Bankruptcy Plan Sales: Secured Lenders Do Not Have an Absolute Right to Credit Bid

In a decision that could have wide-ranging consequences for secured lenders and the distressed debt market, a divided U.S. Court of Appeals for the Third Circuit has held that secured creditors do not have an absolute right to credit bid the value of their loans in Chapter 11 plan-based sales of assets. The case, In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. Mar. 22, 2010), follows on the heels of a similarly decided ruling by the Fifth Circuit in Bank of New York Trust Co., NA v. Official Unsecured Creditors' Committee (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. 2009). Both courts held that notwithstanding Bankruptcy Code ' 1129(b)(2)(A)(ii), which permits secured creditors the right to credit bid under a plan-based sale, a plan may alternatively permit the sale of the creditor's collateral under subsection 1129(b)(2)(A)(iii) without credit bidding protection if the secured creditor receives the “indubitable equivalent” of its claim under the plan. These are the only published circuit court decisions addressing this issue, and thus, absent a contrary ruling by the U.S. Supreme Court or revision of the Bankruptcy Code by Congress, these cases may have an impact not only within the Third and Fifth Circuits but also throughout the United States. In fact, anecdotal evidence suggests that secured creditors are already seeking entry of cash collateral orders that require any plan-based sale to be conducted under subsection 1129(b)(2)(A)(ii) rather than subsection (iii). The extent to which such orders are enforceable and curative of the secured creditors' concerns remains to be seen.