4. Section 363 Sales: An Overview
■ The sale of assets in a bankruptcy under the 11 U.S.C. § 363
sale provisions has become an often beneficial and desirable
means for the realization of value of property in situations
involving a distressed owner, where asserted liens and
interests in the property would cause an elongated sale
process outside of bankruptcy, or where the purchaser seeks
protection from the potential claims of creditors of the
property owner. Section 363 has been used recently in some
of the largest bankruptcies ever (GM, Chrysler), transforming
bankruptcy as a corporate tool and leading some
commentators to note that Section 363 sales were the “new
M&A” during the recent credit crisis.
5. Section 363 Sales: An Overview
■ Parties Entitled to Sell Property Under Section 363
» Property may be sold under Section 363 only by a trustee, a Chapter 11
debtor-in-possession (see 11 U.S.C. §1107(a)), a Chapter 12 debtor (see
11 U.S.C. §1203) or a Chapter 13 debtor (see 11 U.S.C. § 1303). Creditors
and parties in interest do not have the right or power to obtain
authorization for a sale under Section 363.
» Property of a bankruptcy estate also may be sold under a confirmed
Chapter 11 plan (see 11 U.S.C. § 1123(b)(4)), with or without a motion
under Section 363.
□ A plan may be filed by a creditor or other party in interest (see 11
U.S.C. § 1121(c)), subject to certain limitations regarding the right of
a debtor-in-possession to a period of exclusivity for filing a plan.
Accordingly, a creditor or party in interest seeking to compel a sale
of property of the estate may attempt to do so by and through a
creditor plan under Chapter 11. This approach is not commonly
used, as it is usually complicated and often expensive; however, it is
a possibility in some cases.
6. Section 363 Sales: An Overview
■ Authorization for Sales in the Ordinary Course of Business
» Section 363(c) authorizes the trustee, debtor-in-possession or Chapter 13
debtor to sell property in the ordinary course of business, without prior
court authorization, provided that the continued operation of the
business is authorized (in Chapter 7 cases, such authorization is required)
and the court has not ordered otherwise.
» “Ordinary course of business” is not defined in the Bankruptcy Code. It is
to be determined on a case by case basis. When the trustee or debtor-
in-possession is uncertain whether the proposed sale is in the ordinary
course of business, generally the trustee or debtor-in-possession should
seek court authorization. Lender is owed $10 million and believes its
collateral is worth $5 million. At an auction of the collateral the highest
cash bid is $7 million.
» Many courts apply a joint test to determine whether a proposed sale is in
the ordinary course of business: (1) the horizontal dimension test
(reviewing whether the transaction is one that would normally be entered
by similar businesses); and (2) the vertical dimension test, a/k/a the
reasonable expectations test (whether the transaction is one that
creditors would reasonably expect of the debtor). See 3 Collier on
Bankruptcy ¶ 363.03[1] (16th ed. 7/2010).
7. Section 363 Sales: An Overview
■ Authorization for Sales in the Ordinary Course of Business
» Notice of the proposed sale must be served on the debtor
(if the trustee is the movant), the trustee (in Chapter 12 or
13 cases for sales proposed by the debtor), all creditors
and indenture trustees. Rule 2002(a)(2) of the Federal
Rules of Bankruptcy Procedure. Rule 2002(i) provides that,
in lieu of serving all creditors, if a creditors committee has
been appointed, the court may order that the notice may
be mailed only to the committee and to those creditors
who file and serve notices of appearance and requests
for service of documents. It must be noted that service
must also be served on creditors asserting an interest in the
property.
» Most Section 363(b)(1) sales are made upon motion or
application of the trustee, debtor-in-possession or Chapter
13 debtor. Many bankruptcy courts have local rules and
forms governing sales under Section 363.
