On February 28, 2013, the US Court of Appeals for the Fifth Circuit (Court) held in Fire Eagle L.L.C. v. Bischoff (In re Spillman Development Group, Ltd.) that a secured lender's credit bid for a debtor's assets resulted in full payment of the senior debt and extinguished any deficiency claims against the guarantors of the debt. This case demonstrates that cash and credit bids are equivalent in section 363(b) sales and that creditors credit bidding amounts equal to or greater than the face amount of their debt have no deficiency claims against guarantors of the debt.

In 2001, Spillman Development Group, Ltd. (SDG), borrowed a total of $8.1 million in senior secured debt and $4.1 million in junior unsecured debt to build a golf course in Texas. The senior debt was secured by Spillman's assets, limited guarantees executed by SDG's principals, and the rights to a $1.2 million certificate of deposit (CD) which would be returned on payment of the senior debt. The junior debt was unsecured and held by Fire Eagle.

In 2005, after SDG filed for bankruptcy, Fire Eagle purchased the balance of the outstanding senior debt, valued at about $9.1 million. The US Bankruptcy Court for the Western District of Texas refused to confirm competing plans of reorganization proposed by Fire Eagle and the senior lender, and instead ordered the debtor to sell its assets, including the assets securing the senior debt, in a section 363(b) sale. Ultimately, Fire Eagle made a credit bid of $9.3 million, which the Bankruptcy Court accepted.

On a motion from the debtor, the Bankruptcy Court held that Fire Eagle had no deficiency claim against the estate for the senior debt because the credit bid paid the senior debt in full. The debtor and all but one of the individual guarantors filed an adversary proceeding in the Bankruptcy Court seeking a declaratory judgment that, as a result of the sale, all guarantors should be released from their guaranty obligations and that the $1.2 million CD should be returned to the debtor. Fire Eagle moved to dismiss the adversary proceeding and filed an action against the remaining guarantor in the US District Court for the Eastern District of Louisiana.

The Fifth Circuit resolved various challenges to the Bankruptcy Court's jurisdiction, statutory and constitutional authority and the propriety of venue in the Western District of Texas in favor of the debtor before addressing whether the guarantors should be released from their guarantees. Fire Eagle argued that only the fair market value of the assets purchased should be credited against the senior debt and that it should be entitled to further recovery under the guarantees, because:

The debtor and the guarantors argued that the entire amount of the credit bid should be credited against the senior debt because a credit bid is a cash equivalent. The Bankruptcy Court held that the senior debt had been paid in full by the credit bid, ordering the release of the guarantors and return of the CD to the debtor. The District Court for the Western District of Texas affirmed these rulings.

The Fifth Circuit affirmed the lower courts and held that Fire Eagle was not entitled to recover against the guarantors because the full amount of the credit bid should be credited against the senior debt. In doing so, it followed the US Court of Appeals for the Third Circuit's holding in In re SubMicron Systems Corp., which held that a credit bidder is entitled to credit bid up to the full face value of its secured claim, including any portion considered to be unsecured (see 432 F.3d 448, 461 (1st Cir. 2006)).

The Fifth Circuit noted that Fire Eagle's first argument was illogical. It reasoned that had a higher or equal cash bid been accepted, those proceeds would have been applied to satisfy the senior debt in full. In that case, Fire Eagle could not proceed against the guarantors to receive payment in excess of the face value of the guaranteed debt. The Fifth Circuit saw no reason why Fire Eagle should recover more as a result of its credit bid than it would have had the assets been sold to a third party for an equivalent amount of cash.

The Fifth Circuit was also unmoved by Fire Eagle's second argument. It distinguished the present case from others cited by Fire Eagle because in none of those cases was the guaranteed debt repaid in full with a credit bid, as was the case here. Had a cash or credit bid for an amount less than the face value of the debt been accepted, Fire Eagle may have had further recourse against the guarantors.

The Fifth Circuit also rejected Fire Eagle's third argument. The guarantees explicitly stated that they would not be affected by bankruptcy, but that they would terminate on payment of the senior debt. As the credit bid constituted payment in full of the senior debt, the right of Fire Eagle to recover under the guarantees was extinguished.

Creditors seeking payment on secured debt through a section 363(b) sale should consider the following implications of this case:

For more information on credit bidding, see Practice Note, Credit Bidding in Section 363 Bankruptcy Sales.