Merriam Mikhail, Extra! Extra!: Philadelphia Newspapers Jeopardizes Credit Bidding

• Citation: Vol. 28 No. 1
• Publication year: 2011

EXTRA! EXTRA!: PHILADELPHIA NEWSPAPERS

JEOPARDIZES CREDIT BIDDING

INTRODUCTION

Secured creditors have generally enjoyed the opportunity to credit bid at the public auction of their collateral during bankruptcy proceedings. Recently, however, the Third and Fifth Circuits have authorized unprecedented cramdown plans that allow sales of collateral free and clear of liens to be

authorized under § 1129(b)(2)(A)(iii) of the Bankruptcy Code.1 Consequently,

they have permitted secured creditors’ once powerful credit bidding rights, granted in § 1129(b)(2)(A)(ii), to be circumvented.

1. Facts of In re Philadelphia Newspapers

   
   

   Philadelphia Newspapers, LLC, the former owner and operator of several Philadelphia print and online publications, including the Philadelphia Inquirer, Philadelphia Daily News, and Philly.com, filed a voluntary chapter 11 petition in February 2009.2 At the time of filing, the debtor owed its senior lenders

   $295 million, a value that increased to $318 million during the course of the bankruptcy proceedings.3 The senior lenders held first priority liens on substantially all of the debtor’s real and personal property.4 In June 2009, PMH Holdings, LLC, Philadelphia Newspapers, LLC’s parent company, also filed a voluntary chapter 11 petition.5

   
   

   Philadelphia Newspapers, LLC and PMH Holdings, LLC proposed a plan of reorganization in August 2009 that contemplated selling substantially all of their assets free and clear of all liens and surrendering their headquarters building.6 The debtors also entered into an asset purchase agreement with a

   stalking horse bidder, composed of some of the debtors’ prepetition equity

   
   

   1 11 U.S.C. § 1129(B)(2)(A)(iii) (2006).

   1. Voluntary Petition at 1, In re Phila. Newspapers, LLC, No. 09-11204SR, 2009 WL 3242292 (Bankr.

      E.D. Pa. Feb. 22, 2009); see also In re Phila. Newspapers, LLC, 599 F.3d 298, 301 n.1 (3d Cir. 2010), aff’g

      418 B.R. 548 (E.D. Pa. 2009).

   2. In re Phila. Newspapers, 599 F.3d at 301.

   3. Id.

   4. Id.

      6 Id. at 301–02.

      
      

      holders.7 Under the debtors’ proposed plan, following a successful stalking horse bid, the senior lenders would only receive approximately $36 million of their $295 million claim.8 Surprisingly, as the Bankruptcy Court for the Eastern District of Pennsylvania noted, these facts and circumstances are

      mundane:

      
      

      To this extent the circumstances presented are unremarkable. Indeed, it has become increasingly common for [c]hapter 11 debtors to proceed in precisely the fashion the instant Debtors do. Often such proceedings are consensual. The present cases are distinguishable, however, in the degree of animosity that exists between the Debtors and their creditors. It is, regrettably, quite

      high.9

      
      

      Pursuant to their plan, the debtors filed a motion for approval of their proposed bid procedures10 that would preclude secured lenders from “credit bidding”11 at the public auction. It did this by requiring all bidders to fund their purchases with cash.12 To justify this result, the debtors suggested a reading of

      the Bankruptcy Code that circumvented the secured creditors’ express right to credit bid articulated in § 1129(b)(2)(A)(ii). The debtors proposed that the three provisions in § 1129(b)(2)(A) should be interpreted as disjunctive alternatives. Accordingly, the sale of the secured creditors’ collateral could be

      
      

      7 Id. at 301. A “stalking horse bidder” is “a prospective buyer who commits to an initial [minimum] bid” at a chapter 11 asset sale. 3 COLLIER ON BANKRUPTCY ¶ 363.02[7] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2011). The stalking horse bidder for this public auction included insiders who owned a substantial share in PMH Holdings, LLC. See In re Phila. Newspapers, 599 F.3d at 301.

      8 In re Phila. Newspapers, LLC, 418 B.R. 548, 554 (E.D. Pa. 2009), rev’g No. 09-11204SR, 2009 WL

      3242292 (Bankr. E.D. Pa. Oct. 8, 2009), aff’d, 599 F.3d 298.

      9 In re Phila. Newspapers, 2009 WL 3242292, at *1, rev’d, 418 B.R. 548, aff’d, 599 F.3d 298.

      1. See Debtors’ Motion for an Order: (A) Approving Procedures for the Sale of Certain of the Debtors’ Assets; (B) Scheduling an Auction; (C) Approving Assumption and Assignment Procedures; (D) Approving Form of Notice; and (E) Granting Related Relief at 9, 15–18, In re Phila. Newspapers, LLC, No. 09-11204SR, 2009 WL 3242292 (Bankr. E.D. Pa. Aug. 28, 2009) [hereinafter Debtors’ Motion for an Order Approving Sale Procedures].

      2. In re Phila. Newspapers, 599 F.3d at 302 n.4 (“A credit bid allows a secured lender to bid its debt in

         lieu of cash.”); see also infra pp. 15–16.

      3. In re Phila. Newspapers, 599 F.3d at 302. The debtors’ motion expressly sought to prohibit credit bidding:

         
         

         Credit Bid: The Plan Sale is being conducted under [§§] 1123(a) and (b) and 1129 of the Bankruptcy Code, and not [§] 363 of the Bankruptcy Code. As such, no holder of a lien on any assets of the Debtors shall be permitted to credit bid pursuant to [§] 363(k) of the Bankruptcy Code.

