by Robert J. Keach
Bernstein Shur; Portland, Maine
The relatively recent decisions of the Third and Fifth Circuits in Philadelphia Newspapers  and Pacific Lumber,  with respect to the rights of creditors to credit-bid in a sale of assets under a reorganization plan, uprooted the expectations of secured lenders who had come to expect that in the case of a proposed plan effecting a sale of assets free and clear of liens, they would have the ability to credit-bid. In light of the holdings in these two cases, creditors faced the possibility that a debtor can confirm a cramdown plan proposing a sale of assets free and clear of liens by merely providing the impaired creditor with the “indubitable equivalent” of its claim, but denying an opportunity to credit-bid. The extent to which other circuits would adopt the Philadelphia Newspapers holding remained to be seen. Now, at least one circuit—the Seventh Circuit in River Road —has rejected the so-called “plain meaning” construction of § 1129(b)(2)(A) articulated by the majority in Philadelphia Newspapers, instead embracing the Philadelphia Newspapers dissent. This article examines these recent case law developments in the world of credit bidding in plan sales, particularly the Philadelphia Newspapers and River Road cases, and these cases’ differing statutory interpretations.
Statutory Basis for Credit-Bidding in a Sale of Assets under a Reorganization Plan
A proposed reorganization plan may be confirmed over the dissent of an impaired secured creditor, provided that the plan does “discriminate unfairly, and is fair and equitable,” with respect to such secured creditor.  Section 1129(b)(2) elaborates on the meaning of “fair and equitable” in the context of plan confirmation, and provides that:
(2)…the condition that a plan be fair and equitable with respect to a class includes the following requirements:
(A) With respect to a class of secured claims, the plan provides—
(i)(I) that the holders of such claims retain the liens securing such claims…to the extent of the
allowed amounts of such claims; and
(II) that each holder of a claim of such class receive on account of such claim deferred cash
payments totaling at least the allowed amount of such claim, of a value . . . of at least
the value of such holder’s interest in the estate’s interest in such property;
(ii) 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…or
(iii) for the realization by such holders of the indubitable equivalent of such claims. 
Section 1129(b)(2)(ii), by reference to § 363(k),  thus preserves the impaired secured creditor’s right to credit-bid if cram down is sought by virtue of a sale of the collateral under a confirmed plan and under that subsection. The more controversial aspect of section 1129(b)(2) is whether a debtor must provide an impaired secured creditor with the right to credit-bid, or whether a debtor can restrict credit-bidding altogether, and still meet the requirements of § 1129(b)(2), if the plan provides for a sale of the collateral but seeks cramdown under subsection(iii) (i.e., by provision of the “indubitable equivalent”).
“Plain Meaning” Construction of § 1129(b)(2) and Restriction on Credit-Bidding
In Philadelphia Newspapers, the bankruptcy court addressed the debtors’ proposed bid procedures, which required that any qualified bidder fund its purchase with cash only and prohibited credit bidding.  The debtors argued that, as the proposed asset sale was to take place under § 1129(b)(2)(A)(iii) and not § 1129(b)(2)(A)(ii), § 363(k) did not apply to provide the secured creditors with a right to credit-bid the purchase price.  Central to the debtors’ argument was that § 1129(b)(2) is phrased in the disjunctive, such that compliance with only one prong of § 1129(b)(2)—in this case, § 1129(b)(2)(iii), the indubitable-equivalence prong—would “independently entitl[e] their Plan to confirmation.”  The bankruptcy court disagreed with the debtors’ interpretation of § 1129(b)(2), stating that:
First, the Court disagrees with the proposition that, although § 1129(b)(2)(A) specifies three alternative means by which a reorganization plan may be confirmed, the last of these three (indubitable equivalence) may be employed when the exact means by which the plan intends the indubitable equivalent cramdown of a dissenting secured creditor is a cash out of the creditor via an auction sale such as is provided for in detail under the second of the three described alternatives. That is illogical and at odds with a settled canon of statutory construction which dictates that a generic provision of a statute should not be used to achieve a result not contemplated by a more specific provision.
…[T]o avail oneself of an “alternative” to one section of a statute, one cannot simply employ the provisions of that very section itself and render it an “alternative” merely by calling it such. 
Furthermore, the court found that legislative history supported the contention of the secured creditors, namely that Congress intended to provide secured creditors with the right to credit-bid when the § 1111(b)(2) election is unavailable.  Accordingly, the bankruptcy court rejected the debtors’ proposed bid procedures.
