credit bidding by secured lenders in bankruptcy...

Credit Bidding by Secured Lenders in Bankruptcy Sales

Strategies for Asserting and Defending Credit Bidspresents Strategies for Asserting and Defending Credit Bids and Resolving Intercreditor Disputes

presents

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

Today's panel features:James C. McCarroll, Partner, Reed Smith, New York

Ben Pickering, Senior Managing Director, Mesirow Financial, New YorkMichael J. Venditto, Partner, Reed Smith, New York

Tuesday, January 5, 2010

The conference begins at:1 pm Easternp12 pm Central

11 am Mountain10 am Pacific

CLICK ON EACH FILE IN THE LEFT HAND COLUMN TO SEE INDIVIDUAL PRESENTATIONS.

You can access the audio portion of the conference on the telephone or by using your computer's speakers.Please refer to the dial in/ log in instructions emailed to registrations.

If no column is present: click Bookmarks or Pages on the left side of the window.

If no icons are present: Click View, select Navigational Panels, and chose either Bookmarks or Pages.

If you need assistance or to register for the audio portion, please call Strafford customer service at 800-926-7926 ext. 10

For CLE purposes, please let us know how many people are listening at your location by

• closing the notification box • and typing in the chat box your

company name and the number of attendees.

• Then click the blue icon beside the box to send.

Credit Bidding in Bankruptcy Cases:

Strategic & Tactical Issues

Faced by Secured LendersFaced by Secured LendersJanuary 5, 2010

Presented by James C. McCarrolly

James C. McCarroll Partner in Reed Smith’s Commercial

Restructuring & Bankruptcy Practice• Co-Chair of Reed Smith’s Alternative

Investments TeamInvestments Team Telephone: (212) 549 0209 Telecopier: (212) 521 5450p ( ) Email: [email protected]

- 2 -

Scope of this presentation The “What, Who and Why” of Credit Bidsy Predicate steps for a credit bid

• Specific forward-looking provisions for credit bidding in debtor in possession financingbidding in debtor-in-possession financing documents

• Bidding procedures in connection with a §363 l l f i tisale or plan of reorganization

Credit bidding by under-secured creditors Amount of bid & timing of bid starting the ball Amount of bid & timing of bid – starting the ball

rolling; bidding in sequence; laying in wait Bidding for assets in addition to lender’s collateral

- 3 -

What is a “Credit Bid”? Bankruptcy Code §363(k) provides:Bankruptcy Code §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,

l th t f d th i th h ld funless 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.”

This Bankruptcy Code provision permits creditors to bid up to the full amount of their secured debt claim to acquire the assets to which their lien is attached qin exchange for cancellation of indebtedness in the amount of the bid

- 4 -

What is a “Credit Bid”? If the amount of debt to be forgiven is larger than theIf the amount of debt to be forgiven is larger than the

cash amount bid by an outside party, the debt forgiveness may be deemed to be the “highest and b t” bid bj t t h ll b d l tibest” bid, subject to challenge based upon valuation of non-cash components of outside bids – and recently, subject to challenge on other grounds as well

The sole basis for denial of a right to credit bid found in 11 U S C § 363 is “for cause” – which hasin 11 U.S.C. § 363 is for cause which has generally been a very high standard

- 5 -

What is a “Credit Bid”? However recent and developing case law hasHowever, recent and developing case law has

introduced some interesting twists, by interpreting the “fair and equitable” standards of 11 U.S.C. § 1129(b)(2)(A) t it d bt t d i§ 1129(b)(2)(A) to permit a debtor to deprive a secured creditor of its right to credit bid in certain circumstances (see In re Pacific Lumber Co., 2009 WL 3082066 (5th Cir., Sept. 29, 2009), and In re Philadelphia Newspapers, LLC, Third Circuit Dkt. Nos 09-4266/4349)Nos. 09 4266/4349)• This emerging area of case law will be covered in

