The Third Circuit Rules That a Secured Lender Does Not Have an Absolute Right to Credit Bid In a Plan Sale: Philadelphia Newspapers

January 1, 0001


On Monday, the Third Circuit Court of Appeals handed down its highly anticipated decision in the Philadelphia Newspapers ("Philly News") chapter 11 case.[1] In a 2-to-1 decision, with a strenuous dissent, the Court of Appeals held that a debtor may, in appropriate circumstances, prohibit a secured creditor from credit bidding[2] its debt when the debtor proposes to sell the lender’s collateral via a chapter 11 plan.

Credit bidding is frequently an important issue in chapter 11 cases, and the Philly News case has garnered substantial attention for its potential far-reaching implications. The Third Circuit’s decision establishes a new and powerful tool for a debtor to confirm a plan over the opposition of secured creditors. This is likely to be particularly troubling for secured creditors when the secured debt is held by a syndicate of lenders, as is true in most large chapter 11 cases. Credit agreements typically allow the agent to credit bid at the direction of requisite lenders.[3]

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[1] O’Melveny represents the Official Committee of Unsecured Creditors in Philly News.

[2] In credit bidding, a secured lender “bids” the secured debt it is owed at a foreclosure sale or at an auction. The theory is that the secured creditor is entitled to the proceeds anyway and it makes little sense for the secured creditor to advance cash that is immediately paid back to it.

[3] Whether a credit agreement or security agreement, in fact, authorizes the agent to credit bid at the direction of requisite lenders has been the topic of recent litigation. To date, two cases have held that the standard language in these agreements affords this authority to the agent. See, e.g., In re GWLS Holdings, Inc., 2009 Bankr. LEXIS 378 at *13 (Bankr. D. Del. Feb. 23, 2009); In re Metaldyne Corp., 409 B.R. 671 (Bankr. S.D.N.Y. 2009); affirmed on other grounds, 2009 U.S. Dist.LEXIS 120883 (S.D.N.Y. December 29, 2009).