Some cases really should not be all that difficult. However, when judges choose to divorce statutory text completely from any reference to underlying legislative intent and long standing commercial practice, inexplicable results follow. The recent Third Circuit Court of Appeals decision in Philadelphia Newspapers that prevented secured lenders from credit-bidding their claims stands as a quintessential example of the anomalous results that can transpire from the “plain meaning” mode of statutory interpretation. Particularly with a comprehensive statutory scheme as deeply rooted in commercial law as the Bankruptcy Code, the focus on specific language in single provisions, without relation to the greater whole or long understood practice, will lead to no end of vexatious litigation and create uncertainties and ambiguities where none should exist.
Outside of bankruptcy, a secured lender’s ability 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 fundamental business decision to accept the reduced cash value of the property or take ownership of the property in the hope that it will appreciate. The Bankruptcy Code has always recognized this elemental protection of a secured lender’s rights by providing, under § 363(k), the right to credit-bid whenever property of the bankruptcy estate is sold outside of the ordinary course of business. Similarly, § 1129(b)(2)(A)(ii), part of the “cramdown” provision, permits plan confirmation over a secured lender’s objection so long as the lender has been afforded the right to credit-bid at a sale of its collateral, thus effectively providing the lender with the precise benefit for which it initially contracted.
Given that backdrop, the lower-court decision that denied secured lenders the opportunity to credit-bid their loans, in connection with a sale under a plan of reorganization of the collateral securing such loans, was highly disconcerting. The debtors’ management in Philadelphia Newspapers was locked in a contentious struggle with the secured lenders, and developed a highly aggressive approach by which it hoped to retain control of the debtors’ assets while paying the lenders less than the full amount of their claims. The Third Circuit should have used this decision as an opportunity to reject strongly the “plain meaning” rule as a primary mode of statutory interpretation in bankruptcy cases. Unfortunately, rather than repudiate this approach, a majority of the Third Circuit panel that heard this case chose to worship at its altar.
The majority opinion in Philadelphia Newspapers noted that § 1129(b)(2)(A) describes three different means by which a reorganization plan could be confirmed without the consent of a secured creditor class: (1) creditor retention of liens securing the obligations and receipt of the present value of its secured claim, (2) sale of collateral free and clear of liens but subject to credit-bidding or (3) the realization by the creditor of the “indubitable equivalent” of its secured claim. Notwithstanding the express reference in § 1129(b)(2)(A)(ii) to the right to credit-bid in connection with a sale “free and clear” of liens, the majority held that a sale “free and clear” could also take place without allowing the lenders to credit-bid under the “indubitable equivalent” prong. For the Third Circuit majority, the “plain meaning” of the use of the disjunctive “or” in the statute showed that subsection (ii) is not the “exclusive means” by which a secured lender’s collateral may be sold under a plan of reorganization and that, so long as the debtor or other plan proponent could show that the “indubitable equivalent” prong were being satisfied, the opportunity to credit-bid need not be provided.
The majority opinion in Philadelphia Newspapers was met by a lengthy dissent. Not surprisingly, this came from the leading bankruptcy expert on the Third Circuit panel, Hon. Thomas Ambro. In addition to pointing out the flaws in the majority’s reading of the statutory language as “unambiguous,” Judge Ambro noted that the result flies in the face of both the well-established principle that property rights in bankruptcy look to applicable non-bankruptcy law, and long standing premises that underlie secured lending transactions. Judge Ambro strongly criticized the majority’s refusal to look beyond what it viewed as the sole plausible reading of §1129(b)(2)(A) and consider any sense of congressional purpose or the underlying principles of the Bankruptcy Code as evidenced by complementary Code sections. “In effect, a single ‘or’ becomes the bell, book and candle that excommunicates Congressional intent from the Bankruptcy Code…[and] upset[s]…decades of secured creditors’ expectations[.]”
In the end, all of the maneuvering in the Philadelphia Newspapers chapter 11 case appears to have done nothing but leave behind some questionable case law and a great deal of future uncertainty. The majority opinion expressly left open the key question of whether the proposed sale ultimately could in fact satisfy the “indubitable equivalent” prong of §1129(b)(2)(A)(iii), and thus be confirmed over the secured lenders’ objection. However, at the auction, the secured lenders topped the management-backed bid with a cash offer of $138.9 million. (The money, of course, will go directly back into their own pockets, and they will take control of the assets.) The secured lenders’ auction victory thus obviated the need for the “indubitable equivalent” issue to be determined.
Accordingly, while the Philadelphia Newspapers chapter 11 case itself has been resolved, the court’s majority decision left hanging a large shoe that still needs to drop. The majority’s approach to statutory interpretation and the anomalous result engendered here are now binding law within the Third Circuit. The inevitable result will 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 debt’s face amount, that we will know whether the outcome of such an auction can successfully 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 significant cloud of ambiguity will hang over contested chapter 11 cases in the Third Circuit.