In Re: Fisker Automotive Holdings, Inc.: Caveat Emptor For Distressed Debt Purchasers – Your Credit Bid Rights May Be Impaired!

Fisker Automotive Holdings Inc. (the "Debtor" or "Fisker") filed for bankruptcy in November 2013 hoping to have a preplanned sale of substantially all its assets to its principal secured lender, Hybrid Tech Holdings LLC ("Hybrid"), approved within just two short months. The asset purchase agreement provided that Hybrid would credit bid $75 million to purchase substantially all the Debtor's assets in a private sale. The Official Committee of Unsecured Creditors (the "Committee") opposed the private sale to Hybrid. The Committee instead secured an alternative bidder, Wanxiang America Corporation ("Wanxiang"), and proposed an open auction. Both the Committee and the Debtor questioned the extent and validity of Hybrid's secured claim.

Background

Just a month before Fisker filed for bankruptcy, Hybrid purchased $168.5 million of Fisker's debt from the U.S. Department of Energy for $25 million. As a result of this purchase, Hybrid became the Debtor's senior secured lender. Acquiring this new position gave Hybrid new rights; in particular, Hybrid had the right to credit bid if Fisker were to enter bankruptcy. A right to credit bid allows a secured creditor to bid up to the amount it is owed at the sale of its collateral.

Prior to the hearing, the Debtor and the Committee reached several stipulated agreements. Importantly, the parties agreed that Hybrid's credit bid claim should be capped at $25 million for several reasons. First, Wanxiang would bid at the auction only if Hybrid's bid were prohibited or capped at $25 million. Further, it was unclear to what extent the Debtor's assets were subject to Hybrid's security interest. In that same vein, the parties agreed that the resolution of the extent and validity of Hybrid's lien would be a lengthy endeavor.

Bankruptcy Court Decision

On Jan. 17, 2014, the court, relying on Philadelphia Newspapers,1 found that "cause" existed to limit Hybrid's right to credit bid.2 First, the expedited sale process implemented by the Debtor and Hybrid was "inconsistent with the notions of fairness in the bankruptcy process." Second, there was a question as to the validity of Hybrid's lien. Third, Wanxiang made it clear that it would not participate in the auction if Hybrid's credit bid were not limited. Therefore, Hybrid's proposed $75 million credit bid would not only chill bidding, but that bidding would also be "frozen."

Denial of Appeal

Immediately following the bankruptcy court's order, Hybrid filed a request for...

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