lender insisted on a hurried process
and that in any event, the validity
of the secured creditor’s liens had
not been determined in that case.
In addition, the Aéropostale court
noted that in In re Free Lance-Star
Publishing, 512 B.R. 798 (Bankr. E.D. Va.
2014), another case involving “chilled”
competitive bidding, the secured
creditor improperly filed financing
statements covering assets over which
it knew it did not have a valid lien.
Finally, the Aéropostale court
looked to the “Final Report and
Recommendations” promulgated by
the American Bankruptcy Institute
Commission to Study the Reform of
Chapter 11, which asserted that the
commission “did not believe that the
chilling effect of credit bids alone
should suffice as cause under section
10 Because Aéropostale did
not allege that Sycamore or MGF had
acted improperly in its bankruptcy or
during the bidding process, no factor
in addition to the alleged chilling of
competitive bidding existed. As such,
the court denied Aéropostale’s claims.
Tempering the Aéropostale court’s
ruling is the fact that no chilling effect
on competitive bidding likely existed
in the first instance. For example,
Aéropostale contacted 99 parties and
21 were still interested in late June
11 which is quite dissimilar from
Fisker, where no bidding would have
occurred without the restriction
on credit bidding. In addition, the
Aéropostale court noted that Sycamore
has been “relatively cooperative with
the process by, among other things,
agreeing to...a one-week extension
of the sale process.”
12 As such, it
nevertheless remains unclear post-
Aéropostale whether courts will
be willing to find cause based on a
chilling effect in instances in which
the secured lender is uncooperative.
Testing the Waters
Recent cases suggest that credit
bidding in a Section 363 sale may not
result in the chilling effect described in
prior bankruptcy cases, notably Fisker
and Free Lance-Star Publishing. For
example, in the Chapter 11 bankruptcy
of clothing retailer Pacific Sunwear of
California Inc. (PacSun), Golden Gate
Capital, one of the debtor’s secured
lenders, successfully acquired all of
the outstanding equity of PacSun
in exchange for a reduction in the
company’s indebtedness from
$88 million to $30 million and an
additional investment in an amount
equal to approximately $20 million.
As a result, PacSun was able to exit
bankruptcy with reduced debt and
more amenable leases with landlords.
In addition, the auction in Aéropostale
(which included an active credit bidder
as described earlier) resulted in a sale of
the business to a group of third parties
in an amount equal to $243.3 million.
The group indicated that Aéropostale
will continue to operate at least 229
stores in the U.S.
16 Each of these cases
demonstrates that the exercise of the
credit bid right can facilitate successful
reorganizations of distressed
companies out of bankruptcy. This
suggests that the chilling effect
purportedly caused by secured
lenders’ use of credit bidding may not
be as substantial as some believe.
On the other hand, at least one
recent case where credit bidding
was otherwise absent in a Chapter 11
bankruptcy resulted in a full-chain
liquidation. In Sports Authority, none
of the sporting goods retailer’s secured
lenders meaningfully sought to
exercise their credit bid rights. Instead,
a consortium of liquidators acquired
the majority of Sports Authority’s
assets (e.g., inventory) and Dick’s, one
of the Sports Authority’s competitors,
acquired the Sports Authority
brand name and related intellectual
17 Thereafter, the Committee
of Unsecured Creditors sought to
convert the case from Chapter 11 to
a Chapter 7 liquidation, which was
subsequently rendered moot by a
settlement among Sports Authority,
its lenders, and other creditors.
Credit bidding is a valuable tool for
secured lenders, as it (a) protects the
value of collateral upon which secured
lenders made their loans in the first
instance, (b) provides an opportunity
for a syndicate of lenders to participate
in Section 363 sales when individual
lenders may otherwise have limited
authority to provide further liquidity
to the debtors, and (c) as discussed
earlier, may facilitate a successful
reorganization of bankrupt debtors.
The Aéropostale case indicates
that the specter of a chilling effect
is insufficient on its own to limit
secured lenders’ credit bid rights. As a
result, secured lenders may continue
to exercise their credit bidding
rights in full, which may continue
to produce successful outcomes
for debtors out of bankruptcy. J
1 11 U. S.C. §363.
2 “Credit Bidding in Section 363
Bankruptcy Sales,” Practical Law
Practice Note 7-500-4339 (2016).
3 The court’s decision notes that Aéropostale
conceded that its liquidity did in fact fall
below $150 million by the end of February
2016 and that Aéropostale had overstated
its liquidity by as much as $40 million.
4 Aéropostale asserted the full gamut of
arguments against Sycamore’s claims,
including equitable subordination,
disqualification of Sycamore from credit
bidding, and recharacterization. Aéropostale
lost on each of these arguments.
5 Memorandum of Decision at 73, In
re Aéropostale, Inc., No. 16-11275
(Bankr. S.D.N.Y. Aug. 26, 2016).
6 Id. at 73-74.
7 Id . at 76-77.
8 Id . at 77.
9 Id. at 77-78.
10 Id. at 78 citing American Bankruptcy
Institute Commission to Study the Reform
of Chapter 11, 2012-2014 “Final Report and
Recommendations,” 147 (2014), available
11 The Aéropostale court did note that
“roughly fifteen parties that stepped
away from the sale process indicated
that Sycamore’s ‘participation in the
process’ was an element of their decision."
Aéropostale, No. 16-11275 at 41.
12 Id. at 75.
13 Steven Church, “Pacific Sunwear Has
‘Retailer’s Dream’ as Bankruptcy Wraps
Up,” Bloomberg (October 14, 2016,
10:00 a.m.), bloomberg.com/news/
15 “Aéropostale Auction Closes with a $243.3
Million Bid,” Fortune (October 14, 2016,
10:00 a.m.), fortune.com/2016/09/02/
17 Lillian Rizzo, “Dick’s Sporting Goods
Wins Sports Authority Brand Name in
Bankruptcy Auction,” The Wall Street
Journal (October 14, 2016, 10: 30 a.m.),
Rizzo, “Sports Authority Bankruptcy
Auction Won by Trio of Liquidators,” The
Wall Street Journal (October 14, 2016,
10: 15 a.m.), wsj.com/articles/tiger-led-liquidator-group-wins-bankruptcy-