The question haunting Fisker's bankruptcy
As failed EV startup Fisker winds its way through bankruptcy, a persistent and tricky question has become a flashpoint of the proceedings: does its only secured lender, Heights Capital Management, deserve to be at the front of the line to reap the proceeds of a liquidation?
Heights has maintained an unequivocal “yes.” But new information was coming into view as the parties prepared for a hearing Monday morning – until a last-minute pivot shook things up.
Fisker reached an agreement with Heights late Sunday to spend the next three weeks hammering out a settlement on how to liquidate its assets. If successful, the case could remain in Chapter 11. If not, it would convert to Chapter 7, a status that would effectively dissolve Fisker forever. It could also end any chance to learn more about how Heights arrived at this position of power.
First, a quick recap: Heights (an affiliate of financial services company Susquehanna International Group) loaned Fisker around $500 million in 2023 across two convertible notes. This meant the startup could either pay the balance owed or have it converted to stock. The loans were therefore not secured by any collateral. But Fisker was late filing its third-quarter financial results in November, which breached a covenant in the Heights deal. To cure the breach, Fisker pledged all its assets to Heights, putting Heights first in line come bankruptcy time. Heights claims to still be owed more than $180 million.
Heights recently moved to convert the bankruptcy case to Chapter 7, which the firm says would offer a faster and less expensive path to liquidating the rest of Fisker’s assets. Meanwhile, Fisker has been proceeding as a Chapter 11 case that allows the company to stay alive with a skeleton crew largely focused on completing a sale of its inventory to a New York-based leasing company.
Converting to a Chapter 7 would save on those costs but create new challenges. The startup’s lawyers have argued Chapter 7 would make it difficult to finish preparing Fisker’s remaining vehicles to be sold as it could basically shut down the business and hand oversight of the case to a trustee.
A Chapter 7 conversion would also put Heights closer to reaping the proceeds of a liquidation before its status as priority lender can be thoroughly questioned.
The committee of unsecured creditors has been racing to uncover that information.
The committee, led by unsecured creditors like contract manufacturer Magna, and Fisker’s largest lender, U.S. Bank, spent weeks investigating the relationship between Heights and Fisker and what happened late last year when the EV startup pledged its assets to the financial firm.
Before Fisker and Heights reached their eleventh-hour agreement, Monday’s hearing was shaping up to be the venue for the committee to air some of its findings. The committee’s objection to a Chapter 7 conversion was submitted under seal. However, supplemental filings showed a slide that claimed Heights had “profited from Fisker’s death spiral,” as well as a list of evidence the committee planned to reference during Monday’s hearing.
That list included five emails from Fisker co-founder, CFO and COO Geeta Gupta-Fisker to Heights’ CEO Martin Kobinger, as well as multiple text messages between the two. Those communications could have shed some light on this persistent question of Heights’ role during Fisker’s undoing. But their entry into the public record has been set aside while settlement talks move forward.
Fisker’s late Sunday pivot took some other pressure off Heights, too, as multiple parties – including the Department of Justice – had objected to Heights’ attempt to convert the case.
The DOJ objected on behalf of the National Highway Traffic Safety Administration, writing that a conversion to a Chapter 7 case “risks public safety” because it could thwart Fisker’s attempts to remedy multiple active recalls. Fisker’s own objection – filed last week – agreed with this, noting that it had only fixed about 1,400 of the more than 3,000 cars it’s in the process of selling.
Jordan Mueller, a consultant working with Fisker, said in a declaration that “the service technician workforce responsible for preparing the Sale Vehicles at storage sites across the country has been materially reduced over the past several weeks, potentially jeopardizing” the ability to fully consummate the transaction. “[M]orale amongst the workforce has already suffered severely in light of these Chapter 11 Cases and particularly since the filing of the Motion to Convert” to a Chapter 7, he wrote.
All of these objections, including the committee’s sealed one, are now on the sidelines for the next three weeks. They could come back into play, though, if no settlement is reached and Heights and Fisker move to convert to Chapter 7.
Doug Mannal, a lawyer from Morrison Foerster LLP who represents the committee of unsecured creditors, and who has accused Heights of using Fisker as a “money tree” in a past hearing, said Monday he was “hopeful” a deal can get done.
“When I began my Sunday trip to Wilmington [Delaware], I thought we were going to have a fully contested evidentiary hearing today,” Mannal said at Monday’s hearing. “A lot has changed.”
Scott Greissman, a lawyer from White & Case LLP who represents Heights, said he is “keeping an open mind” that a settlement can be reached, but once again stressed that he thinks there will be “nothing left” if Fisker’s bankruptcy remains contentious. He thanked Fisker’s legal team, saying that it “could not have been an easy decision to make” to agree to a Chapter 7 conversion.
He also said Heights has been “very restrained” in the face of a lot of “invective on the record” about the firm’s relationship with Fisker. “I don’t think we need to belabor the point here today, and I really don’t want to, honestly.”
Now the differing sides will spend the next few weeks trying to work out how to split up the proceeds from the fleet sale, as well as any other liquidation of assets. While the fleet sale is supposed to return up to $46.25 million to Fisker, Heights said in a filing over the weekend that as much as 90% of that could go to covering administrative costs and legal fees — explaining why the firm is so eager to convert to a Chapter 7 case.
There still remains a question of what other assets Fisker has that it can sell. The company’s lawyers have said there is hundreds of millions of dollars worth of equipment at its contract manufacturer Magna’s factory in Austria, and Fisker has claimed to have around $1 billion in total assets. But Fisker’s Austrian subsidiary is in its own insolvency process, and it’s unclear if any assets overseas will wind up locked to that proceeding.
“If we can’t [reach a settlement] in three weeks, it’s a signal that it can’t be done,” Brian Resnick, a lawyer for Davis Polk who represents Fisker, said Monday. As the hearing ended, Resnick made a bee-line toward Greissman and offered a hearty handshake.