In a recent opinion issued in the case In re Philadelphia Newspapers, LLC, et al., Case No. 09-4266 (3rd Cir. 2010), the United States Court of Appeals for the Third Circuit held that secured lenders do not have an absolute right to credit bid on all asset sales under section 1129(b)(2)(A) of the Bankruptcy Code. This opinion could have a profound effect on the manner in which debtors seek approval of a sale pursuant to a plan of reorganization and, potentially, a chilling effect on the willingness of lenders to extend credit in the future.
The debtors2 own and operate several newspapers in Philadelphia, and are parties to a Credit and Guaranty Agreement entered into with a group of lenders owed approximately $318,000,000. In exchange for the $318,000,000 in loans made by the lenders, the debtors granted to the lenders a security interest in substantially all of their assets. The debtors defaulted under the lenders’ loan documents.
After defaulting on their obligations to the lenders, the debtors filed for bankruptcy protection. The debtors later filed a joint Chapter 11 plan of reorganization pursuant to which they proposed to sell substantially all of their assets free of any liens at a public auction (the “Proposed Sale”). The debtors devised procedures to govern the Proposed Sale, and filed a motion with the bankruptcy court seeking approval of those procedures. Among the sale procedures proposed by the debtors was a ban on the ability of the lenders to “credit bid”3 for the assets being sold by the debtors. In support of the proposed ban on credit bidding, the debtors pointed to the fact that the Proposed Sale was to be conducted pursuant to sections 1123(a) and (b) of the Bankruptcy Code4, which sections do not specifically address the right of a secured lender to make a credit bid, and not pursuant to section 363 of the Bankruptcy Code, which does specifically address the right of a secured creditor to make a credit bid. Because the Proposed Sale was to be conducted pursuant to a section of the Bankruptcy Code that does not expressly provide a secured creditor with the right to make a credit bid, the debtors argued that it was permissible to conduct the Proposed Sale without providing for such a right. Several parties, including the lenders, objected to the sale procedures.
The Bankruptcy Court disagreed with the debtors on the issue of credit bidding, and approved revised sale procedures that provided the lenders with the opportunity to make a credit bid at the auction. The Bankruptcy Court based its decision on its reading of section 1129(b)(2)(A) of the Bankruptcy Code,5 which lists the requirements for a plan of reorganization when fewer than all classes of creditors vote to accept the plan. The Bankruptcy Court noted that though the debtors considered the Proposed Sale as proceeding under subsection (iii) of that section, the Proposed Sale was more properly a sale pursuant to subsection (ii), which expressly addresses credit bidding by secured lenders through its reference to section 363. The Debtors appealed the Bankruptcy Court’s decision to the District Court.
The District Court reversed the Bankruptcy Court’s decision, and held that the lenders did not have a right to credit bid at the Proposed Sale. The District Court also based its opinion on the language of section 1129(b)(2)(A) of the Bankruptcy Code, but interpreted that language differently. The District Court found that each subsection provides separate and independent paths to confirmation of a plan of reorganization, and held that a plan of reorganization need only comply with the specific provisions of any one of the subsections. The District Court reasoned that because the Proposed Sale was to proceed under subsection (iii), which does not expressly provide for a right of secured creditors to credit bid, the lenders did not have the right to credit bid in connection with the Proposed Sale. The District Court’s order was appealed to the Third Circuit Court of Appeals by the lenders.
The Third Circuit affirmed the ruling of the District Court, holding that secured lenders do not have an absolute right to credit bid on all asset sales under section 1129(b)(2)(A) of the Bankruptcy Code. The Court began by observing that section 1123(a)(5)(D) of the Bankruptcy Code, which governed the Proposed Sale, does not address the procedural aspects of the sale. Like the Bankruptcy Court and the District Court, the Court of Appeals turned to section 1129(b) to determine the procedural requirements, and made three crucial findings. First, the Court noted that the language of section 1129(b)(2)(A) is unambiguous and provides for three different methods, prescribed in subsections (i), (ii) and (iii), to effectuate a sale, and a debtor need comply with only one of these subsections. Second, the Court found that the language of subsection (iii), unlike the language of subsection (ii), does not expressly address the right of a secured creditor to credit bid. Because subsection (iii) does not expressly address the right to credit bid, the Court ruled that it could not read such a requirement into that subsection. Finally, the Court noted that even if the language of a statute is unambiguous, there are limited circumstances where a literal application would produce a result demonstrably at odds with the intentions of its drafters. After discussing the interplay of section 1129(b)(2)(A) with other sections of the Bankruptcy Code, the Court concluded that In re Philadelphia Newspapers, LLC, et al. did not present one of those limited exceptions, and it therefore was bound to enforce the language of the statute as written. In closing, the Court held that secured lenders do not have an absolute right to credit bid, but noted that certain circumstances may require such a right to achieve the “fair and equitable” requirement also demanded by section 1129(b)(2)(A). A dissent authored by Judge Ambro argues that subsection (iii), the provision relied upon by the debtors, may only be relied upon if a sale of assets is not encompassed by either subsection (i), addressing sales in which assets are transferred subject to pre-existing liens, or subsection (ii), addressing situations where assets are to be transferred clear of liens. Because the debtors proposed to transfer assets clear of liens, subsection (ii), which specifically addresses credit bidding by secured creditors, is the section that should govern.
The decision in In re Philadelphia Newspapers, LLC, et al. will almost certainly impact the manner in which sales in bankruptcy are effectuated going forward, may affect the willingness of lenders to provide post-petition financing in future cases and may also impact the terms upon which lenders are willing to provide such financing. The decision in Philadelphia Newspapers is yet another in a long line of decisions in which the Third Circuit applied a fairly strict “plain meaning” analysis to a question of statutory interpretation. A final point of note is that despite the persuasiveness of the majority’s decision, the well written, well reasoned dissent in this case may provide other courts with a basis to disagree with the plain language interpretation employed by the Third Circuit in In re Philadelphia Newspapers, LLC, et al.