Mike Venditto’s presentation

- 6 -

Who Can Credit Bid? Only creditors holding valid perfected liensOnly creditors holding valid, perfected liens

on assets of the debtor can credit bid The ability of a secured creditor to credit bidThe ability of a secured creditor to credit bid

is based on the premise that it makes little sense to force a secured creditor to pay

h f it ll t lcash for its collateral• Cash proceeds would be subject to the

secured creditor’s lien and ultimatelysecured creditor s lien and ultimately would likely end up back in the secured creditor’s pocket

- 7 -

Procedures for the Credit Bid Secured creditor may bid up to the faceSecured creditor may bid up to the face

amount of its secured claim, regardless of the actual value of the collateral securing the d btdebt

Credit bidders need only document the face t f d bt ith t d t thamount of debt, without regard to the

underlying value, if any, of the collateral However any pending challenge to the However, any pending challenge to the

validity or perfection of a secured creditor’s lien may deprive it of its right to credit bid

- 8 -

y p g

Procedures for the Credit Bid Cohen v. KB Mezzanine Fund II, LP (In re SubMicron Systems

C ti ) 432 F 3d 448 459 60 (3d Ci 2006)Corporation), 432 F.3d 448, 459-60 (3d Cir. 2006).• The Third Circuit ruled that “it is well settled among district and

bankruptcy courts that creditors can bid the full face value of their secured claims under [section] 363(k)…In fact, logic demands that [ ti ] 363(k) b i t t d i thi i t ti it t[section] 363(k) be interpreted in this way; interpreting it to cap credit bids at the economic value of the underlying collateral is theoretically nonsensical” (citing In re Realty Invs., Ltd. V, 72 B.R. 143, 146 (Bankr.C.D.Cal.1987) (stating that secured party has the right to bid in the full amount of his allowed claim at any sale ofright to bid in the full amount of his allowed claim at any sale of collateral under section 363(k)) (citing legislative history); Criimi Mae Servs. Ltd. P'ship v. WDH Howell, LLC (In re WDH Howell, LLC), 298 B.R. 527, 532 n. 8 (D.N.J. 2003))

• It is therefore clear, at least in the 3rd Circuit, that credit biddersIt is therefore clear, at least in the 3rd Circuit, that credit bidders need only produce documentation evidencing the face amount of their secured debt without regard to the underlying value, if any, of the collateral

- 9 -

Procedures for the Credit Bid Lender Group dynamics:Lender Group dynamics:

• Who has the authority to credit bid? This analysis should begin with the lender group y g g

documents• Authority of the agent to act unilaterally, by

majority vote, or by unanimous decision of themajority vote, or by unanimous decision of the lender group

• If majority, simple majority or super-majority?

• Difficulties confirming authority of lender group members where there has been active trading

- 10 -

Procedures for the Credit Bid• Working within the lender groupWorking within the lender group Divergent interests?

• Old & cold group members• Newer members Divergences among hedge funds, bank prop

desks and classic banksdesks and classic banks U.S. vs. offshore holders

- 11 -

Procedures for the Credit Bid Dealing With Dissident Lenders

I GWLS H ldi 2009 WL 453110 (B k D D• In re GWLS Holdings, 2009 WL 453110 (Bankr. D. De. Feb. 23, 2009) The question presented was whether a credit bid could

proceed over the objection of a dissenting secured lender All but one of the first lien lenders consented to the

purchase of substantially all of the assets pursuant to a credit bid in a bankruptcy auction

The dissenting creditor argued that the collateral agent did g g gnot have the authority to bid the entire amount of the first lien debt without unanimous consent of the first lien lenders

• This case is of value because it specifically affirms the intuitive “first look to the deal documents” concept; however, p ; ,it does not fully resolve the question of how to deal with such complex issues if the deal documents are silent or irreconcilably ambiguous

- 12 -

Procedures for the Credit Bid Dealing With Dissident Lenders: In re GWLS Holdings

• Bankruptcy Court found that the release of the lien was within the scope of the agent's authority in the event of default

The first lien secured lenders had irrevocably appointed the The first lien secured lenders had irrevocably appointed the first lien collateral agent to “take such actions on [their] behalf and to exercise such powers as are delegated…by the terms hereof,” which included the power to dispose of the collateral

t f d f ltupon an event of default• Unanimous voting requirements applicable to amendments

or waivers that release collateral did not apply in the context of a credit bidof a credit bid Credit bidding fell within the agent's delegated powers to

