If you’re in the business of bankruptcy, chances are there isn’t a line outside your door of companies seeking chapter 11 protection in this market. After all, in 2013, the most prominent filing was Detroit’s chapter 9 case, the largest municipal case to date. Companies are more likely to raise new capital or refinance their debt to take advantage of low interest rates.

Aside from this economic trend, businesses in the education and healthcare industries are even more hesitant to file. “You can’t really file as an education company; you could lose your accreditation and there’s no business left,” said Lawrence. “These industries are being forced to go out of court.” (See Figure B).

“Bankruptcy cases are simply races to sales now,” explained James J. Vincequerra, a partner in Duane Morris’ New York office, “because these companies have typically gone to a significant amount of time, effort and cash to get to a workout position. They did it, and it didn’t work out the way they thought. Bankruptcy is their last resort.”

Net-net, out-of-court workouts, refinancings, private equity infusions and a speedy sale within chapter 11 to the first bidder out of the gate—that has been the state of play in 2014.

Case In Point

In January 2014, a recent decision regarding a pre-packaged bankruptcy highlighted one court’s concern over transparency and the importance of the auction process. In November 2013, Fisker Automotive Holdings, Inc., a maker of plug-in hybrid electric vehicles, filed for bankruptcy protection with the U.S. Bankruptcy Court for the District of Delaware in order to sell its assets to a stalking horse bidder, Hybrid Tech Holdings, LLC. Hybrid was lined up for a quick sale. The motion was filed to determine whether Hybrid was entitled to a credit bid to the full amount of its secured debt.

Said Walter Greenhalgh, managing partner of Duane Morris’ Newark office: “The court was concerned that if you permitted this credit bidding, it would basically eliminate any possibility of a real auction.”

Ultimately, the court limited Hybrid’s credit bid to $25 million, which resulted in outside bidding from another company. That company, Wanxiang Group, won the assets at auction, and the court approved the sale for $149.2 million.

Greenhalgh noted: “The court was concerned with the transparency of the original proposal—that the auction process was being jeopardized and the secured lender was just trying to bulldoze its way through.”

Said Vincequerra of the pre-packaged case: “Here, you have a very well-respected judge, in one of the most respected bankruptcy courts in the United States, basically double down on the Third Circuit Court of Appeals’ ruling in Philadelphia Newspapers and say to secured creditors: 1) you may not be able to credit bid the full amount of your debt and 2) we are no longer going to necessarily allow hyper-aggressive stalking horse tactics that credit bidders engage in to achieve a quick sale.”

The decision highlights the judiciary’s concern over stalking horse bids. “We’ve all been in situations where we file a company with a stalking horse bidder that’s credit bidding and you have a 30- day window or less to market the company,” said Vincequerra. The pace is set early, said Warshauer. “They hire lawyers and bankers; the company is saying, my business is at risk and we need to get this done quickly. Everybody has an incentive to do it on a lower-cost basis and to move the process along. All the constituents are there, saying ‘get it done, get it done quickly.’”

It underscores the importance of counsel, said Lawrence. “Your lawyer is very important. When you are going into a bankruptcy, you want to be sure you have the right lawyer.”

Warshauer added: “The judge in Fisker was right in that you have to create the right environment between your lawyers and investment bankers. Make sure you have the collateral, the security and a process. You’ve run all the things you need to do pre-petition and then file. At this point, you have a much greater chance of minimizing the fact-specific issues of Fisker, and getting a 363 sale done if that’s in the best interest,” he said. Otherwise, “If you want certainty, it’s a little bit longer of a process, but you go through the process of a plan of reorganization.”

Vincequerra referred to a second case “indicative of the trend favoring pre-petition workouts.” Residential Capital, LLC (ResCap), once one of the largest mortgage servicers and mortgage lenders in the U.S., filed for bankruptcy protection in 2013. In December 2013, Judge Martin Glenn of the U.S. Bankruptcy Court in New York’s Southern District confirmed ResCap’s plan to exit chapter 11 and liquidate.

“It’s an important case in that it gives more certainty for fair value exchanges in pre-petition workout scenarios,” said Lawrence. Judge Glenn determined that the original issue discount (OID) is allowable in bankruptcy after a fair value prepetition debt exchange just as it has been in face value exchanges since Chateaugay. “It is a very encouraging case for lenders and debtors who are involved in pre-petition workouts,” he said.

Basically, said Warshauer, “The judges want to expedite these cases. They are not interested in having investment bankers come in and spend many days in depositions and hearings discussing and opining upon valuations. Judges want to be fair and not subject to appeal. In ResCap, Judge Glenn effectively said, ‘Let’s make the process fair and predictable for everyone.’”

The bottom line: Uncertainty for secured creditors could lead to fewer bankruptcy cases, or at least be a disincentive. When advising companies on potential credit bidding or a Section 363 sale, it pays to be cognizant of the facts and results in Fisker.