8. Section 363 Sales: An Overview
■Authorization for Sales Outside the Ordinary Course
of Business
» Section 363(b)(1) authorizes the trustee or debtor-in-possession to
sell property other than in the ordinary course of business, after
notice and a hearing. The “notice and a hearing” requirement
may be satisfied by passive notice without an actual hearing if
no objections are filed within the prescribed time. 11 U.S.C. §
102(1)(B). However, entry of an order by the court authorizing
the sale is required.
» Rule 6004 of the Federal Rules of Bankruptcy Procedure applies
to sales not in the ordinary course of business. Rule 6004 provides
that notice of the proposed sale must be given in accordance
with Rule 2002(a)(2), which provides for twenty-one days notice
by mail. However, the notice period may be shortened by the
court in its discretion under Rule 9006(c) for cause shown.
9. Section 363 Sales: An Overview
■Sale of Property Free and Clear of Liens,
Claims, Encumbrances and Other Interests
» The trustee or debtor-in-possession may sell property free and clear of an
interest in the property provided that one or more of the provision under
Section 363(f) is satisfied. Pursuant to Section 363(f), the trustee or debtor-
in-possession may sell free and clear of the interest only if:
□ Applicable nonbankruptcy law permits the sale of such property free
and clear of such interest;
□ The creditor or other entity asserting the interest consents;
□ Such interest is a lien and the price at which such property is to be
sold is greater than the aggregate value of all liens on the property;
□ Such interest is in bona fide dispute; or
□ Such entity could be compelled, in a legal or equitable proceeding,
to accept a money satisfaction of such interest
10. Section 363 Sales: An Overview
■ Sale of Property Free and Clear of Liens, Claims, Encumbrances and
Other Interests
» The term “interest,” “although not defined in the Bankruptcy Code, should be
interpreted broadly.” In re Daufuskie Island Properties, LLC, 431 B.R. 626, 642 (Bankr.
D.S.C. 2010) (internal citations omitted). “It is well settled that what constitutes an
interest under § 363(f) is defined by state property law.” Id.
» In most cases, the sale of property free and clear is addressed to liens,
encumbrances and asserted interests, with the liens, encumbrances and asserted
interests to attach to the sale proceeds in substitution of the property sold, i.e., to
allow the parties to fight, if not in agreement, over money instead of property.
There are some cases, however, in which the proposed sale is to be made free and
clear of an interest in property, as to which the asserted interest holder is not
agreeable to a monetary substitute.
» In the recent decision in In re Daufuskie Island Properties, LLC, 431 B.R. 626 (Bankr.
D.S.C. 2010), the court authorized the sale of the property free and clear of a
covenant running with the land, on the basis that the covenant could be
invalidated under the state law doctrine of changed circumstances, which was
applicable under Section 363(f)(1). The facts in this case were exceptional, and
selling property free and clear of an interest under a recorded covenant or
restriction generally is not possible in most cases; however, in a case involving
exceptional circumstances, such a sale free and clear may be possible under
Section 363(f)(1).
11. Section 363 Sales: An Overview
■ Sale of Property Free and Clear of Liens, Claims,
Encumbrances and Other Interests
» Section 363(f)(4), allowing a sale free and clear of an asserted interest in
property where the asserted interest is subject to bona fide dispute,
involves two important considerations to note. First, the bona fide dispute
must be just that; it cannot be simply an objection to an interest, but must
be based on reasonable grounds, so that a bona fide dispute exists.
Second, a sale on this basis may enable the sale of the property to
proceed, but the sale proceeds may be subject to the requirement that
they be held in escrow until the bona fide dispute is finally adjudicated or
settled.
12. Section 363 Sales: An Overview
■Burden of Proof/Other Provisions Under Section 363
» Pursuant to Section 363(p), in a hearing under Section 363, (1) the trustee
(or debtor-in-possession or Chapter 13 debtor) has the burden of proof on
the issue of adequate protection, and (2) the entity asserting an interest in
the property has the burden of proof of the validity, priority, or extent of
such interest.
