will apply stricter scrutiny in such cases.
How courts will ultimately adapt to the
recent trend is unclear. Stay tuned. J
1 Loan to own lenders generally did not
serve as DIP lenders, leaving that role to
the senior secured lenders to provide a
“defensive” DIP financing package. Such
defensive DIP loans were usually short-term loans providing financing sufficient to
support the debtor through the closing of
a Section 363 asset sale and no further.
2 An alternative to buying the prepetition debt prior
to the bankruptcy filing is for the potential buyer
to agree to provide DIP financing that includes
sufficient funds to pay off the prepetition debt.
The new DIP lender/buyer is then in a position to
serve as a stalking horse by credit bidding its DIP
loan. The primary difference between the two
approaches is that in the DIP lending scenario
the buyer/DIP lender will almost certainly have
to pay par to buy the prepetition debt. The net
result to the estate, however, is the same.
3 “New” is not strictly accurate. Buyers have
acquired debt for purposes of acquiring debtors
for some time. See In re The Colad Group, Inc.,
324 B.R. 208 (Bankr. WDNY 2005) (Debtor’s
DIP financing lender “had recently acquired its
secured position, with the stated desire to effect
a purchase of assets as a going concern under
section 363 of the Bankruptcy Code.”). What is
“new” is the recent prevalence of the practice.
4 In re Fisker Automotive Holdings, Inc., 2014
WL 210593 (Bankr. D. Del. Jan. 17, 2014).
5 It is important to note that the court did not
limit the credit bid to $25 million based on the
fact that Hybrid had purchased the debt for
Christopher S. Sontchi is a U.S. Bankruptcy Court
judge for the District of Delaware and a frequent
speaker in the U.S. and Canada on issues relating
to corporate reorganizations. He is a lecturer
at The University of Chicago Law School and
an adjunct professor at Widener Law School in
Wilmington, Delaware. Sontchi is a member of the
Committee on Financial Contracts, Derivatives
and Safe Harbors of the ABI’s Commission to Study
the Reform of Chapter 11 and recently testified
on safe harbors for financial contracts before a
House Judiciary Committee subcommittee. He
holds a bachelor’s degree from the University of
North Carolina at Chapel Hill and a law degree
from The University of Chicago Law School.
The author wishes to thank Katharina Earle for her
valuable research assistance in writing this article.
that amount. Rather, based on the stipulation
of facts submitted to the court, $25 million
was the agreed limit to the credit bid in the
event that the court determined (as it did) that
allowing the auction to go forward as proposed
would not result in a fair price for the assets.
6 See, e.g., Colad, 324 B.R. at 219 (“At the hearing
to consider the debtor's first day motions,
the respective attorneys for Colad and
Continental responded to the above concerns,
by asserting that the proposed lending
arrangement represented the best and only
terms available to the debtor. In my view, this
position seemed disingenuous. Continental
had recently acquired its secured position,
with the stated desire to effect a purchase of
assets as a going concern under section 363
of the Bankruptcy Code. With this objective,
Continental would be obviously disinclined to
compel a distressed liquidation of its position.”).
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