Possible Ramifications of Barring Credit Bidding

In the recent Philadelphia Newspapers case, the Third Circuit Court of Appeals-which includes Delaware, a key bankruptcy venue-affirmed bidding procedures preventing the secured lenders in the case from credit bidding in an asset sale pursuant to a bankruptcy plan of reorganization.

Philadelphia Newspapers filed a Chapter 11 plan of reorganization where all of its assets would be sold free and clear ofliens at a public auction. The secured lenders objected, arguing that the procedures deprived them of their right to credit bid, or use debt to make an offer on the assets at auction. The Bankruptcy Court decision, agreeing with the lenders, was appealed to the District Court and then to the Third Circuit. The Appeals Court held that the Bankruptcy Code unambiguously permits a “debtor to proceed with any reorganization plan that provides secured lenders with the ‘indubitable equivalent’ of their secured interest in the assets and contains no statutory right to credit bidding.” The Third Circuit became the second Court of Appeals to reach this conclusion.