» Section 363 includes provisions to authorize the sale of property under other
circumstances, namely, (1) free and clear of any vested or contingent right
in the nature of dower or courtesy, Sections 363(g), (i) and (j); (2) property in
which the debtor holds an undivided interest as a tenant in common, joint
tenant, or tenant by the entirety, upon specified conditions, Sections 363(h),
(i) and (j); and (3) property that was community property of the debtor and
the debtor’s spouse immediately before the commencement of the case,
Section 363(i).
13. Section 363 Sales: An Overview
■Protection on Appeal Under Section 363(m)
» Section 363(m) provides protection to the estate and good faith
purchasers, enabling them to close a sale under an order even
though (1) the appeal period may not have run, or (2) an
appeal of the order authorizing the sale may have been filed.
Unless the appellant obtains a stay pending appeal, the appeal
is mooted upon the closing of the sale. Specifically, Section
363(m) provides as follows:
The reversal or modification on appeal of an authorization under subsection
(b) or (c) of this section of a sale or lease of property does not affect the
validity of a sale or lease under such authorization to an entity that
purchased or leased such property in good faith, whether or not such entity
knew of the pendency of the appeal, unless such authorization and such
sale or lease were stayed pending appeal.
14. Section 363 Sales: An Overview
■Protection on Appeal Under Section 363(m)
» As indicated in the above provision, it is critical that
the court include a finding that the purchaser is a
good faith purchaser in the order authorizing the sale.
» This provision is important to prevent the loss of an
important sale, and important value to the estate, by
a disgruntled party filing an appeal.
15. Section 363 Sales: An Overview
■Protection on Appeal Under Section 363(m)
» An issue may exist in some courts, and for title insurance companies asked to insure
title in a bankruptcy sale, as to the applicability of the “mootness doctrine” under
Section 363(m) with respect to a sale free and clear under Section 363(f). The
majority position was stated in the decision in Official Committees of Unsecured
Creditors v. Anderson Senior Living, LLC, et al (In re Nashville Senior Living, LLC, et
al.), 407 B.R. 222, 231 (6th Cir. BAP 2009), which held that the appeal of a sale under
Section 363(f) is equitably moot upon the closing of the sale if the appellant did not
obtain a stay of the sale pending its appeal, even though Section 363(m) does not
specifically mention Section 363(f).
» The minority position that a sale under Section 363(f) is not protected by the
provisions of Section 363(m) – because only Sections 363(b) and (c) are mentioned
in the provision – and is thus appealable, is stated in the decision in Clear Channel
Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25 (9th Cir. BAP 2008).
16. Section 363 Sales: An Overview
■Steps to Completing a 363 Sale
» Marketing
» Locating a Stalking Horse Bidder
» Approval of Bid Procedures
» Due Diligence
» Auction
» Sale Hearing and Finalization of Sale Order
» Closing
18. Bidding Incentives
■Types of Bidding Incentives
» Break-up Fees
» Minimum Bid Increments
» Expense Reimbursement
» Other Incentives
□ Right of First Refusal
□ Limits on “Shopping” Stalking Horse Bid
■Approval of Bidding Incentives in Bankruptcy
19. Bidding Incentives
■Break-up Fees
» A sum paid to the initial or “stalking horse” bidder in the
event the sale to the stalking horse bidder is not
completed
» Generally, break-up fees are paid when a subsequent
bidder makes a higher or better offer
» Appropriateness evaluated in light of purchase price and
industry standards
□ In re Integrated Resources, Inc., 147 B.R. 650, 656 (S.D.N.Y. 1992)
20. Bidding Incentives
■Minimum Bid Increments
» Evaluated hand in hand with break-up fees
» Generally must be high enough to cover the break-up fee
but not so high as to discourage other bidders. See In re
Twenver, Inc., 149 B.R. 954, 956-57 (refusing to approve
$100,000 bid increment where initial purchase price was
$450,000).
