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Son of Pine Gate

posted by Stephen Lubben

As Credit Slips readers may know, a group of key Philadelphia newspapers are currently in chapter 11. The debtor that owns the papers owes its secured lenders north of $290 million. It wants to sell itself under a plan to a group of buyers that include some insiders. The deal will net the lenders $36 million. You'll be shocked to learn the lenders are not fond of the proposed plan.

But when the debtor sought approval of bidding procedures that denied the lenders a right to credit bid under §363(k) or exercise their right to an "1111(b) election," under the theory that the debtor's proposed plan was providing the lenders with the "indubitable equivalent" of their claims under §1129(b)(2)(A)(iii) the bankruptcy court said "not so fast." Among other things, that court said that the "indubitable equivalent" bit of 1129(b)(2)(A) could not be used to rather obviously avoid the more specific provisions of 1129(b)(2)(A).

But the debtor appealed to the district court, whose 57 page opinion was issued a week ago.  After a discussion about whether the court had jurisdiction to hear the appeal, the opinion moves on to an extensive discussion of the "plain meaning" approach to statutory interpretation.  Those of you who have heard of the "plain meaning" rule can skip right to page 23 of the opinion, where the action starts.

In short, the district court rules that the only relevant statutory provision is §1129(b)(2)(A)(iii), and because each subpart of 1129(b)(2)(A) is separated by an "or," the plain reading of the statute must give each subpart independent significance.  That is, subpart (iii) is not limited by anything in subparts (i) and (ii), and a sale under subpart (iii) is not subject to the limitations in those other subparts.  That is, no credit bidding or 1111(b) elections need be provided in a sale under the "indubitable equivalent" prong.

I've been waiting for the same crowd that got all hot and bothered about GM and Chrysler to rear up, but it hasn't happened yet.  So I'll have to be outraged all by myself.

It seems clearly problematic to create an exception to what I have previously described as fundamental secured creditor protections in the Code:  the right to credit bid and the right to make an 1111(b) election are the primary protections that secured lenders have against "lowball" sales in a world where chapter 11 has become increasingly sale driven. It remains unclear to me how a sale that lacked these features could ever provide creditors with the "indubitable equivalent" of their claims.

Citing the 5th Circuit's recent Pacific Lumber opinion, the district court essentially says, don't worry, this will all work out fine so long as the debtor is valued properly. But isn't that the whole point? The district court's approach shifts the risk of an erroneous valuation onto the lenders.

And in doing so, the court seems to have created an obvious "best interests of the creditors" problem.  After all, a debtor can't cram down a dissenting creditor under §1129(b) unless it has complied with all parts of §1129(a), save for (a)(8). I don't see how the debtor can strip the lenders of their right to credit bid in the hypothetical chapter 7 case contemplated by section 1129(a)(7).

The district court responds that it is only considering bidding procedures at this point, and that confirmation issues will be addressed by the bankruptcy court at a future stage. But it seems distinctly odd that the bankruptcy court is being told to approve bidding procedures for an auction that may well be pointless. How can Congress have ever possibility intended to allow the debtor waste estate funds in this manner? With all due respect to the district court, it seems as though the court got a bit too focused on §1129(b)(2)(A), at the expense of that provision's place in the larger Bankruptcy Code.

The lenders have appealed to the 3d Circuit, although they only obtained a 7 day stay from the district court.  We can hope that this will be sorted by the Circuit before any lasting harm is done.

UPDATE:  The 3d Circuit is getting involved.


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In addition to your analysis, which I totally agree with,

The opinion seems very contradictory about finality - it justifies taking the appeal by explaining how it will help resolve the rest of the case and yet at the end says its ruling has nothing to do with the rest of the case.

I did not see a discussion of why or how the secured lenders were denied their 1111B election although the opinion says they were.

Finally, why can't the secured lenders just bid in cash, since the cash would go to them anyway?

The Philly Inquirer is reporting today that the debtor has agreed to defer the sale until the Third Circuit rules. Argument is apparently set for December 15.

The district court opinion is all over the map on its reasoning. I'm curious about the whole idea of deeming a sale to be pursuant to the plan when it was contemplated (see p. 55 of the opinion) that the auction would take place pre-confirmation. Doesn't that open the door for the Third Circuit to address this issue the same way they did with Section 1146 in the Hechinger case -- where they said, more or less, that if it happens before confirmation, it isn't pursuant to the plan, and saying it doesn't make it so. The result would be that you can't evade 363(k) before plan confirmation, but you can afterwards. Part of the argument would be that secured creditors are protected by their ability to contest confirmation.

The district court opinion misunderstands what a "credit bid" is. When a secured creditor bids at a sale, the creditor's bid is not classified differently from the offers made by other creditors. 363(k) says that a secured creditor may bid at a sale, and then, to the extent the bid is accepted, may set off the amount of the winning bid against the secured creditor's allowed claim. The reason for this rule is to avoid the absurdity of the secured creditor paying the debtor and then having the debtor pay the same amount right back to the secured creditor.

If a secured creditor is willing to bid more than any other prospective bidder, then the amount bid by the secured creditor, not the second-highest bid, is what establishes the "indubitable equivalent" value of the collateral, because the Bankruptcy Code does not treat the secured creditor's bid as second-class currency. Only after the bid is accepted does the question arise of what sort of currency may be used to satisfy the bid.

In other words, if a secured creditor is willing to bid more, but is prohibited from doing so, they cannot receive the "indubitable equivalent" of their claim.

Maybe I have to look at Pacific Lumber again, but I don't understand how (ii) (or (i) for that matter doesn't inform the "plain meaning" of (iii). I had always thought (iii) was a catch-all for such exotica as, e.g., dirt-for-debt. I don't see how you can do an end-run of (ii) by saying it's a sale, not under (ii) but under (iii). Perhaps I'm just thick, but it seems that even an ardent textualist should have trouble defending this stance.

To be totally clear, I'm no big fan of Pacific Lumber either.

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