Wilmington and Philadelphia partner Andy Kassner and associate Joe Argentina co-wrote an article for The Legal Intelligencer titled, “Del. Court Caps Secured Creditor's Right to Credit Bid.”
The article explains that secured creditors often purchase debt for the purpose of ultimately owning the borrowers' assets, either through a foreclosure sale, bankruptcy sale, or other judicial sale process. Debt purchasers who attempt to employ this "loan to own" strategy assume that, in a sale, they will not have to pay cash but have the right to credit the amount of the debt against the purchase price. The opinion in In re Fisker Automotive Holdings, issued on January 17, 2014, indicates, however that this assumption may not be valid in all cases.
U.S. Bankruptcy Chief Judge Kevin Gross of the District of Delaware concluded in that case that that a secured creditor's right to credit bid is set forth in Section 363(k) of the U.S. Bankruptcy Code, however, credit-bidding under the particular circumstances of the case would not just chill competitive bidding but would eliminate it entirely. The court held that the secured creditor’s right to credit bid should be limited to $25 million, the amount it had paid for the position.
Andy and Joe say that the facts of this case are “somewhat unusual compared to other credit-bidding cases in both the proximity of the debt purchase to the bankruptcy filing, the proposed private sale to the creditor, and the fact the creditor did not have a lien on all assets.” Consequently, “Time will tell if the area of credit-bidding will now enter a new phase of litigation.”
To read the entire article, click here.