Credit Bid: 'This Is Not Rocket Science'

Fire Eagle L.L.C. v. Bischoff (In re Spillman Dev. Group Ltd.), 710 F.3d 299 (5th Cir. 2013) -

A bank made loans to the debtor to finance construction of a golf course. The loans were secured by senior liens on the debtor's assets, limited guaranties of its principals, and a $1.2 million certificate of deposit. During a sale of the debtor's assets ordered by the bankruptcy court, the holder of the senior debt submitted a credit bid. Spillman involved a dispute over the effect of the credit bid.

After the debtor filed bankruptcy, a junior lender (Fire Eagle) that had loaned the debtor $4.1 million, purchased the senior debt from the bank. At that time, the parties stipulated that the outstanding balance of the senior loans were ~$9.1 million.

After the bankruptcy court refused to confirm any of the proposed plans of reorganization, it ordered a sale of the debtor's assets under Section 363 of the Bankruptcy Code. After the bidding at the sale reached a cash bid of $9.2 million, Fire Eagle submitted a credit bid of $9.3 million, which was the winning bid.

The debtor and most of the guarantors brought an action in the bankruptcy court seeking a declaratory judgment that the guarantors were released from their obligations. Fire Eagle argued that its credit bid did not result in the senior debt being paid in full. Instead, it contended that the court should have determined the fair market value of the assets, and only that value should have been credited against the senior debt. Assuming the value was less than the debt, Fire Eagle argued that it could still recover the deficiency from the guarantors.

The bankruptcy court found that the credit bid paid the senior debt in full so that there was no deficiency claim left and Fire Eagle was not entitled to recover from the guarantors. Consequently, the bankruptcy court granted summary judgment to the guarantors holding: "This is not rocket science. The Senior Loan has been PAID!!!!"

On appeal Fire Eagle proposed three arguments to support this position:

(1) Credit bidding in a bankruptcy auction affects only the claim in the bankruptcy and not any underlying debt.

(2) Bankruptcy events "do not typically 'inure to the benefit of non-bankrupt guarantors.'"

(3) The guaranties provided that the guarantors' obligations would not be affected by a bankruptcy.

The 5th Circuit rejected the first argument as "logically unsound." The court noted that if Fire Eagle had been outbid by a cash bid, the cash would...