Judge Gross approved a sale motion in the Fisker Automotive case in January that seems to dramatically curtail a secured creditor's ability to credit-bid in a Section 363 sale where the underlying debt instrument was purchased at a discount. The basic facts are that the U.S. Department of Energy had a $168.5 million senior loan facility that it auctioned off. Hybrid was the winning bidder for the loan facility, purchasing it for $25 million.

Fisker filed for Chapter 11 and filed a sale motion, originally proposing to sell the assets in a private sale to Hybrid for a credit bit of $75 million. The Committee opposed that motion, and instead proposed an auction with a different purchaser. Ultimately, the Committtee and the Debtor asked the Court to cap Hybrid's ability to credit bid at the purchase price of the loan. The court agreed, entering this opinion. While the Court noted that it had not yet sorted out which of Fisker's assets were encumbered by the Hybrid liens, the motivating factor for limiting the bid to the purchase price was that permitting a full credit bid "might well have frozen out other suitors for Fisker's assets."

That last part is certainly true, but it's true in any case where the debtor does not have any equity in its assets. If the secured creditor has the statutory ability to bid all of the debt, the face value of which exceeds the market value of the asset being sold, it's always going to win if it wants to. And that will always chill competitive bidding. But that's exactly part of the secured creditor's bargain, and protecting it is what Section 363(k) is supposed to do. If "facilitating an open and fully competitive cash auction" equates to cause to limit a credit bid under Section 363(k), that cause exists in every case where a lender is undersecured.

The District Court recently denied an emergency motion for an interlocutory appeal. This almost certainly is not going to be the last word on the matter, but everyone should expect Committees and Debtors to raise this issue going forward. Note purchasers employing loan-to-own Section 363 strategies need to take special note of this development.