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The Need for More Bankruptcy Knowledge on the Circuit Courts

posted by Stephen Lubben

So today I take up Adam's invitation and talk a bit about the 3d Circuit's recent opinion in Philadelphia Newspapers. I previously had posted suggesting it was a good thing that the 3d Circuit was getting involved, because the District Court clearly didn't understand the Bankruptcy Code. Turns out at least two members of 3d Circuit don't either, although I'll concede that they might have been mislead by some loose drafting in the Code.

Why do I think they don't understand the Bankruptcy Code? Because they fall into the same bizarreness that the District court did:

We are asked here not to determine whether the “indubitable equivalent” would necessarily be satisfied by the sale; rather, we are asked to interpret the requirements of § 1129(b)(2)(A) as a matter of law. This distinction is critical . . . We approve the proposed bid procedures with full confidence that such analysis will be carefully and thoroughly conducted by the Bankruptcy Court during plan confirmation, when the appropriate information is available. (Page 32).

First, how can you have a sale "under a plan" if you don't have a confirmed plan yet -- to my mind any pre-confirmation sale should be under §363, which obviously must include credit bidding under §363(k).  Second, the court's approach sets up the obvious possibility that the sale might happen, and then the bankruptcy court will rule that the plan can't be confirmed. Then what happens? I think this further suggests that all the confirmation requirements are to be applied at once, and not piecemeal as in the 3d Circuit's opinion.

More generally, the 3d Circuit seems not to understand the point of sections 363(k) and 1111(b). Both protect secured creditors against judicial valuation errors and collusive sales by requiring a sale for at least the amount of the secured debt -- in 363(k) by allowing credit bidding, and in 1111(b) by allowing the creditors to resist lien stripping under §506. How can a sale ever provide the "indubitable equivalent" of the secured creditors' claim if it strips off this basic protection?

It would have been helpful if the Code expressly referenced section 1129(b)(2)(A)(ii) in 1111(b), but I think the structure is reasonably plain, if one does not get too hung up on reading 1129(b)(2)(A)(iii) in isolation.

Here's hoping for en banc review.

UPDATE:  The request has been made.


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"How can a sale ever provide the 'indubitable equivalent' of the secured creditors' claim if it strips off this basic protection?"

Maybe it can't. But, I don't think the court was relying on the ability of a sale to satisfy the indubitable equivalent standard. Instead, the court suggests that a sale pursuant to a plan is different than a 363 sale because the bankruptcy court can evaluate the overall treatment of the secured creditor's claim. In other words, a secured creditor might be harmed by the sale of his collateral without the ability to credit bid, but a plan could make up for it with some very valuable/favorable replacement consideration. Unfortunately (because it’s a bad result from a normative perspective), I think such analysis makes sense given the way the Code is actually written.

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