Cadwalader Restructuring Review, June 2010

Philly News: Third Circuit Upholds Bidding Procedures Denying Lenders Opportunity to Credit Bid

 By Douglas S. Mintz, Leslie Chervokas and Mark Arinci

The Third Circuit Court of Appeals recently affirmed the District Court's ruling in In re Philadelphia Newspapers, LLC. The Court allowed Philadelphia Newspapers, LLC to require all-cash bids for the asset sale under their proposed plan. This precluded secured creditors from credit bidding, as long as the plan provided those creditors with the "indubitable equivalent" of the value of their claims. In sanctioning a mechanism that would allow the Debtors to trump the Bankruptcy Code's credit bidding requirements, this decision may erode the ability of secured creditors to protect their collateral.

However, because the Third Circuit suggested that the failure to allow credit bidding may prevent the Debtors from providing the required "indubitable equivalent" and, in any case, does not preclude secured lenders from bidding cash at auction, the effect of this decision may be less far-reaching than originally feared by lenders and commentators.


The Debtors own and operate print and online publications including The Philadelphia Inquirer and The Philadelphia Daily News. In July 2006, the Debtors purchased Philadelphia Newspapers, LLC from The McClatchy Company, financing the deal with $295 million provided by a consortium of lenders. Less than three years later, in February 2009, the Debtors filed voluntary chapter 11 cases in the U.S. Bankruptcy Court for the Eastern District of Pennsylvania.

As of the petition date, the Debtors' prepetition secured lenders (the "Lenders") held claims exceeding $300 million. Pursuant to their plan of reorganization, the Debtors proposed to sell their assets at auction, free and clear of liens, and to provide to the Lenders a recovery valued (by the Debtors) at $66 million,

consisting of sale proceeds in the minimum amount of $30 million, and certain real estate.

In conjunction with the filing of their plan, the Debtors signed an asset purchase agreement with Philly Papers, LLC - an entity controlled by the Debtors' current and former management and equity holders - which would act as the stalking horse bidder.

On August 20, 2009, the Debtors filed a motion seeking Bankruptcy Court approval of their proposed procedures to govern selection of the winning bidder for the Debtors' assets (who would then purchase the Debtors' assets under a confirmed plan). These bidding procedures required all bids to be in cash, and prohibited the Lenders from credit bidding their secured claims to acquire their collateral.

The Lenders objected to the Debtors' bidding procedures, arguing that when read inconcert, sections 363(k), 1129, and 1111(b) of the Bankruptcy Code protect a secured creditor's interest in its collateral by granting the creditor the right to credit bid at a sale, whether it be a sale under section 363 of the

Bankruptcy Code or a sale pursuant to a confirmed chapter 11 plan. The Bankruptcy Court ruled in favor of the Lenders, holding that a secured creditor may, as a matter of right, submit a credit bid in a sale pursuant to a plan. [footnotes omitted]

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