As Credit Slips readers may know, a group of key Philadelphia newspapers are currently in chapter 11. The debtor that owns the papers owes its secured lenders north of $290 million. It wants to sell itself under a plan to a group of buyers that include some insiders. The deal will net the lenders $36 million. You'll be shocked to learn the lenders are not fond of the proposed plan.
But when the debtor sought approval of bidding procedures that denied the lenders a right to credit bid under §363(k) or exercise their right to an "1111(b) election," under the theory that the debtor's proposed plan was providing the lenders with the "indubitable equivalent" of their claims under §1129(b)(2)(A)(iii) the bankruptcy court said "not so fast." Among other things, that court said that the "indubitable equivalent" bit of 1129(b)(2)(A) could not be used to rather obviously avoid the more specific provisions of 1129(b)(2)(A).
But the debtor appealed to the district court, whose 57 page opinion was issued a week ago. After a discussion about whether the court had jurisdiction to hear the appeal, the opinion moves on to an extensive discussion of the "plain meaning" approach to statutory interpretation. Those of you who have heard of the "plain meaning" rule can skip right to page 23 of the opinion, where the action starts.
In short, the district court rules that the only relevant statutory provision is §1129(b)(2)(A)(iii), and because each subpart of 1129(b)(2)(A) is separated by an "or," the plain reading of the statute must give each subpart independent significance. That is, subpart (iii) is not limited by anything in subparts (i) and (ii), and a sale under subpart (iii) is not subject to the limitations in those other subparts. That is, no credit bidding or 1111(b) elections need be provided in a sale under the "indubitable equivalent" prong.
I've been waiting for the same crowd that got all hot and bothered about GM and Chrysler to rear up, but it hasn't happened yet. So I'll have to be outraged all by myself.
It seems clearly problematic to create an exception to what I have previously described as fundamental secured creditor protections in the Code: the right to credit bid and the right to make an 1111(b) election are the primary protections that secured lenders have against "lowball" sales in a world where chapter 11 has become increasingly sale driven. It remains unclear to me how a sale that lacked these features could ever provide creditors with the "indubitable equivalent" of their claims.
Citing the 5th Circuit's recent Pacific Lumber opinion, the district court essentially says, don't worry, this will all work out fine so long as the debtor is valued properly. But isn't that the whole point? The district court's approach shifts the risk of an erroneous valuation onto the lenders.
And in doing so, the court seems to have created an obvious "best interests of the creditors" problem. After all, a debtor can't cram down a dissenting creditor under §1129(b) unless it has complied with all parts of §1129(a), save for (a)(8). I don't see how the debtor can strip the lenders of their right to credit bid in the hypothetical chapter 7 case contemplated by section 1129(a)(7).
The district court responds that it is only considering bidding procedures at this point, and that confirmation issues will be addressed by the bankruptcy court at a future stage. But it seems distinctly odd that the bankruptcy court is being told to approve bidding procedures for an auction that may well be pointless. How can Congress have ever possibility intended to allow the debtor waste estate funds in this manner? With all due respect to the district court, it seems as though the court got a bit too focused on §1129(b)(2)(A), at the expense of that provision's place in the larger Bankruptcy Code.
The lenders have appealed to the 3d Circuit, although they only obtained a 7 day stay from the district court. We can hope that this will be sorted by the Circuit before any lasting harm is done.
UPDATE: The 3d Circuit is getting involved.