You Know About <i>Fisker</i>

TRUE or FALSE: Lienholder buys a distressed loan from original lender. Lienholder acts appropriately and reasonably at all times and lien is valid and perfected. Lienholder has an increased risk of having its credit bid limited or capped because of In re Fisker Automotive Holdings, Inc., 2014 WL 210593 (Bankr. D.Del. Jan. 17, 2014).

FALSE. Much has been written about Fisker's potential impact on credit bidding, including warnings of the sky falling. Fisker stands for something less dramatic, and already well known, to debt purchasers. Simply stated, the sky is not falling. And, in the midst of all the noise, Fisker's import has been exaggerated, as it really covers no new ground.

Footnote 14 Survives RadLAX in the Third Circuit

What is the major takeaway from Fisker? It simply serves as further confirmation that RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S.Ct. 2065 (2012) did not overturn all aspects of the Third Circuit's Philadelphia Newspapers opinion, and in particular, the Third Circuit's dicta discussion of ' 363(k) was not undone by RadLAX. Philadelphia Newspapers' famous footnote 14 states:

A court may deny a lender the right to credit bid in the interest of any policy advanced by the Code, such as to ensure the success of the reorganization or to foster a competitive bidding environment.

(citation omitted).

If footnote 14 was a wakeup call, Fisker is akin to the optional second wakeup call a hotel sometimes makes five minutes after the first, to ensure the guest is truly awake.

RadLAX Revisited

In RadLAX, the debtors owned a hotel and an adjacent parking deck. After attempts to solicit new equity for a traditional reorganization proved unsuccessful, the debtors proposed a Chapter 11 plan to sell the hotel and parking deck at an auction, free of liens, and to use the proceeds to fund a liquidating plan.

The debtors filed a motion to approve bid procedures and because of the enormous discrepancy between the secured creditor's claim ($120 million) and the approximate value of the assets to be sold ($55 million), the debtors proposed to prohibit the secured creditor from credit-bidding at the auction.

The debtors took the position that, under Philadelphia Newspapers, a cram down plan could be confirmed by providing the secured creditor with essentially all of the proceeds from the sale as the “indubitable equivalent” of its secured claim under ' 1129(b)(2)(A)(iii).

The bankruptcy court, and then the Seventh Circuit, rejected the debtors' argument. This created a split in the circuits (as the decision was at odds with the Third Circuit's Philadelphia Newspapers decision and Fifth Circuit's Pacific Lumber decision).

The Supreme Court ultimately affirmed the Seventh Circuit decision to deny confirmation of the debtors' Chapter 11 plan because the plan sought to sell encumbered assets free and clear of liens without allowing the secured lender to credit bid its debt in the sale. While RadLAX concerned ' 363(k) and confronted a secured creditor's right to credit bid in an auction proposed in a plan, it simply did not directly address the “for cause” exception found in ' 363(k).

Fisker Understood

In Fisker, the debtor filed a motion seeking authority to sell, without an auction and on a very fast timeline, substantially all of its assets to a third party (we'll call this party “LTO” (as in loan to own)) in exchange for LTO's credit bid of a portion of the secured debt that LTO had bought at a steep discount. Another potential cash bidder wanted an auction, and so did the Committee; the latter objected to the motion.

The debtor and committee subsequently agreed to a set of stipulations providing, among other things, that: 1) the validity of a material portion of the secured creditor's lien was in dispute; 2) if the secured creditor's credit bid was not capped, there would be no realistic possibility of an auction; 3) capping the credit bid would likely foster a “competitive bidding environment” (as those words were used by the Third Circuit in Philadelphia Newspapers); and 4) this would likely result in a material benefit to the estate. These stipulations guided the court's decision. In reaching his decision, Judge Kevin Gross noted:

The cases, I think, are fairly clear that the cause in this situation is that we have undetermined perfected liens on a group of assets. ' I do not know, at the moment, the value of those liens ' I should say value of those assets. ' And I think that certainly has to provide for cause [under ' 363(k)]. Courts can place conditions upon the right to credit bid, without denying the right completely. I'm not denying the right completely; I'm simply saying that it should be capped. ' [I]n the absence of evidence on the perfection of the liens, which would take time and would unduly delay this case, the Court will cap the credit-bid [of the debt purchaser] '

Fisker, Jan. 10, 2014 Hearing Transcript at 136-38.

