On March 22, 2010, the US Court of Appeals for the Third Circuit (Third Circuit) issued a decision in the case of In re Philadelphia Newspapers, LLC. The Third Circuit upheld the decision of the District Court for the Eastern District of Pennsylvania (District Court) that a plain reading of the Bankruptcy Code does not confer on a secured lender the right to credit bid its claims at a sale of its collateral conducted under a plan of reorganization (In re Philadelphia Newspapers, LLC et al., No. 09-4266 (3rd Cir., Mar. 22, 2010)).

The debtors in In re Philadelphia Newspapers filed for Chapter 11 bankruptcy protection in 2009. On August 20, 2009, the debtors submitted a proposed plan of reorganization (the Plan) to the Bankruptcy Court for the Eastern District of Pennsylvania (Bankruptcy Court) that included a public auction for the sale of substantially all of the debtors' assets. The proposed Plan used the "cramdown" provisions of section 1129(b) of the Bankruptcy Code to attempt confirmation of the Plan over the secured lenders' objections.

In connection with the proposed auction under the Plan, the debtors filed a motion with the Bankruptcy Court on August 28, 2009 seeking approval of certain bid procedures. The proposed bid procedures provided that because the auction was being conducted under a plan of reorganization (as opposed to under section 363 of the Bankruptcy Code, which expressly authorizes secured lenders to credit bid their debt), credit bids would not be permitted. The Bankruptcy Court issued an order refusing to bar the secured lenders from credit bidding. The Bankruptcy Court approved a revised set of bid procedures without the ban on credit bidding.

On November 10, 2009, the District Court reversed the Bankruptcy Court's decision, holding that the Bankruptcy Code provides no legal entitlement for secured lenders to credit bid their claims at an auction sale of their collateral under a plan of reorganization.

On appeal, the Third Circuit affirmed the District Court's decision. It explained that section 1129(b)(2)(A)(iii) of the Bankruptcy Code unambiguously permits a debtor to proceed with any plan that provides secured lenders with the "indubitable equivalent" of their secured interest in the assets and contains no statutory right to credit bidding.

For more information on this case, see In Dispute: Philadelphia Newspapers.