         Debtors’ Motion for an Order Approving Sale Procedures, supra note 10, at 9; see also In re Phila. Newspapers, 2009 WL 3242292, at *2.

         crammed down under § 1129(b)(2)(A)(iii) as an alternative to

         § 1129(b)(2)(A)(ii), as long as the § 1129(b)(2)(A)(iii) requirement that creditors receive the “indubitable equivalent” of the value of their collateral was satisfied.13

         
         

         The secured lenders objected to the proposed bid procedures, arguing that

         § 1129(b)(2)(A) must be interpreted to protect secured creditors’ absolute right to credit bid.14 The bankruptcy court agreed with the secured lenders and denied the debtors’ motion for approval of the bid procedures.15 The bankruptcy court “reasoned that while the Plan proceeded under the ‘indubitable equivalent’ prong of § 1129(b)(2)(A)(iii), it was structured as a

         § 1129(b)(2)(A)(ii) plan sale in every respect other than credit bidding,” and the court “determined that any sale of the Debtors’ assets required that a secured lender be able to participate in a sale by credit bidding its debt.”16 Thus, under the bankruptcy court’s opinion, the lenders would be permitted to

         credit bid up to $318 million at the auction sale of their collateral, receiving more value than they would otherwise under the debtors’ proposed bidding procedures.

         
         

         On appeal, the District Court for the Eastern District of Pennsylvania reversed the bankruptcy court’s ruling, thereby precluding the secured lenders

         
         

         
         

         Id.

      4. In re Phila. Newspapers, 2009 WL 3242292, at *3. As the bankruptcy court summarized,

         
         

         The Debtors maintain that the language of the Bankruptcy Code sections they point to is clear, and that the same unambiguously confirms . . . that even if § 363 applies in the instance where cramdown confirmation of a reorganization plan is sought under 11 U.S.C. § 1129(b)(2)(A)(ii), it is still inapplicable to the instant facts, because the Debtors do not intend to request confirmation of their Plan under § 1129(b)(2)(A)(ii), but instead intend to demonstrate that their plan provides the Lenders with the “indubitable equivalent” of their claims, thus independently entitling their Plan to confirmation under § 1129(b)(2)(A)(iii).

         
         

      5. Objection of the Steering Group of Prepetition Secured Lenders and Citizens Bank of Pennsylvania, as

         Agent for the Prepetition Secured Lenders, to Debtors’ Motion for an Order: (A) Approving Procedures for the Sale of Certain of the Debtors’ Assets; (B) Scheduling an Auction; (C) Approving Assumption and Assignment Procedures; (D) Approving Form of Notice; and (E) Granting Related Relief at 10, In re Phila. Newspapers, LLC, No. 09-11204SR, 2009 WL 3242292 (Bankr. E.D. Pa. Sept. 18, 2009); see also In re Phila. Newspapers, 2009 WL 3242292, at *4; Joinder of the Official Committee of Unsecured Creditors in the Objection of the Steering Group of Prepetition Secured Lenders and Citizens Bank of Pennsylvania, as Agent for the Prepetition Secured Lenders, to Debtors’ Motion for an Order: (A) Approving Procedures for the Sale of Certain of the Debtors’ Assets; (B) Scheduling an Auction; (C) Approving Assumption and Assignment Procedures; (D) Approving Form of Notice; and (E) Granting Related Relief at 1–2, In re Phila. Newspapers, LLC, No. 09-11204SR, 2009 WL 3242292 (Bankr. E.D. Pa. Sept. 29, 2009).

      6. In re Phila. Newspapers, 2009 WL 3242292, at *11.

      7. In re Phila. Newspapers, 599 F.3d at 302.

         from credit bidding.17 The district court found that the plain meaning of the statute “provides three distinct alternative arrangements for satisfaction of plan confirmation in the context of cramdown of a dissenting class of secured creditors and that the Debtors may select any of these to proceed to confirmation.”18 The Third Circuit later affirmed the district court’s reversal of the bankruptcy court,19 but not without an extensive and spirited dissent by Judge Ambro.20 Other critics of the majority’s decision were quick to express their surprise and disapproval. Ralph Brubaker, a noted bankruptcy scholar, disparaged the “surprise ‘discovery’ of this unprecedented cramdown power over 30 years after enactment of § 1129(b).”21 He criticized the district court’s “plain meaning” theory and commented that the majority’s reading of the statute “had evidently escaped everyone for over 30 years.”22

         
         

         Because of the Third Circuit’s unprecedented decision in In re Philadelphia Newspapers, the secured creditors resorted to an alternative solution. Having been denied the opportunity to credit bid,23 the secured lenders faced the plausible outcome that their collateral might only receive the low stalking horse bid.24 Fearing excessive undervaluation,25 the senior lenders submitted a cash bid and prevailed at the public auction after bidding against a local philanthropist.26 Their winning cash bid was $105 million, almost $70 million higher than the original stalking horse bid.27

         
         

      8. In re Phila. Newspapers, LLC, 418 B.R. 548, 552 (E.D. Pa. 2009), aff’d, 599 F.3d 298.

      9. Id. at 567.

      10. In re Phila. Newspapers, 599 F.3d at 318.

      11. Id. at 319 (Ambro, J., dissenting).

      12. Ralph Brubaker, Cramdown of an Undersecured Creditor Through Sale of the Creditor’s Collateral: Herein of...