Bankruptcy Plan Confirmation

by Lesley Anne Hawes January/February 2011
The Third Circuit’s decision in the case In re Philadelphia Newspapers concurs with a similar holding in the case In re Pacific Lumber Co. in which the Fifth Circuit upheld an order confirming a plan proposing to transfer collateral securing claims of the secured lenders free and clear of liens, paying the secured lenders in cash the value of their undersecured claims, and precluding the lenders from credit bidding.

The Court of Appeals for the Third Circuit has joined the Court of Appeals for the Fifth Circuit in limiting a secured creditor’s right to credit bid when its collateral is sold under a Chapter 11 plan of reorganization. The Third Circuit’s decision in the case In re Philadelphia Newspapers, LLC, 599 F. 3d 298 (3rd Cir. 2010) concurs with a similar holding in Bank of New York Trust Co. v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F. 3d 229 (5th Cir. 2009) in which the Fifth Circuit upheld an order confirming a plan that proposed to transfer collateral securing claims of the secured lenders free and clear of liens, paid the secured lenders in cash the value of their undersecured claims and precluded the lenders from credit bidding. The decisions rely on the “catch all” cramdown provision of §1129(b)(2)(A), which provides that the court may confirm a plan over the objection of a secured creditor if the plan provides for the secured creditor to receive the “indubitable equivalent” of its secured claim. See 11 USC §1129(b)(2)(A)(iii). The effect is to limit a powerful protection for the secured creditors in plan confirmation battles in those circuits that follow these decisions.

Facts of the Philadelphia Newspapers Case
The Philadelphia Newspapers decision involved multiple related debtors, which owned and operated two Philadelphia newspapers. The debtors had outstanding secured debt in excess of $300 million — 
which was in default — owed to a consortium of lenders. The secured lenders held liens on substantially all real and personal property of the debtors. The debtors proposed a joint plan of reorganization that provided for a sale of the debtors’ assets free and clear of liens. Based on the sale of the debtors’ assets to a third party under a “stalking-horse” offer, the plan proposed that the secured lenders be paid approximately $37 million in cash, that the debtors’ Philadelphia headquarters facility, valued at approximately $29.5 million, be turned over to the lenders subject to two years of rent-free occupancy for the new buyer and that the lenders receive any additional cash generated at the public sale of the debtors’ assets if a higher bid was received. The plan further provided that the secured lenders could not credit bid their debt at the public sale under 11 USC §363(k) and 11 USC §1129(b)(2)(A)(ii).

The debtors sought approval of the bid procedures for the public sale under the proposed plan, and the lenders objected. The bankruptcy court granted the motion approving the bid procedures with a modification allowing the lenders to credit bid, and the debtors appealed the bid procedures order to the District Court. The District Court reversed the bankruptcy court’s decision, holding that the debtors’ proposed bid procedures should have been approved as the procedures could validly preclude the lenders from credit bidding consistent with the plan confirmation provisions of the Bankruptcy Code, including the cramdown provisions of §1129(b)(2)(A). The lenders appealed the District Court’s ruling to the Third Circuit.

Statutory Framework for the Issue
Section 1129 of the Bankruptcy Code addresses the standards for confirmation of a Chapter 11 plan of reorganization. Section 1129(b) provides that if all provisions of §1129(a) required for confirmation are met except for the provision requiring all classes of claims and interests to vote in favor of the plan, then the court can confirm a plan by “cramdown” over the objection of a dissenting class if the plan provides treatment of the dissenting class consistent with the provisions of §1129(b).

Section 1129(b)(2)(A) sets forth the requirements for confirmation of a plan over the dissenting vote of a class of secured claims. The statute permits a plan to be confirmed over the objection of a class of secured creditors if: 1.) the plan provides for secured creditors to retain their liens on the collateral securing their claims and receive payments under the plan equal to the present value of the secured creditors’ allowed secured claims (§1129(b)(2)(A)(i)), 2.) the plan provides for the sale of the collateral securing the secured creditors’ claims free and clear of liens, subject to the secured creditors’ credit bidding rights under §363(k), with the secured creditors’ liens to attach to the proceeds of sale and be paid consistent with the other provisions of §1129(b)(2)(A) (§1129(b)(2)(A)(ii)) “or” 3.) the plan provides for the “realization by [the secured creditors] of the indubitable equivalent of such claims” (§1129(b)(2)(A)(iii)).

The issue presented for determination by the court in the Philadelphia Newspapers case was whether a plan that provides for the sale of a secured creditor’s collateral could only be confirmed if it complied with the provisions of §1129(b)(2)(A)(ii) by allowing the secured creditor to credit bid its debt at the sale pursuant to §363(k). The secured creditors objected to the proposed sale and bidding procedures in that case on the ground that the procedures, which denied the lenders the right to credit bid, violated §1129(b)(2)(A)(ii) and were therefore could not be approved as a matter of law. The lenders asserted that the catch all “indubitable equivalent” provision of §1129(b)(2)(A)(iii) could not be used to override the provisions of §1129(b)(2)(A)(ii) when the collateral is to be sold under a plan.

