iThe hubbub created by Judge Gross’ recent decision limiting a claims purchaser’s credit bid to the amount paid for the claim strikes me as much ado about very little. See In re Fisker Automotive Holdings, Inc., 2014 WL 210593 (Bankr. D. Del. 01/17/14). Does it really come as a surprise to anyone that section 363(k) gives the Bankruptcy Court discretion to limit or even prohibit credit bidding for “cause”?
The case was submitted on a very unusual stipulation of facts that left the judge with little to decide once he rejected the view that credit bidding was an absolute right. What were the grounds for limiting credit bidding? Two major ones were that the assets being sold were not just the creditor’s collateral but included “material assets” not subject to the lien and that the credit bid would deter another serious bidder, with the parties stipulating that limiting the credit bid would foster “a competitive bidding environment [that] would likely result in material benefit to the estate.”
And, unlike some commentators claim, the judge did not declare a new rule that the amount paid for the claim was the correct limit to place on the credit bid. The parties presented only three options: (1) allow credit bidding without restriction; (2) prohibit credit bidding entirely; or (3) limit it to the amount paid for the claim. The stipulated facts provided no support for denying the credit bid altogether, provided strong reasons for limiting it, and provided no factual basis upon which the judge could have picked a bid cap different from the amount paid for the claim.
What’s really going on here is a clash between the old bankruptcy and the new bankruptcy. Old bankruptcy was concerned only about value. The protections provided to secured creditors, like credit bidding, were designed to help secured creditors ensure that their collateral was not sold for less than it was worth. New bankruptcy is about acquisitions, leverage and speculation. The rights granted by the Code in the new regime become tools that can be used to achieve a broader range of objectives than mere recovery of debt. For example, the claims purchaser in Fisker bought the claim so that it could acquire the assets of Fisker. Thus, it was interested in using the credit bid to deter competing buyers rather than to ensure a fair value for the collateral in the sale.
Most courts still seem to be focused on value – even the Supreme Court in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065, 2070 n. 2 (2012), seemed unaware that credit bidding might be used for some purpose other than value protection. Naturally, claims purchasers and commentators who are used to the new bankruptcy are surprised – and maybe even feel outraged and cheated – when confronted by a value-focused judicial decision.
