A recent decision regarding a secured lender’s right to credit bid its debt in the Philadelphia Newspapers chapter 11 case has raised significant concern among financial institutions and investment funds. The U.S. Court of Appeals for the Third Circuit has agreed to hear arguments on an expedited basis in the lenders’ appeal from the decision by the U.S. District Court for the Eastern District of Pennsylvania that the debtors could proceed with an auction pursuant to a plan of reorganization at which the lenders would not be permitted to bid in the face amount of their prepetition loans. Because decisions of the Third Circuit are binding in the District of Delaware, where numerous large chapter 11 cases are filed, the court’s decision could have substantial far reaching effects.
The substantive questions at issue are important, to be sure. Outside of bankruptcy, the ability of a secured lender to exercise rights against its collateral is the essential protection for which it bargains at the time that it extends financial accommodations to a borrower. If the property cannot be sold for the full amount of the debt, the right to credit bid allows the lender – not the borrower or any other party – to make the basic business decision as to whether it wishes to accept a reduced cash value of the property, or to take ownership of the property in the hope that it will appreciate. The U.S. Bankruptcy Code recognizes this elemental protection of a lender’s security interest whenever property of the bankruptcy estate is sold outside of the ordinary course of business, under Section 363(k). Similarly, Section 1129(b)(2)(A)(ii), the “cramdown” provision, permits plan confirmation over a secured lender’s objection so long as the lender has the right to credit bid at a sale of the collateral, effectively providing it with the precise benefit for which it initially contracted. For these reasons, the Court of Appeals will most likely reverse the District Court decision.
What may be even more important, however, would be a strong repudiation by the Court of Appeals of the so-called “plain meaning” mode of statutory construction employed by the District Court. In reaching its conclusion that a secured lender could be denied the right to credit bid, the District Court ignored the clear interplay of three separate Bankruptcy Code sections that address the rights of secured creditors, unambiguous statements of intent in the legislative history, several judicial interpretations and the weight of treatise authority, in favor of what it viewed as the “plain meaning” of Section 1129(b)(2)(A). As stated, that provision permits approval of a plan over a secured lender’s objection so long as one of three criteria can be satisfied:
• The lender maintains its lien on the collateral and receives the present value of its claim;
• The collateral is sold and the lender has an opportunity to credit bid; or
• The lender in some other manner realizes the “indubitable equivalent” of its claim.
The District Court determined that the “plain meaning” of the use of the disjunctive “or” in Section 1129(b)(2)(A) would permit a debtor to sell property under a plan but deny the lenders the right to credit bid, so long as the lender could still in some way realize the “indubitable equivalent” of its claim.
Philadelphia Newspapers stands as a quintessential example of the anomalous results that can transpire from the “plain meaning” rule. Particularly with a comprehensive statutory scheme as deeply rooted in centuries of commercial law as the U.S. Bankruptcy Code, the ability to focus in on specific language in single provisions, without relation to the greater whole or long understood practice, leads to no end of vexatious litigation and creates uncertainties and ambiguities where none should exist. The Third Circuit Court of Appeals should use this decision as an opportunity to repudiate strongly this mode of statutory interpretation in bankruptcy cases.