The LTO appealed, and the district court denied the appeal. The district court determined, among other reasons, that the appeal was interlocutory and the LTO failed to meet the factors for an interlocutory appeal.

Did Fisker concern capping the credit-bid of a loan-to-own debt buyer at the amount the debt buyer paid for its claim and lien? Yes. But would the decision have been similar if the secured creditor who originated the loan had still been holding it? Yes. Sure, the court would not have had the convenience of an amount paid by the debt purchaser to use as the compromise amount it permitted for the credit bid but, under the court's logic, it would have arrived at some capped amount.

Judge Gross did not discuss why the credit bid was capped at the $25 million purchase price, as opposed to some other amount, in his memorandum opinion of Jan. 17, 2014; the stipulations were the only evidence the Judge had to consider. And through the stipulations, the court was advised that no qualified bidder would participate in an auction if the credit bid was over $25 million.

We note also the court's analysis that “absence of evidence on the perfection of the liens” constitutes “cause” under ' 363(k). While the Code section does not explicitly refer to a “valid and perfected” lien, it simply belies logic that anything else could be intended. Judge Gross himself pointed out that where the validity of a secured creditor's lien is at issue, it may be denied the right to credit bid altogether. See Fisker, 2014 WL 210593 at *5 (citing In re Danfuskie Isl. Props., LLC, 441 B.R. 60 (Bankr. D.S.C. 2010)). Giving credit where credit may be due, however, our guess is that Judge Gross analyzed it the way he did so that he could split the proverbial baby.

In other words, the court did not need to reach the question of cause because the secured creditor did not satisfy its initial evidentiary burden. Fisker was not about “cause” under ' 363(k). Fisker and the “cause” to limit the credit bid was more fundamentally about lien validity.

But would the court have capped the credit bid if the liens were not in dispute? Well, maybe, and this is where much of the commentary to-date has focused. Taking a step back, Fisker concerned a non-operating company seeking approval of a private sale to a group led by one of Fisker's original investors within 24 business days after the petition date. Maybe the court would have found cause under these facts alone, but it simply didn't get that far. The lien validity issue sculpted the court's decision first and foremost.

Keep Your Eye on the Ball

Farah Fawcett was a big star. When she passed away, her death was the headline. That is, until Michael Jackson died later the same day; big news can be overshadowed by bigger news.

About two months after Fisker, Judge Kevin R. Huennekens issued an oral ruling and thereafter issued a memorandum opinion in The Free Lance-Star Publishing Co. of Fredericksburg, VA, Case No.14-30315-KRH (Bankr. E.D.Va. April 14, 2014). If Fisker is our Michael Jackson (because it was issued by the Chief Judge for the Delaware Bankruptcy Court), Free Lance-Star is our Farrah Fawcett, yet is arguably a more important decision for the reasons explained below.

The debtor in Free Lance-Star was a family-owned media company. The company borrowed $50 million from Branch Banking and Trust secured by some, but not all, of the company's assets. The company subsequently fell on hard times.

BB&T sold its loan to Sandton Capital Partners in June 2013. Sandton wanted to push the debtor through a Chapter 11 case and sell substantially all the assets to one of its affiliates, DSP Acquisition LLC. DSP took certain actions pre-petition in an effort to expand the scope of its security interest.

The debtor in Free Lance-Star, like the committee in Fisker, sought to limit DSP's credit bid, arguing that: 1) the validity and scope of DSP's lien was at issue; 2) DSP engaged in inequitable conduct; and 3) limiting the credit bid would foster a robust bidding process. DSP counterpunched with an adversary complaint and motion for summary judgment. The matter was briefed on an expedited basis and the court held a combined hearing on DSP's summary judgment motion and the debtor's motion to limit DSP's credit bid.

At a combined evidentiary hearing, the court determined that DSP did not have a valid lien on, among others, the “tower assets” associated with the debtors' radio operations. The court determined that DSP acted in an improper manner, among other reasons, by recording financing statements covering the tower assets pre-petition, and not disclosing its actions to the debtors or the court when seeking post-petition replacement liens in those assets.

