Two recent bankruptcy court decisions from the District of Delaware and Eastern District of Virginia raise serious concerns for secured lenders and purchasers of secured loans in the secondary market. These decisions capped the secured lender’s right to “credit bid” (i.e., to bid the amount of debt owed rather than cash) in a sale process commenced by a debtor pursuant to Section 363 of the Bankruptcy Code. In the most recent case, Free Lance-Star, the bankruptcy court limited the secured creditor’s credit bid amount to $13.9 million, approximately one third of the face amount of the claim. This decision followed on the heels of Fisker Automotive, which capped the secured creditor’s right to credit bid its $169 million secured claim at the $25 million purchase price paid by the secured creditor for the secured claim.
While some view these decisions as limited to their unique facts, we disagree. Upon a closer examination, these rulings appear to break new ground from prior case law in their application of fundamental bankruptcy principles and significantly undermine the protections afforded secured creditors under the Bankruptcy Code. Therefore, purchasers of loans in the secondary market, especially those investors seeking to effect a “loan to own” strategy, and even original lenders seeking to exercise the right to credit bid in order to maximize their recovery, should be mindful of these decisions and how they may impact their rights to credit bid in 363 Sales.