My third post on the upcoming arguments in the RadLAX case (entries 1 and 2 here and here) will quickly scan the two leading--but conflicting--decisions of the Courts of Appeal on the question of whether a plan of reorganization may deprive a secured lender of its right to credit bid on the sale of the reorganizing debtor's assets.
The Third Circuit Court of Appeals decided the Philadelphia Newspapers bankruptcy case in 2010. The Chapter 11 filing came after negotiations broke down with the debtor's consortium of lenders, who had financed the purchase of the debtors in 2006 and who held first liens in substantially all of the debtor's property. The heart of the plan was to be an auction of the debtor's assets, the Philadelphia Inquirer and the Philadelphia Daily News. The critical fact about the bidding procedures proposed by the debtor was that they required all bids to be in cash, thus eliminating any right of the lenders to credit bid. Two members of the Third Circuit panel agreed with the debtor's approach: "or" means "or" and the "indubitable equivalent" of the value of the lender's collateral meant that credit bidding was not required; a cash auction would do. One judge dissented and argued that whatever indubitable equivalent means, it cannot simply trump the requirement of a credit bid when the plan of reorganization proposes a sale of the debtor's assets. (Go here if you want to review the three options provided by Bankruptcy Code section 1129(b)(2)(A). Or not.)
Then a year later the Seventh Circuit in RadLAX decided that the meaning of "or" in this section of the Bankruptcy Code isn't "plain" after all. The arguments from other sections of the Code and the history of credit bidding prior to the Code's adoption in 1978 would take us far afield. What really worried the court was the danger of an auction that, without bidding by the lenders, might sell the property for less than its value. Typically there will be relatively few active bidders given the substantial amounts required to bid in large Chapter 11 cases. And, with restrictions on lenders imposed since the financial crisis in 2008, even they might be priced out of bidding on deals they had financed only a few years earlier.
The split between the Third and Seventh Circuits primed the pump for the Supreme Court; which way should it go? Some thoughts over the next couple of days.
The Third Circuit Court of Appeals decided the Philadelphia Newspapers bankruptcy case in 2010. The Chapter 11 filing came after negotiations broke down with the debtor's consortium of lenders, who had financed the purchase of the debtors in 2006 and who held first liens in substantially all of the debtor's property. The heart of the plan was to be an auction of the debtor's assets, the Philadelphia Inquirer and the Philadelphia Daily News. The critical fact about the bidding procedures proposed by the debtor was that they required all bids to be in cash, thus eliminating any right of the lenders to credit bid. Two members of the Third Circuit panel agreed with the debtor's approach: "or" means "or" and the "indubitable equivalent" of the value of the lender's collateral meant that credit bidding was not required; a cash auction would do. One judge dissented and argued that whatever indubitable equivalent means, it cannot simply trump the requirement of a credit bid when the plan of reorganization proposes a sale of the debtor's assets. (Go here if you want to review the three options provided by Bankruptcy Code section 1129(b)(2)(A). Or not.)
Then a year later the Seventh Circuit in RadLAX decided that the meaning of "or" in this section of the Bankruptcy Code isn't "plain" after all. The arguments from other sections of the Code and the history of credit bidding prior to the Code's adoption in 1978 would take us far afield. What really worried the court was the danger of an auction that, without bidding by the lenders, might sell the property for less than its value. Typically there will be relatively few active bidders given the substantial amounts required to bid in large Chapter 11 cases. And, with restrictions on lenders imposed since the financial crisis in 2008, even they might be priced out of bidding on deals they had financed only a few years earlier.
The split between the Third and Seventh Circuits primed the pump for the Supreme Court; which way should it go? Some thoughts over the next couple of days.
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