Once the court determined that DSP did not have a lien on the tower assets and found cause to limit DSP's credit bid, it turned its attention to how DSP's credit bid should be limited. DSP, apparently in a strategic move, did not take the court's invitation to present testimony as to the amount paid for the BB&T loan.

Therefore, the court, interestingly, accepted a methodology proposed by the debtor's expert, which “eliminated the unencumbered assets of the Debtors [based on the court's determination] from the potential credit bid and applied a market analysis to develop an appropriate cap for a credit bid that would foster a competitive auction process” to develop an appropriate cap for a credit bid that would foster a competitive auction process. The result was that DSP was limited to credit bidding $13.9 million rather than the $38 million it sought to credit bid. DSP appealed. Similar to and adopting portions of the district court's determination and denial of Hybrid's appeal in Fisker, the district court found that the bankruptcy court's order was interlocutory, DSP failed to establish the factors necessary to entertain an interlocutory appeal, and there is no reason why the underlying auction should not proceed.

Free Lance-Star Is More Important Than Fisker

Free Lance-Star, like Fisker, does not create a new basis for “cause” under ' 363(k). Each decision was grounded on the questionable validity or extent of the debt buyers' liens. The other allegations of wrongdoing and bid chilling are interesting and while they likely colored the courts' respective views on a general level, there should be no doubt that these acts, in and of themselves, were not the primary basis of either court's decision to find cause to limit the debt purchasers' credit bids.

Free Lance-Star goes a step further than Fisker in one respect: Fisker relied on stipulations and did not reach a determination of the disputed validity of the debt buyer's lien. Free Lance-Star addressed this issue directly through issuing an expedited briefing schedule and holding a combined evidentiary hearing. After conducting the evidentiary hearing, the court found that the debt purchaser did not have a proper lien on all the assets it claimed was covered by its lien.

As stated above, the amount DSP was allowed to credit bid was significantly reduced because the court determined that DSP did not have a lien on many of the assets over which asserted an interest, and conducted a market analysis in the absence of evidence as to the value paid for the debt. This, more than any reason, is why Free Lance-Star should be our Michael and not our Farrah: 1) If a pizza is worth $20, and you scrape off all the cheese, what is the value of the cheeseless pizza? 2) If you take a lien on all of the assets of a newspaper empire consisting of 25 regional and one national newspaper and it turns out you messed up and you don't have a lien on the one national newspaper, what does that do to your collateral position? What if it was one of the regionals? What if it was 10 of the regionals? 3) If hedge fund X loans an ice cream manufacturer $50 million secured by liens on all its assets, but it turns out that the secret recipe upon which the entire company is built is not owned by the company, what does that do to the company's value (and to the career of people at the fund who did the underwriting)? But wait, the brand is huge and other, newer recipes may be better than the original?

Get our point? Once a court has to look at the value of pieces rather than the value of a whole, there is a lot of room for argument.

The Practical Take-Away

Fisker is not going to decimate loan-to-own tactics or destroy the broader credit markets any more than the worries about GGP dooming collateralized loan originations came to pass. Do secured creditors need to conduct themselves in a manner that will withstand attacks suggesting they have engaged in inequitable or bid chilling conduct? Sure, but that is not news. And do they need to conduct stellar legal diligence on liens before they buy related claims? Of course but, again, this is not new ground.

There are three key take-aways from Fisker and Free Lance-Star. First, we expect committees and debtors to be more vigilant than ever in putting a secured creditor's liens through figurative proctology exams before the holders of those liens are permitted to credit bid. Second, as discussed above, a creditor that has a lien on some but not all assets of a going concern should be aware of the issues that may cause down the road. And third, one tactic such a creditor should consider is to try to force separate auctions.

Jonathan Brand ([email protected]) is a managing attorney at Lakelaw, and Jonathan Friedland ([email protected]) is a partner at Levenfeld Pearlstein. The opinions expressed in this article are not necessarily those of the authors' respective firms. Nothing contained herein should be construed as such or as legal advice or legal positions. They are simply observations.