The bankruptcy court’s decision in Philadelphia Newspapers was hardly unprecedented. In fact, a solid majority of courts had similarly held that the right to credit-bid must be preserved under § 1129(b)(2) with regard to any sales of assets under a plan. 
On appeal, however, the U.S. District Court and Third Circuit disagreed with the bankruptcy court, relying on a supposed “plain meaning” interpretation of § 1129(b)(2). Both relied in part on Pacific Lumber, a case decided contemporaneously with the Philadelphia Newspapers bankruptcy court decision.  In Pacific Lumber, the Fifth Circuit “subscribed to the obvious proposition that because the three subsections of § 1129(b)(2)(A) are joined by the disjunctive ‘or,’ they are alternatives.”  Accordingly, the Pacific Lumber court held that a debtor could meet the requirements under § 1129(b)(2) by providing secured creditors with only the indubitable equivalent of their collateral. 
As did the Pacific Lumber court, the district court in Philadelphia Newspapers focused on the statute’s use of “or,” finding that § 1129(b)(2)(A) “provides three distinct alternative arrangements for satisfaction of plan confirmation in the context of cramdown of a dissenting class of secured creditors and that the Debtors may select any of these to proceed to confirmation.” [1 A debtor’s reliance on the indubitable-equivalence prong alone, not in conjunction with the right to credit-bid provided under § 1129(b)(2)(A)(ii), would not lead to absurd results; although the indubitable equivalence standard is flexible, the district court found it “entirely plausible” that Congress intended that a debtor could conduct a sale in which a creditor received the indubitable equivalent of its claim but was not allowed to credit-bid. 
The Third Circuit affirmed the district court’s decision, holding that “§ 1129(b)(2)(A) is unambiguous and…a plain reading of its provisions permits the Debtors to proceed under subsection (iii) without allowing the Lenders to credit bid.”  As did the district court, the Third Circuit relied on the plain-meaning rule and use of the word “or” as indication that the prongs under § 1129(b)(2)(A) are in fact alternatives, such that the debtors could cram down the secured creditors by providing them with the indubitable equivalent of their claims, even if the proposed plan provided for an asset sale free and clear of liens.  The Third Circuit thus adopted a “flexible” approach with regard to § 1129(b), finding that the three prongs under § 1129(b)(2)(A) are mere “examples” of fair and equitable treatment of creditors, and that subsection (iii) in particular “elevates fair return to the lenders over the methodology the debtor selects to achieve that return, and invites debtors ‘to craft an appropriate treatment of a secured creditor’s claim, separate and apart from the provisions of subsection (ii).’” 
The Third Circuit addressed the secured creditors’ argument that subsection (iii) is ambiguously broad, such that resort to other canons of statutory construction is necessary to determine whether a sale without credit bidding could provide the indubitable equivalent of the secured interest.  Finding that “indubitable equivalent” is broad, but not ambiguous, the court determined that subsection (iii) contains no right to credit-bid.  Furthermore, the court found that an auction without credit bidding would not per se fail to provide creditors with the indubitable equivalent, as “it is the plan of reorganization, and not the auction itself, that must generate the ‘indubitable equivalent.’”  Thus, a court would look not only at the cash value generated at the auction of assets, but also at whatever other compensation or security the secured creditor might receive outside of the auction to determine whether the secured creditor was treated fairly and equitably. 
Additionally, the Third Circuit rejected the secured creditors’ argument that the interplay of §§ 363(k), 1111(b) and 1129(b)(2) indicates congressional intent to permit credit bidding when assets are sold under a plan. The Philadelphia Newspapers court noted two statutory instances in which Congress had clearly intended to limit a creditor’s ability to credit-bid: (1) a court could restrict credit bidding under § 363(k) “for cause;” and (2) if a debtor should sell encumbered assets under § 1129(b)(2)(A)(i), § 1129(b)(2)(A)(i)(I) would cap the transferred lien at the amount of the creditor’s secured claim, as bifurcated under § 506(a), and § 1129(b)(2)(A)(i)(II) would limit the deferred cash payments to the creditor to the present value of the deferred payments. 
