In a sharply divided decision producing three separate opinions, the Court of Appeals for the Third Circuit has joined the Fifth Circuit in holding that a secured creditor was not necessarily entitled to “bid in” its lien on collateral to be sold as part of a plan in a Chapter 11 case. In re Phila. Newspapers, LLC, ____ F.3d ____, Case No. 09-4266, 2010 U.S. App. LEXIS 5805 (3rd Cir. March 22, 2010); see also Bank of N.Y., Co. N.A. v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. 2009). The Third Circuit’s decision (as well as the Fifth’s) has come as an unpleasant surprise to both lenders and their counsel who have generally presumed that a secured creditor has an inviolate right, through credit bidding, to protect its interest in collateral from a sale for less than the lender is prepared to accept. The decision in Philadelphia Newspapers comes at an early stage in the reorganization process. Thus, it is still not entirely clear what will happen if the debtor attempts to confirm a plan incorporating the controversial sale. Nevertheless, the decision is likely to provide Chapter 11 debtors and trustees in certain cases with a new tool for negotiating with partially secured lenders.
Ironically, in another closely-watched opinion decided in 2008, the Bankruptcy Appellate Panel for the Ninth Circuit held that a Chapter 11 trustee could not sell property outside a plan free and clear of a partially secured creditor’s lien by merely paying the value of the collateral unless there was an unusual non-bankruptcy law procedure that permitted such lien stripping. Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25 (B.A.P. 9th Cir. 2008). Thus, the bid-in rights of a secured creditor may be significantly different depending on whether a bankruptcy sale is part of or outside of a plan.