* Plug-in sports car maker sent to competitive auction
* $25 mln cap on Richard Li bid; lawyer cries foul
* China's Wanxiang says plans to start bidding at $35 mln
WILMINGTON, Del., Jan 10 (Reuters) - A U.S. judge rejected a planned sale of Fisker Automotive to Hong Kong businessman Richard Li in favor of competitive bidding, opening the way for China's largest auto parts company to bid for the maker of the Karma plug-in hybrid sports car.
U.S. Bankruptcy Judge Kevin Gross said on Friday competitive bidding between a company affiliated with Li and a unit of auto parts maker Wanxiang Group of China was the best way forward.
"I think that, for me, at the end of the case, whether or not the price paid was fair or reasonable, I think an auction will provide that mechanism. That is the most favored method," Gross said. He scheduled a hearing for 2 p.m. EST (1900 GMT) on Monday to decide how to proceed with an auction.
Gross made the ruling at a hearing in the U.S. Bankruptcy Court in Wilmington, Delaware, that was held to determine how to proceed in Fisker's bankruptcy.
Fisker filed for bankruptcy in November with a plan to forgo the typical route in Chapter 11 procedure of putting the business on the auction block.
Li was planning to "credit bid," or forgive a portion of what Fisker owes on a $168 million secured loan that he holds. Under the plan, other creditors were likely to get next to nothing.
Li bought the loan for $25 million from the U.S. government at an auction in October. The government extended the loan to the start-up in 2009 under a program to promote cleaner vehicles.
Fisker's unsecured creditors objected to the company's plan and teamed up with Wanxiang, which has said it plans to start the cash bidding at $35 million. The unsecured creditors said the Wanxiang plan could fetch more than 40 cents for every dollar they are owed.
At Friday's hearing, Gross said he would still allow Li to make a credit bid, but said he would cap the amount at the $25 million Li paid for the loan.
Li's lawyer, Tobias Keller, called such a cap on a credit bid "radical."
"Be careful of the precedent you're setting for yourself and your brethren," Keller said.
Li's company, Hybrid Tech Holdings, said in a statement it was "deeply disappointed" with Gross's ruling.
"Despite the court's decision, Hybrid will participate in the auction, as we still feel Hybrid represents the most competitive and viable bid for Fisker's future," the company said.
Sunni Beville, a lawyer representing creditors, said they were happy with the ruling. "The bidders will talk with their wallets," she said, adding that an auction could be held in February.
Beville said the creditors hoped to entice others to bid. Bob Lutz, a former General Motors executive, and GreenTech Autos, a car maker, had shown interest in Fisker's assets prior to the bankruptcy, she said.
Fisker shut down production in 2012 after a series of missteps and recalls of its luxury cars, which were priced at more than $100,000.
Wanxiang America, headquartered in Elgin, Illinois, operates 27 manufacturing plants in 13 states and employs approximately 6,000 U.S. workers, according to court documents.
In a 2012 bankruptcy court auction, it paid about $256 million for most of the assets of A123 Systems Inc, which made batteries for Fisker. Like Fisker, A123 was also funded in part with a U.S. government loan.
Wanxiang has said it hopes to restart production at Fisker and that it could shift production to Michigan from Finland.
The case is re Fisker Automotive Holdings Inc, U.S. Bankruptcy Court for the District of Delaware, No. 13-13087.