Judge Thomas Ambro’s comprehensive dissent in Philadelphia Newspapers deviated from the alleged plain language statutory construction and expressed the desire to “restore the presumptive right to credit bid”  per the “longer-lived reading” of § 1129(b)(2)(A).  Under the dissent’s reading of the statutory text, the subsections of § 1129(b)(2)(A) do not exist as independent alternatives, each equally applicable to all plans in the reorganization universe, but rather prescribe specific treatment for specific types of plans:
The reading of § 1129(b)(2)(A) just noted prescribes a specific treatment that a plan must afford to secured creditors if it allows them to retain the liens securing property. This is clause (i). Likewise, this reading of the statute prescribes a specific treatment if a plan sells property free and clear of a secured creditor’s lien. This is clause (ii). And clause (iii) prescribes a specific treatment for situations not addressed by either clause (i) or clause (ii). 
Thus, in a case involving a plan proposing a free and clear sale of assets, as in the case at hand, the dissent would find subsection (ii) “exclusively applicable.” 
As pointed out by the Philadelphia Newspapers dissent, the holdings in Philadelphia Newspapers and Pacific Lumber undoubtedly “uproot settled expectations of secured lending.”  No longer could a secured lender comfortably expect that, in the case of a proposed plan effecting a sale of assets free and clear of liens, it will have the ability to credit-bid.  Rather, secured creditors were put in the uncomfortable position of having to prepare for the loss of the ability to credit-bid, perhaps forcing those creditors to increase interest rates or generally reduce credit opportunities. 
Post-Philadelphia Newspapers: Seventh Circuit’s Adoption of Ambro Dissent in River Road
The Seventh Circuit has now adopted an interpretation of § 1129(b)(2)(A) directly contrary to that adopted by the Third Circuit, embracing Judge Ambro’s dissent. In River Road Hotel Partners LLC v. Amalgamated Bank, the Seventh Circuit reviewed the bankruptcy court’s holding that the debtors’ plans could not be confirmed because they did not qualify as “fair and equitable” under § 1129(b)(2)(A).  The debtors in River Road had submitted proposed reorganization plans that sought to sell substantially all of the debtors’ assets, plans that would impair the interests of certain of the debtors’ secured lenders. The lenders objected to the debtors’ proposed bid procedures on the basis that the debtors sought to sell their assets free and clear of liens, but that the bid procedures did not permit the lenders to credit-bid in violation of § 1129(b)(2)(A)(ii).  The bankruptcy court in River Road held that the debtors’ plans could not be confirmed because of the plans’ failure to comply with the specific requirements of § 1129(b)(2)(A)(ii), notwithstanding the debtors’ arguments that they needed merely to comply with the indubitable-equivalence prong in subsection (iii). The bankruptcy court based this holding on the statutory analysis set forth in Judge Ambro’s dissent in Philadelphia Newspapers, adopting wholesale Judge Ambro’s reasoning. 
Upon review, the Seventh Circuit affirmed the bankruptcy court’s denial of confirmation. The River Road court noted the holdings in Pacific Lumber and Philadelphia Newspapers, but found that “the statute does not have a single plain meaning,” contrary to the view expressed in the majority opinions in Pacific Lumber and Philadelphia Newspapers.  Rather, the Seventh Circuit found that “there are two plausible interpretations of the statute: one that reads Subsection (iii) as having global applicability and one that reads it as having a much more limited scope.”  Even viewing subsection (iii) in isolation, the River Road court found that the debtors’ plans did not unambiguously qualify for fair and equitable status. Specifically, where a creditor holds an undersecured claim, as did the lenders in River Road, the indubitable equivalent of the creditor’s secured claim is the value of the asset securing that claim; thus, any determination of indubitable equivalence relies on a determination of the assets’ value. The debtors argued that “because their proposed plans would sell their assets at an open auction and the Lenders would receive the proceeds from these sales, the free market will determine the assets’ current values and the Lenders will receive the indubitable equivalent of their secured claims.”  The Seventh Circuit found this argument flawed due to the “substantial risk” that assets sold through bankruptcy auctions could be undervalued.  Accordingly, merely selling assets through a bankruptcy auction and providing the lender with the sale proceeds would not necessarily provide the lender with the indubitable equivalent of its claim. Indeed, the very purpose of allowing credit-bidding in bankruptcy auctions is to ensure that creditors who are concerned that the bids in an auction do not accurately reflect the assets’ true value can use their credit-bid to trump the other bids and take possession of their assets. 
