, That brief footnote launched an armada of bidding process, and reduce the overall benefits
AND AUTO / TRUCKING concerned whitepapers. Credit bidding, by its to the estate.” In re CS Mining, LLC, 574 B.R.
CASES very nature, depresses the bidding environment, 259, 283 (Bankr. D. Utah 2017).
especially when the amount of secured debt Even though the right to credit bid is not
outstanding exceeds the value of the debtor’s absolute, limiting or denying that right “should
216.223.7535 assets. Practitioners and commentators be the extraordinary exception and not the

ROBENALTLAW.COM speculated that Fisker could result in a new norm.” See RML Dev., 528 B.R. at 155–56. The
U.S. Supreme Court has acknowledged credit
status quo where purchasers of secured debt
could have their credit-bidding rights limited bidding’s importance, stating that the practice
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