“dispose of or deliver the collateral” on behalf of the secured parties

- 13 -

Procedures for the Credit Bid Dealing With Dissident Lendersg

• Pivotal points in GWLS Holdings have been further explored by the In re Metaldyne Corp., 409 B.R. 671 (Bankr S D N Y 2009) case as well as the Chrysler case(Bankr. S.D.N.Y. 2009) case, as well as the Chrysler case (In re Chrysler LLC, 576 F.3d 108 (2d Cir. 2009); vacated and remanded with instructions to dismiss as moot, Indiana State Police Pension Trust v. Chrysler LLC (In re Chrysler y ( yLLC), Dkt. No. 09-285)). These cases will be covered in some detail in Mike Venditto’s presentation.

- 14 -

Procedures for the Credit Bid Inter-creditor dynamics: second-lien debt?

• Pervasive nature of second-lien debt financing through the mid-decade credit boom creates issues for recession era unwinds

• Second lien holders’ different expectations• Second-lien creditors may have a different (i e higher) view of valueSecond lien creditors may have a different (i.e., higher) view of value

than do first-lien creditors.• Who can bid? The intercreditor agreement usually defines credit bidding and other

rights of second-lien holders as related to the first-lien holders.rights of second lien holders as related to the first lien holders. In the absence of an intercreditor agreement, second-lien secured

creditors should not be able to defeat any cash bid with a credit bid, unless and until the first-lien is paid in full or fully protected (a subject that will be discussed in some detail by Ben Pickering)

?• Mixed asset pool? Secured creditor can only credit bid for its own collateral, but may

make a mixed bid to include a cash component for assets outside its collateral basket

- 15 -

DIP financing documents

Procedures for the Credit Bid

• As belt and suspenders protection, should specifically state the DIP lender’s right to credit bid in any sale

• From the DIP lender’s perspective, such documents ideally should specifically state the DIP lender’s right of last offer in any salep y g y

§363 motions and orders• Stalking horse provisions• Marketing timeframe• Who is paying for all of this?

• Use of cash collateral for marketing?• Bidding increments

I th t l f l th th d l d ’• Is the asset pool for sale the same as the secured lender’s collateral? How to deal with discrepancies? Supplementing the credit bid with cash

S l i h di bid i h d b b d d

- 16 -

Supplementing the credit bid with new debt to be advanced

Take-Aways Secured lenders usually have an Secured lenders usually have an

unequivocal right to credit bid, subject to validity of liens, composition of collateral y , ppool, intercreditor and intra-group issues, and any potential for equitable subordination or equitable denial of credit bidding rights

Careful strategic planning and tactical execution are critical to protection of rights, and maximization of recoveries

- 17 -

- 18 -

© 2010 Mesirow Financial Holdings, Inc. All rights reserved.

��

� � ��

� ��

��

This presentation made by Mesirow Financial Consulting, LLC. © 2010 Mesirow Financial Holdings, Inc. All rights reserved. 2

Mr. Pickering has 20 years of experience providing corporate recovery services to secured lenders, debtors and unsecured creditors in the United States and internationally.

Mr. Pickering has been involved in numerous formal and informal restructuring engagements and provided a wide variety of services including financial analysis and business planning, viability analysis and assessment; cash flow financial forecast preparation, analysis and assessment; reorganization plans and negotiations; stakeholders’recovery assessment; sale of operations and assets; operational cost qualification and improvements; shareholder dispute resolution; expert witness testimony and numerous other related services. Mr. Pickering also has considerable experience with cross-border engagements.

Mr. Pickering’s industry specialization includes financial services, automobiles, manufacturing, resins and plastics, steel, metals, food processing, transportation and trucking, print and retail.

Mr. Pickering’s international experience includes various formal and informal restructuring assignments in Canada, China, Thailand, the Caribbean, Europe, Latin America and Africa.

