In re Free Lance-Star Publishing Co.
512 B.R. 798, 2014 Bankr. LEXIS 1611 (2014)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A bankruptcy court may limit a secured creditor’s right to credit bid under 11 U.S.C. § 363(k) if “cause” exists, such as when the creditor lacks valid, perfected liens on all assets it seeks to acquire, or when its inequitable conduct chills the bidding process and undermines the goal of maximizing asset value for the estate.
Facts:
- In 2006, The Free Lance-Star Publishing Company of Fredericksburg, VA (The Free Lance-Star) and William Douglas Properties, LLC (William Douglas, collectively, Debtors) borrowed approximately $50.8 million from Branch Banking and Trust (BB&T) for a commercial printing business expansion.
- The Debtors granted BB&T liens on certain real and personal property, but did not grant or record any liens or security interests on the Tower Assets (radio broadcasting properties) to BB&T.
- Beginning in 2009, the Debtors experienced financial difficulties, falling out of compliance with loan covenants, though they continued to make timely payments to BB&T.
- In late June 2013, BB&T sold its loan to Sandton Capital Partners (Sandton).
- On July 3, 2013, Sandton (acting through DSP Acquisition, LLC, or DSP) informed the Debtors that it wanted them to file Chapter 11 bankruptcy and sell substantially all assets under § 363, with DSP intending to be the buyer.
- In July 2013, DSP requested the Debtors execute new deeds of trust to encumber the Tower Parcels, but this request was not agreed upon.
- Unbeknownst to the Debtors, in August 2013 and again in January 2014, DSP unilaterally filed UCC Fixture Financing Statements purporting to perfect security interests in the Tower Assets, without the Debtors' knowledge or consent for these specific liens.
- DSP pressured the Debtors for a quick bankruptcy sale, objected to comprehensive marketing, and insisted that any marketing materials prominently feature DSP's $39 million credit bid rights, even after Debtors' financial consultant, Protiviti, projected the company could survive without a new post-petition loan from DSP.
Procedural Posture:
- On January 23, 2014, The Free Lance-Star Publishing Company of Fredericksburg, VA and William Douglas Properties, LLC (Debtors) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.
- On the Petition Date, the Debtors filed Sale Motions seeking court approval for bidding procedures for an auction of substantially all of their assets.
- On March 10, 2014, the United States Bankruptcy Court entered orders approving the bidding procedures, which included DSP's right to credit bid its claim against assets on which it had valid liens, to be agreed upon or determined by the court.
- Also on March 10, 2014, DSP Acquisition, LLC (DSP) filed a Complaint initiating Adversary Proceeding No. 14-03038, seeking a declaration that it had valid and perfected liens on substantially all of the Debtors’ assets, including the Tower Assets.
- DSP subsequently filed a motion for summary judgment on all counts set forth in its Complaint.
- The Debtors, as defendants in the Adversary Proceeding, filed their own motion for summary judgment against DSP.
- On March 24, 25, and 31, 2014, the United States Bankruptcy Court conducted an evidentiary hearing to determine DSP’s right to credit bid its claim and to rule on the Cross Motions for Summary Judgment regarding the validity, extent, and priority of DSP’s asserted liens.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a bankruptcy court have the authority to limit a secured creditor's credit bid rights under § 363(k) when the creditor lacks perfected liens on all claimed collateral and has engaged in inequitable conduct designed to depress asset value and chill the competitive bidding process?
Opinions:
Majority - Kevin R. Huennekens
Yes, a bankruptcy court can limit a secured creditor's credit bid rights under § 363(k) when sufficient 'cause' exists, such as a lack of perfected liens on all asserted collateral and inequitable conduct that chills the bidding process. The court found that DSP did not have valid, properly perfected liens on several categories of assets it claimed, including the Tower Assets, motor vehicles, FCC licenses, insurance policies, and bank accounts, meaning it could not credit bid against these unencumbered assets. Furthermore, the court determined that DSP engaged in inequitable conduct through its 'loan-to-own' strategy, which involved unilateral attempts to expand its collateral without debtor consent, a failure to disclose these filings at a prior hearing, and actively trying to depress the sale price and chill competitive bidding. The court concluded that this confluence of factors — DSP's less-than-fully-secured status, its aggressive loan-to-own strategy, and the negative impact of its misconduct on the auction process — created 'perfect storm' requiring the curtailment of its credit bid rights. While the court did not extinguish DSP’s credit bid right entirely, it limited the amount to foster a robust and competitive bidding environment, based on an expert's testimony regarding the methodology for fashioning a competitive auction sale and credit bid price.
Analysis:
This case significantly clarifies the 'for cause' exception to a secured creditor's credit bid rights under § 363(k) of the Bankruptcy Code. It establishes that a court can consider a creditor's pre-petition and in-bankruptcy conduct, including attempts to expand collateral without authorization and actions that undermine the integrity of the sale process, as 'cause' to limit credit bidding. The ruling provides a critical tool for debtors and unsecured creditor committees to challenge aggressive 'loan-to-own' strategies that prioritize a specific creditor's acquisition over maximizing value for the entire bankruptcy estate. This precedent encourages transparency and good faith in creditor-debtor relations during bankruptcy proceedings, potentially leading to more competitive auctions and better outcomes for all stakeholders.