□ This interplay can be addressed by setting an initial minimum bid
increment sufficient to cover any break-up fee and lower
subsequent bid increments.
21. Bidding Incentives
■Expense Reimbursement
» Stalking horse bidders will frequently request expense
reimbursement as part of the proposed asset purchase
agreement.
» Generally considered non-controversial but may be
denied if other proposed incentives make reimbursement
unreasonable.
22. Bidding Incentives
■Other Incentives
» Rights of First Refusal
□ Gives stalking horse bidder an opportunity to match any subsequent
bid for a limited period of time.
» Limits on “Shopping” Stalking Horse Bid
□ Stalking horse bidder may request that the debtor keep the terms of
its bid confidential so as to limit the bidding.
» Generally will not be approved in the bankruptcy context given
requirements to maximize the value of estate assets.
» In re Big Rivers Elec. Corp., 233 B.R. 726, 738 (Bankr. W.D. Ky. 1998) (so-called “no-
shop” clauses are per se illegal and other clauses meant to limit ability to shop to
stalking horse bid must be subjected to heavy scrutiny).
23. Bidding Incentives
■Approval of Bidding Incentives In Bankruptcy
» Standards
□ Business Judgment Test
» Holds that it is presumed that once a debtor articulates a valid
business justification for sale, court will generally defer to this
judgment.
» Courts will consider
» Whether the relationship of the parties who negotiated the break up fee was‑
tainted by self dealing or manipulation.‑
» Whether the fee hampers, rather than encourages, bidding.
» Whether the amount of the fee is unreasonable relative to the proposed
purchase price (Integrated Resources, 147 B.R. at 657-58).
□ Best Interests Test
» More restrictive than the Business Judgment Test.
» Analyzes whether sale is in the best interest of the estate.
24. Bidding Incentives
■Approval of Bidding Incentives in Bankruptcy
» Break-up Fees
□ Generally 2-3% of purchase price is considered reasonable.
□ However, this percentage can change based on the
nominal value of the break-up fee/size of the sale.
» Financial News Network, Inc., 980 F.2d 165, 167 (2d Cir. 1992) (noting without discussion
a $8.2 million break-up fee on a $149.3 million transaction – or 5.5% of total
consideration offered);
» LTV Aerospace and Defense Co. v. Thomson-CSF, S.A. (In re Chateaugay Corp.), 198
B.R. 848, 861 (S.D.N.Y 1996), aff’d, 108 F.3d 1369 (enforcing a $20 million “reverse break-
up fee” payable to debtor on a $450 million offer – 4.4% of total consideration);
» Integrated Resources, 147 B.R. at 662 (break-up fee representing up to 3.2% of
bidder’s out-of-pocket expenses, or 1.6% of the proposed purchase price; expert
testified that outside of bankruptcy, break-up fees average 3.3%);
» In re Bally Total Fitness of Greater N.Y., Inc., No. 07-12395 (BRL) (Bankr. S.D.N.Y. Aug. 21,
2007) (approving break-up fee of 4.3% and expense reimbursement);
» In re Mount Vernon Monetary Management Corp., No. 10-23053 (RDD) (Bankr. S.D.N.Y.
Sept. 30, 2010, Nov. 19, 2010) (approving break-up fees of 4% and 5% for two sales of
debtors’ assets).
27. Sales to Insiders
■What is an “insider”?
» If the debtor is a corporation, insiders include,
among others, a director, an officer, a person in
control of the debtor, and a relative of a GP,
director, officer, or person in control of the
debtor.
» If the debtor is a partnership, insiders include,
among others, a GP in or of the debtor, person in
control of the debtor, and a relative of a GP in or
of, or person in control of the debtor.
11 U.S.C. § 101(31)
28. Sales to Insiders
■The true test of an “insider” is one who has such a
relationship with the debtor that their dealing with
one another cannot be characterized as an arms-
length transaction. In re Wilde Horse Enterprises, Inc., 136 B.R.