Mr. Pickering has recently advised stakeholders in engagements including Lyondell Chemical Company, AlerisInternational, Chrysler LLC, Lear Corporation, Cadence Innovations LLC, Quebecor (World) USA, Delphi Corporation, Plastech Engineered Products, Fedders Corporation, Weld Wheel Industries Inc., Engineered Plastic Products, Bethlehem Steel, LTV Steel / Copperweld, Buffalo Molded Plastics Inc. (d/b/a Andover Industries), Algoma Steel, The Transit Group, TCT Logistics, High-Tech Express & Distribution, and the Bank of Credit and Commerce International. In addition, Mr. Pickering has also provided advice to numerous secured lenders in restructuring and recovery situations including Bank of America, GE Capital, KeyBank, Morgan Stanley, Citibank, LaSalle Business Credit, Bank of America Business Capital, HSBC, Bear Stearns, CIBC, Royal Bank of Canada, Bank of Montreal, Bank of Nova Scotia, TD Bank, Laurentian Bank and First Citizens Bank.

405 Lexington Ave., 40th FloorNew York, NY 10154

Telephone: 212-808-8355Fax: 212-682-5015Email: [email protected]

EDUCATIONB.A., University of Toronto

PROFESSIONAL CERTIFICATIONSChartered Accountant, Ontario, CanadaQualified Bankruptcy and Insolvency Act Counselor, CanadaLicensed Trustee in Bankruptcy, CanadaChartered Insolvency Restructuring Professional, Canada

PROFESSIONAL ASSOCIATIONSMember, American Bankruptcy InstituteMember, Turnaround Management Association

� ��

Ben PickeringBen PickeringSenior Managing DirectorSenior Managing DirectorMesirow Financial Consulting, LLCMesirow Financial Consulting, LLC


��

In re Chrysler

Pre Bankruptcy Activity

• Pre bankruptcy vs post bankruptcy issue different

• TARP lenders held 70% of $6.9B total outstanding

• Pre bankruptcy lenders initially stood together (TARP and non-TARP)

• Several rounds of offers until TARP lenders agreed; non-TARP did not

• Agreement mainly a cash deal; Counter-offers included equity (effectively credit bid) but government would not agree

• Lender group splintered

• Chrysler filed for Chapter 11


��

In re Chrysler

Post Bankruptcy Activity

• Non-TARP lenders not satisfied with settlement

• Non-TARP argued issue with absolute priority rule

– Non-TARP stated lenders received less than 100% yet other constituents received more and were paid first (i.e. union VEBA received 55% of ownership)

• Non-TARP given opportunity to credit bid but had several issues

– No support from TARP lenders

– Identity of bidders must be provided

– Cash component required; not a pure credit bid

– No ability to argue “best interest of creditors” due to Section 363 sale


��

In re Chrysler

Wrap-Up

• TARP lenders argued that alternatives weren’t supported and neither was liquidation

• US and Canadian government funded DIP may not be repaid in full – where did their value go?

• How did the lender dispute get resolved in the Chrysler case?

– Majority of holders accepted government offer

– Dissident group dwindled due to numerous factors outside the control of the group

– Roadblocks became too large to overcome

– Bankruptcy process did not provide opportunity for strong objection


��

In re GWLS Holdings

• Key dispute issue – unanimous consent provision in loan documents

• Agent bank credit bid with consent of all but one holder ($1M of the total $337M first lien)

• Hold-out lender argued that agent required unanimous consent per loan documents

• Agent argued the following contrary points:

– Powers delegated to agent to take actions to exercise remedies

– Collateral agent allowed agent to exercise all rights and remedies

– Intercreditor agreement gave agent exclusive right to exercise remedies against the collateral


��

In re GWLS Holdings

Court Ruling

• Court considered unanimous consent provision in loan documents

• Concluded that unanimous consent does not apply when agent is exercising remedies against the collateral consistent with original rights

– No amendment to credit agreement required in GWLS Holdings for agent to proceed with credit bid

• Resolution to dispute required court interpretation

– Amendment (and requirement to seek amendment) to the credit agreement to allow credit bid is key

– Agent had support from majority of participants


��

In re Delphi Corp

Background

• Parnassus (Platinum Equity) identified as potential purchaser; had GM support of $3.9B, which included $2B equity investment in Platinum Equity

• Lenders felt Parnassus deal was “secretly negotiated transaction”that did not maximize value

