The Philadelphia Newspapers, LLC Chapter 11
After defaulting on secured loans totaling approximately $300 million, Philadelphia Newspapers, LLC – then owner and operator of The Philadelphia Inquirer and The Philadelphia Daily News – and several of its affiliated entities filed for Chapter 11 relief. Dilworth Paxson was retained as co-lead counsel to represent the group of related debtors.
A Chapter 11 plan calling for an auction sale of the entities’ operating assets, free and clear of liens, using a stalking horse bidder, was proposed to establish the market value of the assets and to identify the highest or otherwise best bidder for the assets, who would then be approved upon confirmation of the Chapter 11 plan.
Dilworth attorneys filed a motion to establish bidding procedures that sought to preclude the secured lenders from “credit bidding” for the assets, thereby requiring all bidders to fund a purchase with cash. Dilworth attorneys argued that the lenders’ ability to credit bid did not exist because the sale was being conducted pursuant to a proposed Chapter 11 plan and section 1129(b)(2)(A)(iii) of the Bankruptcy Code. The Bankruptcy Court rejected this position and entered an order approving bidding procedures that would allow the lenders’ to credit bid. The debtors appealed the Bankruptcy Court’s decision, with Dilworth as lead counsel, and the District Court reversed, finding that the lenders did not have an absolute right to credit bid at an auction sale conducted pursuant to a plan. The lenders appealed this decision to the Third Circuit, which affirmed the District Court’s decision – meaning that any entity seeking to participate at the auction would have to put up cash. Dilworth argued the appeal in the Third Circuit. The Third Circuit determined that the, as a matter of law, a plan could be proposed to sell assets under section 1129(b)(2)(A)(iii), while denying secured lenders the opportunity to credit bid, so long as the debtors proved that the value obtained from the sale was the indubitable equivalent of the lenders’ claim in order to have the proposed plan confirmed. Prior to the Third Circuit’s decision, there were very few opinions that considered a secured creditor’s right to credit bid in an asset sale under a chapter 11 plan and, based on those that did, it was generally considered a non-controversial issue that credit bidding was required. The sale pursuant to the proposed Chapter 11 plan proceeded, with the lenders being required to bid in cash, and ultimately the Chapter 11 plan was confirmed.
The Courts of Appeal in the Fifth and Seventh Circuits subsequently rendered decisions addressing a secured creditor’s right to credit bid in Chapter 11 plan sales, with the Fifth Circuit aligning with the Third Circuit and the Seventh Circuit disagreeing. This lead to a split among the circuits as to which the United States Supreme Court granted a writ of certiorari, ultimately siding with the Seventh Circuit. The credit bidding strategy deployed in the Philadelphia Newspapers case generated much publicity and countless articles in professional journals. It had a profound impact on the outcome of that case, even though the United States Supreme Court later rejected the strategy in another case.