830, 842 (C.D. Cal. 1991) (quoting In re
Montanino, 15 B.R. 307, 310 (Bankr. N.J.
1981)
29. Sales to Insiders
■In approving a 363 sale outside the ordinary course
of business, the court must find
(a) a sufficient business reason for the sale and
(b) that it is in the best interest of the estate
Wilde Horse Enters., 136 B.R. at 842
30. Sales to Insiders
■What Does “Best Interest of the Estate” Mean?
» To be in the “best interest of the estate,” the
sale:
(a) is fair and reasonable,
(b) has been given adequate marketing,
(c) has been negotiated and proposed in
good faith, and
(d) is an arms’-length transaction.
Wilde Horse Enters., 136 B.R. at 842
31. Sales to Insiders
■“Good faith” encompasses
fair value and the integrity of
the transaction.
■Bad faith includes
collusion between
the buyer and seller
and any attempt to
take advantage of
other potential
purchasers.
32. Sales to Insiders
■When is a sale fraudulent?
» A sale is fraudulent where through personal, as
opposed to arms-length dealing, property of the
estate is obtained at the lowest price as
opposed to a higher price and where the
relationship between the seller and buyer has
been concealed.
Wilde Horse Enters., 136 B.R at 842
33. Sales to Insiders
■Does this sale to an insider pass the good faith test?
» Miami Fire, Inc., a debtor in bankruptcy, is owned 60% by
Wade and 40% by his father. Miami Fire seeks to sell
substantially all its assets to buyer. At the hearing to approve
the sale to the buyer, the Court is informed that the buyer’s
100% owner is Wade’s brother, LeBron, and that the debtor
made no efforts to market the assets. Furthermore, LeBron
owns the warehouse in which Miami Fire’s assets are stored.
34. Sales to Insiders
■What is “good faith”?
» “The requirement that a purchaser act in good faith …
speaks to the integrity of his conduct in the course of the
sale proceedings. Typically, the misconduct that would
destroy a purchasers’ good faith status at a judicial sale
involves fraud, collusion between the purchaser and other
bidders, or the trustee, or an attempt to take grossly unfair
advantage of other bidders.” In re Apex Oil Co., et al., 92
B.R. 847, 869 (E.D.Mo. 1988)
35. Sales to Insiders
■The Miami Fire sale does NOT pass the good faith
test
» The evidence showed that LeBron and Dwayne likely
breached their fiduciary duties to the debtor, they
colluded with the debtor, and attempted to take grossly
unfair advantage of other bidders. Accordingly, their
proposed purchase would likely not be approved.
36. Sales to Insiders
■Non-Disclosure is the attorneys’ problem too…
» These last-minute disclosures lead to objections to the fee
application filed by Miami Fire’s counsel, Bosh & Anthony,
LLP. For its inadequate investigation into and disclosure of
the relationship between the buyer and the debtor, Bosh
& Anthony’s fees are denied in full and the firm is ordered
to disgorge its pre-petition retainer. Wilde Horse Enters.,
136 B.R. at 842
37. Sale to Insiders
■Lalake, Inc., a debtor in
bankruptcy, seeks to sell its
primary assets in a 363 sale.
DalMav, Inc., owned equally by
Dirk & JJ, is the stalking horse
bidder. Dirk is the CEO of Lalake
and JJ is a director of Lalake.
■As an insider of Lalake, is DalMav
permitted to purchase Lalake’s
assets in a 363 sale?
38. Sales to Insiders
■When is a sale to an insider not in bad faith and at
arms-length?
» It is not bad faith per se for an insider to purchase property
from an estate, even where the insider has a fiduciary
duty to the estate.
