In re Philadelphia Newspapers, LLC, 2010 U.S. App. LEXIS 5805 (3d Cir. Mar. 22, 2010)

In re Philadelphia Newspapers, LLC, 2010 U.S. App. LEXIS 5805 (3d Cir. Mar. 22, 2010)

Authors from Cravath, Swaine & Moore consider the Third Circuit's decision in In re Philadelphia Newspapers. This decision, along with the decision in In re Pacific Lumber, marks a significant departure from long-held expectations of secured creditors and could endanger protections traditionally thought to be afforded under the Bankruptcy Code. Secured lenders are likely to use at least three tactics to mitigate the effects of the decision.

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The authors write: The United States Court of Appeals for the Third Circuit, in In re Philadelphia Newspapers, LLC, 2010 U.S. App. LEXIS 5805 (3d Cir. Mar. 22, 2010), ruled that a chapter 11 debtor may evade the secured lenders' protection of credit bidding at a sale of their collateral through a cramdown chapter 11 plan. The court permitted such a plan under section 1129(b)(2)(A)(iii) of the Bankruptcy Code, as long as the secured lenders receive the "indubitable equivalent" of their claims. The decision is particularly significant because it is from the court of appeals that sets precedent for bankruptcies in Delaware, a state in which many significant bankruptcy cases are filed.

The decision could substantially increase the risk to secured creditors of undervaluation of collateral in bankruptcy asset sales, reduce the amount of secured lenders recoveries and depress the trading value of distressed leveraged loans.

Background

Section 1129 of the Bankruptcy Code permits a debtor to confirm a chapter 11 plan by "cramming down" the plan over the objection of creditors if "the plan does not discriminate unfairly and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan." 11 U.S.C. § 1129(b)(1). For a cramdown of secured lenders to be fair and equitable, section 1129(b)(2)(A) requires that the plan provide (i) that the secured lenders retain their liens and receive deferred cash payments totaling at least to the value of the collateral securing their claims, (ii) for the sale, subject to the secured lenders' ability to credit bid, of the collateral free and clear of the secured lenders' liens, with such liens attaching to the proceeds of the sale, or (iii) that the secured lenders receive the "indubitable equivalent" of their claims. [footnote omitted]

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