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On March 22, 2010, the Court of Appeals for the Third Circuit issued its 2-1 opinion (No. 09-4266) in the Philadelphia Newspapers, LLC bankruptcy case.  The Third Circuit Court, utilizing a strict constructionist viewpoint, held that the Debtor could sell its assets pursuant to a plan of reorganization without providing secured creditors a right to credit bid their debt.


In the bankruptcy case, the Debtors proposed a plan of reorganization (the "Plan"), which provided for the sale of substantially all of the Debtors' assets free and clear of all liens.  The Debtors selected as a stalking horse a group whose members consisted primarily of former and current equityholders and management of the Debtors.  The Plan further provided that the Debtors' primary secured lenders, who were owed more than $300 million, would not be entitled to credit bid their debt.  Instead, the sale procedures would require all bids to be in cash.  The Plan sale was expected to generate approximately $37 million in cash for the Lenders (along with other non-cash consideration).

The Bankruptcy Court refused to approve bid procedures, which deprived the lenders of their right to credit bid.  On appeal, the District Court reversed, holding that section 1129(b)(2)(A) of the Bankruptcy Code explicitly permits a Plan sale of assets without credit bid rights.  This appeal to the Third Circuit followed.  The District Court order was stayed pending resolution of the appeal.

Third Circuit's analysis

In reaching its decision, the Third Circuit looked to what it characterized as the unambiguous plain language of Bankruptcy Code section 1129(b)(2)(A), which provides that a plan of reorganization is fair and equitable as to a holder of a secured claim (and thus may be confirmed over a secured creditor's objection, or "crammed down") if: (i) the secured creditor retains its liens and receives deferred cash payments; (ii) the plan provides for a sale of assets subject to the secured creditor's right to credit bid; or (iii) the secured creditor receives the "indubitable equivalent" of its secured claim.  The Third Circuit primarily focused its analysis on the Bankruptcy Code's use of the disjunctive "or" and determined that the subsection provisions of 1129(b)(2)(A) provide distinct, non-mutually exclusive alternatives: a debtor may propose a plan that satisfies one, two, or all of the subsections.  But only one need be satisfied in order to find a plan fair and equitable.

The Court was quick to note that it was not holding that the sale proposed in the Debtors' Plan equaled the indubitable equivalent of the lenders' secured claims.  That fact specific issue will be decided in connection with the Bankruptcy Court's hearing to consider confirmation of the Plan.  In fact, the Circuit Court observed that the lenders will be able to argue at the confirmation hearing that the restriction on credit bidding failed to generate fair market value thus preventing the lenders from receiving the indubitable equivalent of their claim.

The Dissent

Judge Ambro issued a dissenting opinion in which he criticized the majority's finding that the language of section 1129(b)(2)(A) was unambiguous and bemoaned the policy consequences of the majority decision.  In Judge Ambro's view, the language of section 1129(b)(2)(A) can more plausibly be read to require the preservation of credit bid rights in the context of a sale of assets under a plan of reorganization.  He further argued that the majority's holding would result in an uprooting of the "settled expectations of secured lending" and would deprive secured lenders of the benefit of their bargains with the debtor.


The Philadelphia Newspapers decision is now the second Circuit level opinion holding that a secured lender does not have the absolute right to credit bid under section 1129(b)(2)(A)(iii).  The Fifth Circuit reached the same conclusion in the plan confirmation context in the Pacific Lumber1 case.  These two decisions will have a substantial impact on secured lenders, providing, as they do, a powerful tool for debtors to cram down an unpalatable plan.  Secured lenders will do well to keep these decisions in mind when negotiating terms in DIP lending or cash collateral orders.  At a minimum, such documents should contain a reaffirmation of the lenders' credit bid rights, even if it's not now known whether they would be enforced by a bankruptcy court.  In addition, preservation of credit bid rights could be required as additional adequate protection.

1584 F.3d 229 (5th Cir. 2009)