TRUE or FALSE: Lienholder buys a distressed loan from original lender. Lienholder acts appropriately and reasonably at all times and lien is valid and perfected. Lienholder has an increased risk of having its credit bid limited or capped because of In re Fisker Automotive Holdings, Inc., 2014 WL 210593 (Bankr. D.Del. Jan. 17, 2014).

FALSE. Much has been written about Fisker's potential impact on credit bidding, including warnings of the sky falling. Fisker stands for something less dramatic, and already well known, to debt purchasers. Simply stated, the sky is not falling. And, in the midst of all the noise, Fisker's import has been exaggerated, as it really covers no new ground.

Footnote 14 Survives RadLAX in the Third Circuit

What is the major takeaway from Fisker? It simply serves as further confirmation that RadLAX Gateway Hotel, LLC v. Amalgamated Bank , 132 S.Ct. 2065 (2012) did not overturn all aspects of the Third Circuit's Philadelphia Newspapers opinion, and in particular, the Third Circuit's dicta discussion of ' 363(k) was not undone by RadLAX . Philadelphia Newspapers' famous footnote 14 states:

A court may deny a lender the right to credit bid in the interest of any policy advanced by the Code, such as to ensure the success of the reorganization or to foster a competitive bidding environment.

(citation omitted).

If footnote 14 was a wakeup call, Fisker is akin to the optional second wakeup call a hotel sometimes makes five minutes after the first, to ensure the guest is truly awake.

RadLAX Revisited

In RadLAX, the debtors owned a hotel and an adjacent parking deck. After attempts to solicit new equity for a traditional reorganization proved unsuccessful, the debtors proposed a Chapter 11 plan to sell the hotel and parking deck at an auction, free of liens, and to use the proceeds to fund a liquidating plan.

The debtors filed a motion to approve bid procedures and because of the enormous discrepancy between the secured creditor's claim ($120 million) and the approximate value of the assets to be sold ($55 million), the debtors proposed to prohibit the secured creditor from credit-bidding at the auction.

The debtors took the position that, under Philadelphia Newspapers, a cram down plan could be confirmed by providing the secured creditor with essentially all of the proceeds from the sale as the “indubitable equivalent” of its secured claim under ' 1129(b)(2)(A)(iii).

The bankruptcy court, and then the Seventh Circuit, rejected the debtors' argument. This created a split in the circuits (as the decision was at odds with the Third Circuit's Philadelphia Newspapers decision and Fifth Circuit's Pacific Lumber decision).

The Supreme Court ultimately affirmed the Seventh Circuit decision to deny confirmation of the debtors' Chapter 11 plan because the plan sought to sell encumbered assets free and clear of liens without allowing the secured lender to credit bid its debt in the sale. While RadLAX concerned ' 363(k) and confronted a secured creditor's right to credit bid in an auction proposed in a plan, it simply did not directly address the “for cause” exception found in ' 363(k).

Fisker Understood

In Fisker, the debtor filed a motion seeking authority to sell, without an auction and on a very fast timeline, substantially all of its assets to a third party (we'll call this party “LTO” (as in loan to own)) in exchange for LTO's credit bid of a portion of the secured debt that LTO had bought at a steep discount. Another potential cash bidder wanted an auction, and so did the Committee; the latter objected to the motion.

The debtor and committee subsequently agreed to a set of stipulations providing, among other things, that: 1) the validity of a material portion of the secured creditor's lien was in dispute; 2) if the secured creditor's credit bid was not capped, there would be no realistic possibility of an auction; 3) capping the credit bid would likely foster a “competitive bidding environment” (as those words were used by the Third Circuit in Philadelphia Newspapers); and 4) this would likely result in a material benefit to the estate. These stipulations guided the court's decision. In reaching his decision, Judge Kevin Gross noted:

The cases, I think, are fairly clear that the cause in this situation is that we have undetermined perfected liens on a group of assets. ' I do not know, at the moment, the value of those liens ' I should say value of those assets. ' And I think that certainly has to provide for cause [under ' 363(k)]. Courts can place conditions upon the right to credit bid, without denying the right completely. I'm not denying the right completely; I'm simply saying that it should be capped. ' [I]n the absence of evidence on the perfection of the liens, which would take time and would unduly delay this case, the Court will cap the credit-bid [of the debt purchaser] '

Fisker, Jan. 10, 2014 Hearing Transcript at 136-38.

