03.30.2010
|
Updates
Analysis
In order to “cram down” a plan of reorganization over dissenting classes of creditors, the debtor must establish, among other things, that the plan is “fair and equitable.” With respect to a secured creditor, the plan meets this test if one of three requirements is met:
Option 1: the secured creditor retains its lien on the collateral, whether the collateral is retained by the debtor or sold, and receives certain minimum deferred cash payments;
Option 2: the collateral is sold free and clear of liens, with the liens attaching to the sale proceeds, and the secured lender has the opportunity to credit bid its claims at the sale; or
Option 3: the secured creditor receives the “indubitable equivalent” of its claims.[3]
In Philadelphia Newspapers, the plan proposed to sell secured lenders’ collateral free and clear of liens, which would seem to indicate the debtor had chosen Option 2 above. However, rather than providing the secured lenders with an opportunity to credit bid, the debtor requested an order precluding the secured lenders from doing so. The bankruptcy court refused to deny the secured lenders’ credit bid right. But the District Court reversed and the Third Circuit affirmed the reversal, thus allowing the debtor to go forward with its plan and subsequent sale without allowing any credit bidding.
The debtor’s position, which the Third Circuit found persuasive, was that it was not seeking confirmation of the plan under Option 2. Instead, it was proceeding under Option 3, which does not specifically require credit bidding but requires a finding that the secured creditors were receiving the “indubitable equivalent” of their secured claims. The Third Circuit agreed, reasoning that the three options were, indeed, alternatives. Even though a sale free and clear of liens was contemplated, it reasoned, the debtor was not compelled to comply with Option 2 and instead could provide the secured creditors with the “indubitable equivalent” of their secured claims, and cash in the full amount of the secured portion of their claims – as measured by the value reached in an auction – is the indubitable equivalent of the claim.
The Third Circuit followed the reasoning of In re Pacific Lumber Co.,[4] where the Fifth Circuit also refused to allow a secured lender to credit bid by applying the “indubitable equivalent” catch-all in the context of an asset sale. PALCO, however, was a messy case where the lender was afforded an opportunity to prepare its own plan. The facts were different,[5] and although the result raised some eyebrows, it was far less surprising. As Judge Ambro stated in his Philadelphia Newspapers dissent “few in the first 30 years of Bankruptcy Code jurisprudence” have interpreted the statutory language in the same manner as the majority in Philadelphia Newspapers.One rationale for credit bidding is that lenders will only credit bid up to the amount they believe they could receive from disposing of the collateral themselves. The Third Circuit’s opinion creates the opportunity for debtors to sell assets for less than the value secured lenders place on their collateral. In Philadelphia Newspapers, the “stalking horse” bid was approximately $43,000,000.[6] Whether or not that amount is adequate consideration for the debtor’s assets, the secured lenders will be forced either to sit and watch the auction without credit bidding their claims in which exceed $318,000,000 or to make a cash bid like cash in to all other bidders.
Now that Philadelphia Newspapers is the law within the Third Circuit, debtors may have yet another reason to file cases in Delaware. Until this issue is addressed in other jurisdictions, debtors likely will use Philadelphia Newspapers as negotiating leverage. Given the long history of credit bidding and the impact of this issue on secured creditors’ rights, it is likely there will be a split within the circuits on the issue, and it would not be surprising for the matter to ultimately be re resolved in the Supreme Court.
[1] 11 U.S.C. §§ 363(k), 1129(b)(2)(A)(ii).
[2] In re Philadelphia Newspapers LLC, 2010 WL 1006647 (3rd Cir., March 22, 2010).
[3] 11 U.S.C. § 1129(b)(2)(A).
[4] In re Pacific Lumber Co., 584 F.3d 229 (5th Cir. 2009).
[5] In Pacific Lumber, a creditor and competitor of the debtor proposed to pay cash and convert debt to equity in exchange for ownership of the assets. Under the plan, the objecting secured lender was to receive a cash payment equal to the court’s valuation of its collateral.
[6] The stalking horse bid also provides for the surrender of certain real property to the secured lenders subject to a two-year, rent-free lease to the purchaser.
