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.

Judge Ambro, a former bankruptcy practitioner, issued a strong dissenting opinion and came to the conclusion that an asset sale in a cram-down plan of reorganization cannot be "free and clear" of liens unless secured creditors are permitted to credit bid at the sale.

The credit bid right is a valuable mechanism used to ensure that collateral, such as real estate, is not undervalued at auction, Ambro noted.

Precluding a lender from credit bidding its secured claim eliminates a significant participant from the auction process and limits the amount of control a lender will have over the disposition of its collateral. Before this decision, lenders entered into loan agreements believing they would have the right to credit bid their claim in both a foreclosure and a bankruptcy plan sale. This would ensure that their claim is either acceptably covered by the final purchase price or the lender will be able to take back the property from the borrower/debtor.

This decision introduces a new degree of unease into the real estate markets, and lenders may choose to respond to this pressure by either building the added risk into the pricing for debt facilities or possibly electing not to lend. The decision may also continue the trend of quick asset sales under Bankruptcy Code Section 363 not pursuant to a plan of reorganization in Chapter 11 cases. Sales in those instances explicitly protect the secured creditors' rights to credit bid.

The Philadelphia Newspapers decision may also cause debtors to choose to pursue confirmation of a plan that permits credit bidding only if they conclude that providing a right to credit bid would be more advantageous than denying such right. As the dissenting opinion points out, this appears to be in contradiction with a generally accepted principle that credit bidding is a form of protection for a secured creditor.

In the syndicated lending context, this decision appears to run counter to other recent decisions that affirmed the ability of "required lenders" to instruct administrative agents to credit bid, when permitted. In cases where the bidding procedures called only for cash bids, it is theoretically possible for the pre-petition lenders to advance the cash needed to bid, recognizing that the funds would ultimately be repaid to them after the sale closed. However, in larger syndicated deals, it is unlikely that all members of the lending syndicates will be able to advance the needed funds to bid at auction. It will be interesting to see if credit agreement language and structures are adopted to provide for non-pro rata advances to bid on behalf of all lenders, perhaps with preferential payment terms benefiting the lenders who actually advanced the funds. Only time will tell how the effects of this decision will ripple through the credit markets, or if the decision will be modified on rehearing, by appeal or otherwise.

GlobeSt.com News Hub is your link to relevant real estate and business stories from other local, regional and national publications.