In the end, all of the maneuvering in the Philadelphia Newspapers chapter 11 case appears to have done nothing but leave behind some very bad case law and a great deal of future uncertainty. 

As previously described on this site, the Third Circuit Court of Appeals upheld the debtor’s efforts to deny the secured lenders the right to credit bid in connection with an auction held under a non-consensual plan of reorganization pursuant to Section 1129(b)(2)(A) of the Bankruptcy Code.  However, at the auction held last week, the secured lenders won anyway, with a cash bid of $138.9 million.  The money, of course, will go back directly into their own pockets, and they will take control of the assets.  

Although a good outcome for the secured lenders, in a significant sense the result was the worst possible outcome for bankruptcy practitioners who regularly appear in Delaware and elsewhere in the Third Circuit.  While the Philadelphia Newspapers chapter 11 case itself has been resolved, the decision of the Third Circuit left hanging a shoe that still needs to drop.  The Third Circuit, in ruling that a sale of assets pursuant to a non-consensual plan need not include a secured creditor’s right to credit bid under Section 1129(b)(2)(A)(ii), left open the the key question of whether such a sale ultimately could in fact satisfy the "indubitable equivalent" prong of Section 1129(b)(2)(A)(iii), and thus be confirmed over such a secured creditor’s objection. 

The secured lenders’ victory last week obviates the need for that crucial issue to be determined in the Philadelphia Newspapers chapter 11 case.  The inevitable result will inevitably be another case or cases in which the same strategy is devised as a means of exerting pressure on secured creditors.  However, it will not be until the auction in one of such cases is won by a party other than the secured creditors, for an amount less than the face amount of the debt, that we will know whether the results of such an auction can result in the realization by a secured creditor of the "indubitable equivalent" of its secured claim and thus permit a plan of reorganization to be confirmed without such creditor’s consent.  Until this question is resolved, a cloud of ambiguity will hang over contested chapter 11 cases in the Third Circuit.