» A debtor who proposes a sale of all of its assets to an
insider must fully disclose to the court and creditors the
relationship between the buyer and seller, the
circumstances under which negotiations have taken
place, any marketing efforts, and the factual basis upon
which the debtor determined that the price was
reasonable. Wilde Horse Enters., 136 B.R. at 842
39. Sales to Insiders
■When an insider seeks to purchase a debtor’s
assets, the relevant inquiry is whether the insiders of
the debtor breached their fiduciary duty to the
estate and creditors.
■“Absent a breach of fiduciary duty, there is nothing
wrong with an arms-length transaction that benefits
both the estate and an insider.” Apex Oil, 92 B.R. at
870.
40. Sales to Insiders
■With all this (and some hard work) – DalMav, Dirk &
JJ’s bid is likely to be approved.
41. Sales to Insiders
■So – what about Dirk, JJ & DalMav?
» The key in 363 sales to insiders – as in most motions in
bankruptcy – is disclosure: Disclose everything that is
relevant and disclose early.
» The Debtor should disclose in its motion to approve
bidding procedures, Dirk and JJ’s role in the stalking horse
bidder and in the Debtor’s business.
» DalMav and the Debtor should each have its own
counsel.
» The Court may even appoint an examiner on behalf of
the O’Brien bankruptcy estate to oversee negotiations
between DalMav and the debtor.
43. Credit Bidding
■What is Credit Bidding?
» Credit bidding refers to the ability of a secured creditor to
bid up to the amount of its debt at a sale of its collateral
instead of cash or other currency, irrespective of the value
ascribed to the collateral.
» Essentially credit bidding is a setoff mechanism.
» Credit bidding is a tool for a secured creditor to obtain
possession of its collateral rather receive the proceeds of
a sale for consideration that it deems inadequate.
» The purpose of credit bidding is to protect a secured
creditor from undervaluation of its collateral and it
provides the secured creditor assurance that its collateral
will not be sold for too low a price.
44. Credit Bidding
■Statutory Basis of Right to Credit Bid
» Section 363(k) provides:
□ At a sale under subsection (b) of this section of property that is subject to a
lien that secures an allowed claim, unless the court for cause orders otherwise
the holder of such claim may bid at such sale, and, if the holder of such claim
purchases such property, such holder may offset such claim against the
purchase price of such property.
» Section 1129(b)(2)(A)(ii) provides that a plan is deemed
“fair and equitable” with respect to an impaired class of
secured claims if the plan provides:
□ for the sale, subject to section 363(k) of this title, of any property that is subject
to the liens securing such claims, free and clear of such liens, with such liens to
attach to the proceeds of such sale, and the treatment of such liens on
proceeds under clause (i) or (iii) of this subparagraph[.]
45. Credit Bidding
■Right to Credit Bid Is Not Absolute
» The Court may deny credit bidding “for cause” pursuant
to section 363(k).
□ However, courts generally only find that cause exists to disallow a
secured creditor from credit bidding in cases that involve
misconduct, inadequate sale price or other bona fide disputes
regarding the collateral or lien.
» In re Antaeus Tech. Servs., 345 B.R. 556 (Bankr. W.D.Va. 2005) (credit bid disallowed where secured
creditor’s conduct was determined to not only protect the value of its collateral, but to enhance its
position).
» In re Aloha Airlines, Inc., No. 08-00337, 2009 WL 1371950 (Bankr. D. Haw. May 14, 2009) (disallowed
credit bid because the party making bid had entered into an agreement with a third party competing
airline that had engaged in misconduct with respect to the debtors).
» In re Akard St. Fuels, L.P., 2001 WL 1568332, 01-ci- 1927D (N.D.Tex. 2001) (right to credit bid denied
where secured creditor’s liens were the subject of a bona fide dispute).
» In re Theroux, 169 B.R. 498 (Bankr. D. R.I. 1994) (disallowed credit bid where secured creditor bid
extremely low amount to obtain an asset which it could contemporaneously resell at a higher price to
the detriment of other creditors).
