September 23, 2016 - September 23, 2016 – In a decision of great importance to secured lenders, the bankruptcy court in Aéropostale ruled that a secured lender could “credit bid” (i.e., use of the amount of its secured debt rather than cash as currency in a sale of the debtor’s assets) the full amount of its secured claim in a sale process commenced by a debtor pursuant to Section 363 of the U.S. Bankruptcy Code (a “363 sale”). This decision is particularly important in light of two 2014 bankruptcy court decisions that had raised serious concerns for secured lenders. In Free Lance-Star and Fisker Automotive, the respective bankruptcy courts severely limited the ability of the secured creditors in question to credit bid their secured claims partly on the basis that allowing lenders to credit bid would “chill” other parties from bidding in the 363 sale.
In both of those cases there were other facts and circumstances that combined to make the courts uncomfortable allowing the secured lenders to bid the full amount of their claims, but they each interpreted “cause” expansively to include situations where limiting secured creditors’ rights to credit bid would foster a robust, open and competitive sale process. The good news for secured creditors is that the Aéropostale opinion reflects the traditional understanding of Section 363 that permits the secured creditor to fully credit bid its claim and may serve to limit the impact of Free Lance-Star and Fisker Automotive.
In Aéropostale, the debtors sought to sell substantially all of their assets pursuant to a chapter 11 plan of reorganization. The debtors also sought to disqualify the secured creditor from credit bidding at the proposed sale. The court addressed the debtors’ arguments, which relied on the Free Lance-Star and Fisker Automotive cases that permitting the secured lender to credit bid would impermissibly chill bidding at the Section 363 sale. The court noted that in both cases, the courts had been concerned with other problematic conduct by the respective lenders and did not rely solely on the fact that credit bidding would chill others from bidding. The court additionally noted that the factual record in this case demonstrated that several parties were interested in the sale process, and parties beyond the secured lender were expected to submit bids. Based on its findings, the court permitted the lender to credit bid the full amount of its claim.
The Aéropostale decision should provide secured creditors with some comfort that the bar to preclude or limit secured creditors’ rights to credit bid has been raised. Importantly, the court was clear that the potential chilling effect of a credit bid, in and of itself, is not sufficient for a court to find cause to preclude or limit a credit bid under Section 363 of the Bankruptcy Code.