On April 14, 2014, the U.S. Bankruptcy Court for the Eastern District of Virginia issued an opinion in In re The Free Lance-Star Publishing Co.1 in which the court found that “cause” existed to limit the right of a secured creditor to credit bid its claims in connection with an asset sale under chapter 11 of the Bankruptcy Code. Although the court’s decision was based largely on the perceived inequitable conduct of the credit bidding party, the court intimated that implementing what it referred to as a “loan-to-own” strategy in and of itself presented “cause” to limit the right of a debt acquirer to credit bid the full amount of its acquired claim in connection with a future asset sale.
The decision is especially noteworthy because it comes less than three months after the U.S. Bankruptcy Court for the District of Delaware issued a similar opinion in In re Fisker Automotive Holdings.2 As discussed in detail below, in Fisker the court capped the amount of a credit bid “for cause” at the amount a creditor paid to purchase secured debt acquired prior to the bankruptcy filing. In light of these decisions, it is imperative that distressed investors understand the risks inherent in employing a strategy to acquire secured debt as a basis to obtain ownership or control of a debtor’s assets, and are properly counseled on what conduct may result in an impairment of credit bidding rights in a chapter 11 case.
