A credit bid allows a secured lender to bid its outstanding debt in lieu of cash. Many people are familiar with bankruptcy sales through 11 U.S.C. 363 (a "363 Sale") 1 which provides that a secured lender has the right to credit bid "unless the court for cause orders otherwise." Less publicity has occurred regarding sales of assets pursuant to plans of reorganizations. However, it is possible that may now change. In a 2-1 decision of the Third Circuit Court of Appeals, the Court held that a debtor in possession may offer a plan of reorganization that allows the debtor to sell assets of a secured lender free and clear of liens and without the right of a secured creditor to credit bid its debt. The plan can be approved so long as the secured lender is provided the "indubitable equivalent" of their secured interest in the assets. In re Philadelphia Newspapers, LLC, No. 09-4266 (3d Cir., March 22, 2010). While it is uncertain whether other circuit courts will follow its lead, the case may have far reaching implications for both debtors and secured creditors alike. As one example, we may begin to see more debtors attempting to steer a sale through a bankruptcy plan process to a preferred buyer rather than conducting the sale through the 363 Sale process.

The Facts2

Philadelphia Newspapers, LLC, (the "Debtors")3, own and operate the print newspapers of the Philadelphia Inquirer and the Philadelphia Daily News and the online publication (collectively, the "Newspapers"). The Newspapers were acquired in July 2006 for $515 million as part of an acquisition of the business by an investor group. Of that purchase price, $295 million came from a consortium of lenders (the "Lenders") that held first priority liens in substantially all of the Debtors' real and personal property. At the time the plan was filed, the Lenders were owed approximately $318 million.

On August 20, 2009, the Debtors filed a plan of reorganization (the "Plan") providing that the assets would be sold at public auction and that the assets would transfer to the successful bidder free and clear of all liens, including those asserted by the Lenders. Simultaneously with the Plan, the Debtors signed an asset purchase agreement with a pension fund and an individual (the "Stalking Horse Bidder") that together owned 50% of the equity when the Debtors filed their petitions. Under the Plan, the purchase would generate $37 million in cash for the Lenders and the Lenders would additionally receive the Debtors' Philadelphia headquarters building valued at $29.5 million.

The Debtors filed a motion for approval of bid procedures which provided that any bid for the assets had to be in cash and thus precluded the Lenders from credit bidding for the assets.4 The Bankruptcy Court refused to approve the bid procedures, issuing an opinion which held that the procedures could not divest the Lenders from their right to credit bid. On appeal, the District Court reversed and the Third Circuit affirmed the District Court's opinion.

The Holding

The Third Circuit has held that the secured lenders rights are not violated by the proposal under a plan which provides for a sale free and clear of liens without the right to credit bid.

The Rationale

The court turned to the language of 1129(b) which allows a plan confirmed over the objection of secured creditors, which is referred to as "cramdown." The court described cramdown as a process in which a secured lender's claims are reduced to the current value of the collateral with the remainder of the debt being treated as an unsecured claim. There are three different methods for cramming down a secured lenders claim under 1129(b) which the court found were to be read disjunctively so that if a debtor met any one of the provisions the plan can be confirmed. First, under section 1129(b)(2)(A)(i), the creditor retains the lien securing its claim and deferred cash payments equal to the current value of the lender's secured interest in the collateral. Second, under section 1129(b)(2)(A)(ii), the debtor may sell property free and clear of liens, with liens attaching to proceeds, but the sale is subject to section 363(k). Section 363(k) gives the secured creditor the presumptive right to credit bid. Third, under 1129(b)(2)(A)(iii), the debtor may propose a plan which provides for the realization of the lender's claims by any means which provides the lender with the "indubitable equivalent" of its secured claim. The court stated that the "indubitable equivalent" is the value of a lender's secured interest in the collateral, which does not necessarily include or require credit bidding if there is another means for providing the lender the value of its claim. Despite the fact that 1129(b)(2)(A)(ii) addresses sales free and clear of claims subject to credit bidding, the Court held that a sale free and clear of liens could also be proposed under the more general "provision of 1129(b)(2)(A)(iii) and that the sale did not necessarily have to include the right to credit bid for the lender to receive the "indubitable equivalent."

Importantly, the court noted that it has not yet been called upon to determine whether the "indubitable equivalent" would be satisfied by the sale that was proposed in this case since the auction had not yet occurred, but was determining only whether the section of the statute could allow a sale of the assets free and clear of liens without the right to credit bid.


The court's decision provides a tool for debtors and a warning to secured lenders and debt purchasers of the risks associated with a bankruptcy case.