The LTO appealed, and the district court denied the appeal. The district court determined, among other reasons, that the appeal was interlocutory and the LTO failed to meet the factors for an interlocutory appeal.

Did Fisker concern capping the credit-bid of a loan-to-own debt buyer at the amount the debt buyer paid for its claim and lien? Yes. But would the decision have been similar if the secured creditor who originated the loan had still been holding it? Yes. Sure, the court would not have had the convenience of an amount paid by the debt purchaser to use as the compromise amount it permitted for the credit bid but, under the court's logic, it would have arrived at some capped amount.

Judge Gross did not discuss why the credit bid was capped at the $25 million purchase price, as opposed to some other amount, in his memorandum opinion of Jan. 17, 2014; the stipulations were the only evidence the Judge had to consider. And through the stipulations, the court was advised that no qualified bidder would participate in an auction if the credit bid was over $25 million.

We note also the court's analysis that “absence of evidence on the perfection of the liens” constitutes “cause” under ' 363(k). While the Code section does not explicitly refer to a “valid and perfected” lien, it simply belies logic that anything else could be intended. Judge Gross himself pointed out that where the validity of a secured creditor's lien is at issue, it may be denied the right to credit bid altogether. See Fisker, 2014 WL 210593 at *5 (citing In re Danfuskie Isl. Props., LLC, 441 B.R. 60 (Bankr. D.S.C. 2010)). Giving credit where credit may be due, however, our guess is that Judge Gross analyzed it the way he did so that he could split the proverbial baby.

In other words, the court did not need to reach the question of cause because the secured creditor did not satisfy its initial evidentiary burden. Fisker was not about “cause” under ' 363(k). Fisker and the “cause” to limit the credit bid was more fundamentally about lien validity.

But would the court have capped the credit bid if the liens were not in dispute? Well, maybe, and this is where much of the commentary to-date has focused. Taking a step back, Fisker concerned a non-operating company seeking approval of a private sale to a group led by one of Fisker's original investors within 24 business days after the petition date. Maybe the court would have found cause under these facts alone, but it simply didn't get that far. The lien validity issue sculpted the court's decision first and foremost.

Keep Your Eye on the Ball

Farah Fawcett was a big star. When she passed away, her death was the headline. That is, until Michael Jackson died later the same day; big news can be overshadowed by bigger news.

About two months after Fisker, Judge Kevin R. Huennekens issued an oral ruling and thereafter issued a memorandum opinion in The Free Lance-Star Publishing Co. of Fredericksburg, VA, Case No.14-30315-KRH (Bankr. E.D.Va. April 14, 2014). If Fisker is our Michael Jackson (because it was issued by the Chief Judge for the Delaware Bankruptcy Court), Free Lance-Star is our Farrah Fawcett, yet is arguably a more important decision for the reasons explained below.

The debtor in Free Lance-Star was a family-owned media company. The company borrowed $50 million from Branch Banking and Trust secured by some, but not all, of the company's assets. The company subsequently fell on hard times.

BB&T sold its loan to Sandton Capital Partners in June 2013. Sandton wanted to push the debtor through a Chapter 11 case and sell substantially all the assets to one of its affiliates, DSP Acquisition LLC. DSP took certain actions pre-petition in an effort to expand the scope of its security interest.

The debtor in Free Lance-Star, like the committee in Fisker, sought to limit DSP's credit bid, arguing that: 1) the validity and scope of DSP's lien was at issue; 2) DSP engaged in inequitable conduct; and 3) limiting the credit bid would foster a robust bidding process. DSP counterpunched with an adversary complaint and motion for summary judgment. The matter was briefed on an expedited basis and the court held a combined hearing on DSP's summary judgment motion and the debtor's motion to limit DSP's credit bid.

At a combined evidentiary hearing, the court determined that DSP did not have a valid lien on, among others, the “tower assets” associated with the debtors' radio operations. The court determined that DSP acted in an improper manner, among other reasons, by recording financing statements covering the tower assets pre-petition, and not disclosing its actions to the debtors or the court when seeking post-petition replacement liens in those assets.