46. Credit Bidding
■Who May Credit Bid?
» In addition to the classic scenario of a single secured
lender using its ability to credit bid in order to obtain
possession of its collateral, credit bidding also applies in
the context of syndicated loan transactions.
» Courts have generally upheld the language of the
prepetition credit agreements in such circumstances.
□ In re Metaldyne Corp., 409 B.R. 671 (Bankr. S.D.N.Y. 2009) (under the credit
agreement, collateral agent has broad powers to dispose of collateral,
including right to credit bid the entirety of the loan with the support of the
required lenders, over the objection of minority lender).
□ In re Electroglas, Inc., No. 09-12416 (PJW) (Bankr. D. Del. Sept. 23, 2009)
(holders of secured notes issued by the debtor could not bypass the indenture
trustee and directly credit bid their claims at a 363 sale of their collateral, even
though one note holder group controlled a majority of the notes).
47. Credit Bidding
■Who May Credit Bid?
» Further, courts have recognized the importance of a single agent
acting in the collective interest of the lenders. In re Chrysler LLC,
405 B.R. 84, 103 (Bankr. S.D.N.Y. 2009), aff’d, 576 F.3d 108 (2d Cir.
2009) (citations omitted) (“Restricting enforcement to a single
agent to engage in unified action for the interests of a group of
lenders, based upon a majority vote, avoids chaos and prevents
a single lender from being preferred over others.”)
» Due to the deference courts show the underlying loan
documents when the right to credit bid is in question, credit
agreements should be explicit with regards to minority rights
relating to credit bidding and release of liens.
48. Credit Bidding
■Ways to Sell Assets in Bankruptcy
Sale Pursuant to a Plan Section 363 Sale
• Requires disclosure statement, solicitation and
confirmation of a plan
• Requires entry of bidding procedures order and
sale order
• Two-step, multiple party approval required • Much faster than a sale under a plan
(approved by motion with relatively short, 21-
day notice period)
• Superior successor liability protections available • Prospective buyer can be more easily overbid
• Enables a debtor and/or a purchaser to assert
more control over bidding
• Limited representations and warranties
• Avoids transfer taxes under Section 1146(c) • Deposit or down payment typical
49. Credit Bidding
■Right to Credit Bid Under a Plan Called Into Question
» “Cramdown” is a statutory mechanism by which a plan of
reorganization can be confirmed over the objection of a
class of dissenting creditors.
» Section 1129(b)(1) of the Bankruptcy Code requires a
bankruptcy court to assess whether the proposed treatment
of the dissenting class or classes is “fair and equitable.”
50. Credit Bidding
■Pursuant to section 1129(b)(2)(A) of the Bankruptcy
Code, a plan which proposes to cram down secured
claims is deemed to be “fair and equitable” if either
of the following requirements are met:
» It provides for the creditor to retain the lien securing its claim, whether the
property subject to the lien is retained by the debtor or transferred, and for
deferred cash payments equal to the present value of the creditor’s secured
interest in the collateral;
» It provides for a sale of any property that is subject to liens free and clear of
those liens, so long as the creditor has the opportunity to credit bid pursuant
to section 363(k) with the liens attaching to the proceeds of the sale; or
» It provides for the realization by the creditor of the “indubitable equivalent”
of its claim.
51. Credit Bidding
■Philadelphia Newspapers
» Background:
□ Debtors’ chapter 11 plan of reorganization called for a sale of
substantially all of their assets, free and clear of liens, at public
auction.
□ Stalking horse bidder was a group largely composed of
management and equity holders.
□ Debtors’ proposed bidding procedures required cash bids and
prohibited credit bids.
□ Secured lenders objected, arguing that the plan was not “fair and
equitable” under Section 1129 and that a secured lender has an
express right to credit bid if its collateral is being sold.
52. Credit Bidding
■Philadelphia Newspapers (cont.)