Having concluded that subsection (iii) could not be used to confirm plans that propose auctioning off assets free and clear of liens without allowing credit-bidding, the Seventh Circuit determined that the “infinitely more plausible interpretation” of § 1129(b)(2)(A) “would reach each subsection as stating the requirements for a particular type of sale.”  In other words, the River Road court concurred with Judge Ambro dissent’s construction of § 1129(b)(2)(A) as addressing categories of proceedings, under which plans would only qualify as fair and equitable under subsection (iii) if they proposed of disposing of assets in a way not described in subsections (i) and (ii).  The interpretation of subsection (iii) suggested by the debtors and adopted by the Third and Fifth Circuits would “nullify its neighboring subsections and ignore the protections of secured creditors recognized in other Code provisions.”  Accordingly, the River Road court held that cramdown plans providing for the sale of encumbered assets free and clear of liens at an auction must satisfy the requirements set forth § 1129(b)(2)(A)(ii). 
Although secured lenders may still remain uneasy in light of the Pacific Lumber and Philadelphia Newspapers holdings, the Seventh Circuit’s decision in River Road indicates that the traditional, widely adopted interpretation of § 1129(b)(2)(A)—articulated in Judge Ambro’s dissent—is not dead. River Road is evidence that Judge Ambro’s comprehensive dissent in Philadelphia Newspapers has not gone unread in other jurisdictions and that the trend seemingly started in Pacific Lumber and Philadelphia Newspapers may not be as extensive or widespread as some have perhaps thought (or feared).
1. In re Philadelphia Newspapers LLC, 599 F.3d 298, 318 (3d Cir. 2010).
2. In the Matter of Pacific Lumber Co., 584 F. 3d 229 (5th Cir. 2009).
3. River Road Hotel Partners LLC v. Amalgamated Bank (In re River Road Hotel Partners LLC), 2011 WL 2547615 (7th Cir. June 28, 2011).
4. 11 U.S.C. § 1129(b)(1).
5. 11 U.S.C. §1129(b)(2).
6. Section 363(k) provides that:
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.
11 U.S.C. § 363(k).
7. In re Philadelphia Newspapers LLC, 2009 WL 3242292, *2 (Bankr. E.D. Pa. 2009).
8. Id. at *3.
9. Id. The secured creditors disagreed with this argument, referring instead to 11 U.S.C. § 1111, which automatically treats nonrecourse creditors as recourse creditors. 11 U.S.C. § 1111(b)(1)(A). Under § 1111, an undersecured, nonrecourse creditor may waive the § 1111(b)(1)(A) treatment and instead opt to make an election under § 1111(b)(2) to waive any deficiency claim it might have obtained and instead have its allowed claim treated as fully secured—the so-called § 1111(b)(2) election. 11 U.S.C. § 1111(b)(2). A creditor may not make an § 1111(b)(2) election if the property in which it has an interest is sold under § 363(k). 11 U.S.C. § 1111(b)(1)(A)(ii). The secured creditors argued that “the intent of the integrated provisions of the Bankruptcy Code…is to ensure that where an undersecured creditor’s collateral is proposed to be sold, whether under § 363 or under a plan, the secured creditor is entitled in all events to protect its rights in the collateral, either by making an election under § 1111(b) or by credit-bidding its debt.” Id. at *5.
11. Id. at *7.
12. See, e.g., In re California Hancock Inc., 88 B.R. 226, 230-31 (9th Cir. B.A.P. 1988) (“By holding that it would allow the appellee the right to credit bid as set forth in § 363(k), the bankruptcy court ruled that the appellee should be protected from the consequences of the loss of recourse treatment as set forth in § 1111(b)(1)(A). The legislative history to § 363(k) clearly contemplates such protection.”); In re Lake Country Investments, 255 B.R. 588, 605 (Bankr. D. Idaho 2000) (“For the nonrecourse secured creditor, the right to credit-bid under § 363(k) and § 1129(b)(2)(A)(ii) when the encumbered property is to be sold under the plan provides an alternative to the election available under § 1111(b).”); In re SunCruz Casinos LLC, 298 B.R. 833, 839 (Bankr. S.D. Fla. 2003); In re Midway Investments Ltd., 187 B.R. 382, 390-91 (Bankr. S.D. Fla. 1995); In re Kent Terminal Corp., 166 B.R. 555, 566-67 (Bankr. S.D.N.Y. 1994) (“If a plan proposes the sale of a creditor’s collateral free and clear of liens, the lienholder has the unconditional right to bid in its lien.”).