Third Circuit Finds Lenders Can Be Denied Right to Credit Bid
In a split decision, which includes a vigorous dissent, the majority of the Third Circuit rejected the lenders’ position and held that the proposed bidding procedures were not improper as a matter of law based on their failure to allow the lenders to credit bid under §363(k) and §1129(b)(2)(A)(2)(ii). The court ruled that the statute unambiguously provided three discrete alternative forms of treatment of a secured creditor’s claim under a non-consensual plan, satisfaction of any one of which is sufficient to allow the plan to be confirmed, so that the plan could be confirmed if it provided the lenders the “indubitable equivalent” of their claim (§1129(b)(2)(A)(iii)) even if it did not meet the provisions of the other alternative treatment for a sale free and clear of liens under §1129(b)(2)(A)(ii). The court relied on the plain meaning of the term “or” as being disjunctive as well as the Bankruptcy Code definition of “or” and case law could conclude that compliance with any one alternative provision met the standard of the statute.

The lenders argued an alternative statutory construction principle, asserting that the more specific alternative addressing a sale of collateral should govern over a more general provision when the plan provides for a sale of assets. The lenders argued that the confirmation provisions should be interpreted to mean that if the plan proposes a sale of assets, that the sale must comply with the sale free and clear of liens/credit bidding provisions of §1129(b)(2)(A)(ii) since the statute contains specific requirements directed at sales of a secured creditor’s collateral under the plan. Further, the lenders argued that the fact that §1129(b)(2)(A) includes express requirements pertaining to a sale of a secured party’s collateral under the plan rendered the statute ambiguous, warranting an examination of congressional intent and an analysis of the Bankruptcy Code scheme to determine the meaning of the cramdown provision, rather than limiting the interpretation of the statute solely to its language.

The majority rejected that contention, finding that the statute clearly specifies three distinct alternative treatments for secured claims under a plan and that the “indubitable equivalent” provisions unambiguously fail to include any credit bidding requirement. Instead, the Third Circuit asserted that the lenders’ position would result in the “indubitable equivalent” standard being modified by the sale provisions of §1129(b)(2)(A)(ii), which would violate the plain language of the statute that makes the three alternatives distinct and independent. The majority concluded that the statute must be applied according to its plain meaning and that resort to any legislative intent or analysis of the broader scheme of the Bankruptcy Code was inappropriate given the clear language of the statute.

The Legacy of Philadelphia Newspapers
for Secured Creditors
The right of an undersecured creditor to credit bid its debt to protect against its collateral being sold at an unfairly low price, or a price that the secured creditor at least believes is too low, is one of the bundle of rights generally recognized as inherent in the secured creditor’s position as a lienholder. The Bankruptcy Code recognizes that right by explicitly providing that a secured creditor may credit bid at a sale of its collateral by the debtor under §363(k) and by incorporating that right into the plan confirmation provisions of §1129(b)(2)(A)(ii). On the other hand, the Third Circuit properly noted that even the provisions of §363(k) state that the lienholder may credit bid at the sale “unless the court for cause orders otherwise.” Thus, even under the sale provisions of the plan confirmation statute asserted by the lenders to be controlling in Philadelphia Newspapers, the bankruptcy court had the authority to “order otherwise” and deny the lenders the right to credit bid under the plan if “cause” existed to warrant such denial.

The decision in Philadelphia Newspapers does not prevent secured creditors from challenging a plan that fails to permit the creditor to credit bid its debt if its collateral is to be sold under the plan. The Third Circuit implicitly recognized the injury that could result to secured lenders if they are denied the right to credit bid and the significance that the right to credit bid represents when it expressly addressed the limits of its ruling in the Philadelphia Newspapers case. The court noted at the conclusion of the opinion that its holding “only precludes a lender from asserting that it has an absolute right to credit bid when its collateral is being sold” under a plan and recognized, as did the Fifth Circuit in the Pacific Lumber decision that “credit bidding may be required” in some circumstances. A secured creditor can still argue that under the specific plan and circumstances of a particular Chapter 11 case, the failure to allow the secured creditor to credit bid may mean that the plan fails to provide the secured creditor with the “indubitable equivalent” of its claim as required under §1129(b)(2)(A)(iii).

However, the secured creditor will be forced to marshal factual and evidentiary proof to support the contention that credit bidding must be allowed since credit bidding under these circuit court decisions is not considered a legal requirement for a sale under a plan. In effect, the decision shifts the burden to the secured creditor to demonstrate why it should be allowed to credit bid if the debtor seeks to deny the creditor that right, rather than forcing the debtor to develop the facts and evidence to demonstrate under the standard of §363(k) that “cause” exists to prevent the lienholder from credit bidding.


Lesley Anne HawesLesley Anne Hawes, a partner in the Los Angeles office of McKenna Long & Aldridge, LLP, specializes in the representation of secured and unsecured creditors in bankruptcy proceedings and in the representation of federal equity receivers appointed in civil enforcement actions by federal agencies such as the Federal Trade Commission and Securities and Exchange Commission. Hawes is a regular contributor to the Monitor and other legal journals, and she has lectured for the National Business Institute and other organizations. She graduated Order of the Coif from University of Southern California law school and earned her undergraduate degree in political science magna cum laude from University of Southern California.

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