» Lower Court Decisions
□ Bankruptcy Court for Eastern District of Pennsylvania upheld the
secured lenders’ objection to the proposed bidding procedures.
□ District Court reversed on appeal.
» Court looked to the Fifth Circuit’s decision in In re Pacific Lumber, 584 F.3d 229 (5th Cir.
2009), which held that payment in cash equal to the value of the collateral provided
the secured lenders the “indubitable equivalent” of their claim value and thus
satisfied the “indubitable equivalent” requirement of the cramdown provisions.
» Court held that where a debtor seeks to cram down the claims of secured creditors
by way of an asset sale under Section 1129(b)(2)(A)(iii) (“indubitable equivalent”),
secured creditors have no right to credit bid at the sale.
» Section 1129(b)(2)(A) provides three ways to confirm a plan by cramming down a
secured creditor, one of which is by giving the secured creditor the “indubitable
equivalent” of its collateral.
□ Because this prong does not expressly allow for credit bidding (as
section (ii) does), a debtor under subsection (iii) does not need to
afford secured creditors the ability to credit bid at the sale of their
collateral.
53. Credit Bidding
■Philadelphia Newspapers (cont.)
» Third Circuit’s Majority Opinion:
□ Affirmed District Court’s decision.
□ The use of the disjunctive “or” in 1129(b)(2)(A) provides three distinct
alternatives for cramdown.
□ Debtor can provide the indubitable equivalent of a secured lender’s
claim through other means such as cash payments or a substitution
of collateral following an asset sale.
□ The Court held that the Bankruptcy Code does not give secured
lenders the right to recover value greater than their allowed secured
claim, either by treating their unsecured claim as a secured
deficiency claim under Section 1111(b) or making a credit bid under
Section 363(k) in the hope of realizing any potential upside value
after recovering their collateral.
54. Credit Bidding
■Philadelphia Newspapers (cont.)
» Judge Ambro’s Dissent:
□ Any plan involving a sale of assets free and clear of liens and a
cramdown of secured creditors must comply with the requirements
of section 1129(b)(2)(A)(ii), which incorporates the presumptive right
of secured creditors to credit bid.
□ Each subsection of section 1129(b)(2)(A) applies to an entirely
different situation:
» (i) to transfers of assets, including sales, in which the assets remain to the liens;
» (ii) to sales free and clear of liens; and
» (iii) to other situations not covered by subsections (i) and (ii).
» Sections 363(k) and 1111(b) provide protection to secured
creditors against under-valuations of collateral, which cannot be
eroded by resort to section 1129(b)(2)(A)(iii).
55. Credit Bidding
■Effect of Majority Decision in Philadelphia
Newspapers
» Along with Pacific Lumber, provides that a secured lender
cannot assert an inalienable right to credit bid when its collateral
is proposed to be sold free and clear of liens pursuant to a
Chapter 11 plan.
» Secured lenders maintain right to object to plan confirmation on
a number of grounds, including that without credit bidding, they
cannot receive the “indubitable equivalent” of their collateral.
» Secured lenders have greater incentive to seek protection of the
credit bid right in financing and cash collateral orders.
56. Credit Bidding
■Applicability Outside Fifth and Third Circuits?
» While the applicability and treatment of Philadelphia
Newspapers and Pacific Lumber outside the Third and
Fifth Circuits remains unclear, at least one court has
rejected the reasoning and holding therein.
□ In In re River Road Hotel Partners, LLC, No. 09 B 30029, 2010 WL
6634603 (Bankr. N.D. Ill. Oct. 5, 2010), the Bankruptcy Court for the
Northern District of Illinois rejected the majority decision in
Philadelphia Newspapers, stating that Judge Ambro’s dissent was
more persuasive, and refused to permit the debtors to circumvent a
secured lender’s right to credit bid in connection with a sale of assets
subject to the lender’s lien.
» Appeal has been certified directly to the Seventh Circuit; argument was
heard in April.