Once the court determined that DSP did not have a lien on the tower assets and found cause to limit DSP's credit bid, it turned its attention to how DSP's credit bid should be limited. DSP, apparently in a strategic move, did not take the court's invitation to present testimony as to the amount paid for the BB&T loan.

Therefore, the court, interestingly, accepted a methodology proposed by the debtor's expert, which “eliminated the unencumbered assets of the Debtors [based on the court's determination] from the potential credit bid and applied a market analysis to develop an appropriate cap for a credit bid that would foster a competitive auction process” to develop an appropriate cap for a credit bid that would foster a competitive auction process. The result was that DSP was limited to credit bidding $13.9 million rather than the $38 million it sought to credit bid. DSP appealed. Similar to and adopting portions of the district court's determination and denial of Hybrid's appeal in Fisker, the district court found that the bankruptcy court's order was interlocutory, DSP failed to establish the factors necessary to entertain an interlocutory appeal, and there is no reason why the underlying auction should not proceed.

Free Lance-Star Is More Important Than Fisker

Free Lance-Star, like Fisker, does not create a new basis for “cause” under ' 363(k). Each decision was grounded on the questionable validity or extent of the debt buyers' liens. The other allegations of wrongdoing and bid chilling are interesting and while they likely colored the courts' respective views on a general level, there should be no doubt that these acts, in and of themselves, were not the primary basis of either court's decision to find cause to limit the debt purchasers' credit bids.

Free Lance-Star goes a step further than Fisker in one respect: Fisker relied on stipulations and did not reach a determination of the disputed validity of the debt buyer's lien. Free Lance-Star addressed this issue directly through issuing an expedited briefing schedule and holding a combined evidentiary hearing. After conducting the evidentiary hearing, the court found that the debt purchaser did not have a proper lien on all the assets it claimed was covered by its lien.

As stated above, the amount DSP was allowed to credit bid was significantly reduced because the court determined that DSP did not have a lien on many of the assets over which asserted an interest, and conducted a market analysis in the absence of evidence as to the value paid for the debt. This, more than any reason, is why Free Lance-Star should be our Michael and not our Farrah: 1) If a pizza is worth $20, and you scrape off all the cheese, what is the value of the cheeseless pizza? 2) If you take a lien on all of the assets of a newspaper empire consisting of 25 regional and one national newspaper and it turns out you messed up and you don't have a lien on the one national newspaper, what does that do to your collateral position? What if it was one of the regionals? What if it was 10 of the regionals? 3) If hedge fund X loans an ice cream manufacturer $50 million secured by liens on all its assets, but it turns out that the secret recipe upon which the entire company is built is not owned by the company, what does that do to the company's value (and to the career of people at the fund who did the underwriting)? But wait, the brand is huge and other, newer recipes may be better than the original?

Get our point? Once a court has to look at the value of pieces rather than the value of a whole, there is a lot of room for argument.

The Practical Take-Away

Fisker is not going to decimate loan-to-own tactics or destroy the broader credit markets any more than the worries about GGP dooming collateralized loan originations came to pass. Do secured creditors need to conduct themselves in a manner that will withstand attacks suggesting they have engaged in inequitable or bid chilling conduct? Sure, but that is not news. And do they need to conduct stellar legal diligence on liens before they buy related claims? Of course but, again, this is not new ground.

There are three key take-aways from Fisker and Free Lance-Star. First, we expect committees and debtors to be more vigilant than ever in putting a secured creditor's liens through figurative proctology exams before the holders of those liens are permitted to credit bid. Second, as discussed above, a creditor that has a lien on some but not all assets of a going concern should be aware of the issues that may cause down the road. And third, one tactic such a creditor should consider is to try to force separate auctions.

Jonathan Brand ([email protected]) is a managing attorney at Lakelaw, and Jonathan Friedland ([email protected]) is a partner at Levenfeld Pearlstein. The opinions expressed in this article are not necessarily those of the authors' respective firms. Nothing contained herein should be construed as such or as legal advice or legal positions. They are simply observations.