Lenders Beware: Preservation of Credit Bid Rights Not Required Under Chapter 11 Plans

In the Jan. 18 issue of the New Jersey Law Journal , we discussed two court decisions that analyzed a secured creditor’s “right” to credit bid, and the interplay of that right when a secured creditor’s collateral is being sold under a Chapter 11 plan: (i) In re Pacific Lumber Co. , 584 F.3d 229, 242 (5th Cir. 2009); and (ii) In re Philadelphia Newspapers, LLC , et al., 418 B.R. 548, 573 (E.D. Pa. 2009). These significant and controversial decisions held that a debtor can preclude a secured creditor from credit bidding in a sale proposed under a Chapter 11 plan by alternatively satisfying the “indubitable equivalent” prong of Section 1129(b)(2)(A) of the United States Bankruptcy Code. On March 22, the U.S. Court of Appeals for the Third Circuit agreed. See In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010). Clarifying an issue that has been a subject of recent debate, the Third Circuit held that a plan may be “fair and equitable” to secured creditors under Section 1129(b)(2)(A) even though the secured creditors’ collateral is sold absent preservation of the credit bid right.

The implications of the Philadelphia Newspapers decision are considerable. Credit bidding allows a secured creditor to use the amount owed to it by the debtor as a bid in an auction sale of its collateral. To some, it is seen as an inherent benefit of secured lending and a presumptive protection commonly invoked by secured creditors to combat undervaluation. This was the policy goal articulated by the secured lenders in Philadelphia Newspapers , where the “stalking-horse bidder,” comprised largely of the debtors’ insiders, made a low purchase bid unlikely to be rivaled. Others view the credit bid right as a near veto power that has a chilling effect on competitive bidding. Despite policy concerns, the Third Circuit’s decision was strongly founded on the confines of statutory construction, noting that “[t]o the extent this holding permits a course of conduct not contemplated or not desirable under the Code . . . it is the sole province of Congress to amend a statute that carries out by its plain language an undesirable end.”