The Third Circuit recently held that a bankruptcy court may confirm a Chapter 11 plan that includes a sale of assets in which secured creditors are not permitted to “credit bid” for the assets. In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010). In that case, the debtors in possession, companies that own and operate the Philadelphia Inquirer and Philadelphia Daily News, moved the bankruptcy court to approve bid procedures for an auction of the debtors’ assets. Id. at 302. In that motion, the debtors asked the bankruptcy court to preclude the secured creditors from bidding their debt in lieu of cash, a practice known as “credit bidding.” Id. The bankruptcy court denied the debtors’ request to preclude credit bidding, but the district court reversed, holding that 11 U.S.C. § 1129(b)(2)(A)(iii) permits auction procedures that preclude credit bidding. Id. at 302–03. On appeal, the Third Circuit affirmed the district court’s holding.

A Chapter 11 plan of reorganization my include among its provision the “sale of all or any part of the property of the estate, either subject to or free of any lien[.]” 11 U.S.C. § 1123(a)(5)(D). Section 1123, however, does not specify the procedures for the sale of assets that secure debts of the estate. Courts, therefore, look to § 1129(b), which provides the procedures for such a sale. Under that section, a court may confirm a reorganization plan, even over the objections of secured lenders, so long as the plan is “fair and equitable.”

Section 1129(b)(2)(A) sets forth three alternative circumstances that make a plan “fair and equitable.”

(A) With respect to a class of secured claims, the plan provides--

(ii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or

(iii) for the realization by such holders of the indubitable equivalent of such claims.

11 U.S.C. § 1129(b)(2)(A).

Section 1129(b)(2)(A)(ii), by incorporating § 363(k), gives secured creditors the right to credit bid in a plan confirmed under that subsection. Section 363(k) provides:

At a sale under subsection (b) of this section of property that is subject to a lien that secures an allowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property.

But § 1129(b)(2)(A)(iii) does not incorporate § 363(k) or otherwise give secured creditors the right to credit bid. Instead, subsection (iii) requires that the secured creditors realize the “indubitable equivalent” of their security interests. The Third Circuit reasoned that because subsections (i), (ii), and (iii) are phrased in the disjunctive—“or”—Congress contemplated that Chapter 11 plans may include sales that do not give secured creditors the right to credit bid. In re Philadelphia Newspapers, LLC, 599 F.3d at 305. In so holding, the court rejected the secured creditors’ argument that the more generally phrased requirements of subsection (iii) necessarily include the more specific requirements of subsection (ii). Id. at 308. “Congress’ inclusion of the indubitable equivalence prong intentionally left open the potential for yet other methods of conducting asset sales, so long as those methods sufficiently protected the secured creditor’s interests.” Id.

In so holding, the Third Circuit joined the Fifth Circuit, which last year confirmed a sale of assets at a private auction by determining the that cash payout to the noteholders provided the “indubitable equivalent” of their security interests in the assets. In re Pacific Lumber Co., 584 F.3d 229 (5th Cir. 2009). That sale, like the proposed sale in In re Philadelphia Newspapers, LLC barred secured lenders from credit bidding.