13. See Pacific Lumber, 584 F.3d 229 (5th Cir. 2009). Pacific Lumber was decided by the Fifth Circuit on Sept. 29, 2009; the bankruptcy court’s decision in Philadelphia Newspapers was filed on Oct. 8, 2009.
14. Pacific Lumber, 584 F.3d at 245.
15. Id. at 249. As stated in Pacific Lumber, “Congress did not adopt indubitable equivalent as a capacious but empty semantic vessel… Indubitable equivalent is…no less demanding a standard that its companions [in subsections (ii) and (iii)].” Id. at 246. The court found that the debtors’ proposal to pay off its secured creditors in cash clearly met the indubitable-equivalent standard such that the plan met the fair and equitable requirements in § 1129(b)(2). Id. at 249.
16. In re Philadelphia Newspapers LLC, 418 B.R. 548, 567 (E.D. Pa. 2009).
17. Id. at 568. Furthermore, according to the district court, a creditor in such a situation would not be wholly unprotected, as a secured creditor that was both unable to credit bid and to make an § 1111(b)(2) election would still have a deficiency claim entitled to vote both as a secured and an unsecured claim. Id.
18. Philadelphia Newspapers LLC, 599 F.3d at 318.
19. Id. at 309; see also id. at 319 (Smith, J., concurring) (finding that statutory language “plainly supports” majority’s conclusion, rendering any reference to legislative history unnecessary, and concluding that “satisfaction of any of the three subsections is sufficient to meet the fair and equitable test of §1129(b)(2)(A)”).
20. Id. at 310 (quoting In re Philadelphia Newspapers LLC, 418 B.R. 548, 568 (E.D. Pa. 2009)).
22. Id. at 311.
23. Id. at 312.
25. Id. at 316. The Third Circuit did note that its holding “only precludes a lender from asserting that it has an absolute right to credit-bid when its collateral is being sold pursuant to a plan of reorganization.” Id. at 317. Additionally, “a lender can still object to plan confirmation on a variety of bases, including that the absence of a credit bid did not provide it with the ‘indubitable equivalent’ of its collateral.” Id. at 317-18.
26. Id. at 319.
27. Id. at 324.
28. Id. at 326-27. The dissent elaborated on its argument by examining different canons of statutory construction as applied to § 1129(b)(2)(A). First, specific statutory provisions prevail over general statutory provisions; it “seems Pickwickian to believe that Congress would expend the ink and energy detailing procedures in clause (ii) that specifically deal with plan sales of property free of liens, only to leave general language in clause (iii) that could sidestep entirely those very procedures.” Id. at 329. Second, the majority’s reading of subsection (iii) would render subsections (i) and (ii) unnecessary, such that those subsections “become no more than measures seen only as overmuch.” Id. Additionally, a review of other relevant statutory sections—§§ 1123(a)(5)(D), 363(k) and 1111(b)—reveals “a comprehensive arrangement” designed to protect the rights of secured creditors while maximizing value for the estate and minimizing deficiency claims against other collateral. Id. at 331-34. Finally, the dissent looked to legislative history, which indicated Congress’s intent that § 1129(b)(2)(A) be read in conjunction with § 1111(b): “Sale of property under section 363 or under the plan is excluded from treatment under section 1111(b) because of the secured party’s right to bid in the full amount of his allowed claim at any sale of the collateral under section 363(k).” Id. at 335 (quoting 124 Cong. Rec. at 32,407).
29. Id. at 338. The debtor could still evade subsection (ii) by arguing that cause under § 363(k) existed to preclude credit bidding, or by proposing a plan that did not involve a sale of assets free and clear of liens and which thus fell within the parameters of subsection (i) or (iii). Id.
30. Id. at 337.
31. See id.
33. 2011 WL 2547615 (7th Cir. June 28, 2011).
34. Id. at *2.
35. See id. at *4.
36. Id. at *6.
38. Id. at *7.
39. Id. The River Road court cited a number of factors that might lead to undervaluation of assets in bankruptcy auctions, such as the speed and timing of the bankruptcy auction, inability to provide sufficient notice to interested parties, risk of self-dealing that might lead management to favor bidders who would keep the existing business in place, liquidity constraints and expense that would have to be incurred by potential bidders and might lead them to submit lower offers on account of such expense. Id. at n. 6.
41. Id. at *8.
43. Id. at *9.