• Lenders unified to provide credit bid; required their own deal with GM

– Lenders provided better terms to GM than Parnassus

• Lenders view was that the international operations and the electronics/technology divisions of Delphi were undervalued in Parnassus deal

• Parnassus provided opportunity to re-bid but passed


��

In re Delphi Corp

Lender Actions

• Lenders view of enterprise value versus Parnassus deal only part of the decision to credit bid

• DIP was selling at discount in market; funds bought into DIP allowing for opportunity to take longer term view on returns

Key Deal Points

• Lenders ability to successfully credit bid impacted by

– Ability to obtain support agreement with GM

– Reimbursement of Parnassus deal expenses

– Agreement with Unsecured Creditors’ Committee

– Ability to approve sale either through modified plan or Section 363 sale


!�� " �� # � ��

Key Issues for Second Lien Holders

• Valuation (second liens may have to fight for value)

• Exclusivity (opportunity to propose own plan limited by exclusivity)

Valuation

• Difficult to argue Debtors’ business judgment and view of business

• First liens argue value covers them (to be financed out) or short so that they take equity (minimal/no recovery or upside for others)

Exclusivity

• Even if exclusivity is terminated, numerous issues remain:

– Who funds the plan? Pays administrative costs and the DIP?

– Is new equity required? (rights offering - who backstops?)

Control via purchase of first or second lien debt at discount possible?


!�� " �� # � ��

MagnaChip – A Good News Story for Second Lien Holders

• $600M semiconductor manufacturer

• Filed Chapter 11; within weeks proposed deal with first lien lenders whereby assets would be sold for less than outstanding first lien

• $750M second lien and unsecured creditors receive nothing

Analysis

• Numerous factors impacted value:

– Worst market conditions in history of business

– Market recovers 6-9 months after bankruptcy driving up valuation multiples

– Debtors close a money losing division


!�� " �� # � ��

Second Lien Lenders and Unsecured Creditors Committee Team Up

• Object to exclusivity based on valuation and revised view of business plan – Judge terminates exclusivity

• Second Lien and Committee propose own plan, which includes credit bid by second liens, $50M rights offering and “cram up” to senior secured lenders

– Cram up supported since adequate protection provided and senior secured at no greater risk than when they made the loan

� Multiple projections resulted in senior secureds being the same or better than when credit was originally extended

� Senior secureds were adequately protected based on key credit measures and the interest rate relative to other like rated debt instruments

� Total enterprise value and liquidation value also supported adequate protection


!�� " �� # � ��

Result of Competing Plan

• Committee filed the competing plan with the second liens

• Majority second lien holder purchased, at a discount, the dissenting members of the senior secured debt

• Successful confirmation of the Committee’s plan


$ �� % ��& �� ' ' �� ( ��

Background

• Committees trying to slow cases which are now fast moving

– Recent cases of Debtors seeking to close sales of their assets under Section 363 within weeks of filing for Chapter 11

– Little time for Committee to be appointed and investigate the sale

Committee Strategies

• Attack the rights of secured creditors to credit bid absent a determination of the validity, extent and priority of the relevant liens

• Argue that the liens may be subject to avoidance as preferential or fraudulent transfers

• Likely results in negotiations of a potential recovery to unsecured creditors (even where they may be out of the money)

Challenges to Credit BidsCredit Bids

January 5, 2010

presented by

Michael J. Venditto

Michael J. Venditto Partner in Reed Smith’s Bankruptcy &

Commercial Restructuring Practice Telephone: (212) 205 6081 (New York) Telecopier: (212) 521 5450 Email: [email protected]

- 2 -

Creditor vs. Debtor Challenges are part of case strategyChallenges are part of case strategy

Motivation for challenging credit bid Debtor is aligned with stalking Debtor is aligned with stalking

horse bidder

Challenges are fact specific:g p Terms of loan and security

documents Liens are subject to challenge Creditor acting in bad faith

- 3 -

Cause to deny credit bid under ySection 363(k) “unless the court for cause orders otherwise unless the court for cause orders otherwise

the holder of such [secured] claim may bid”

Cause may exist when Cause may exist when The liens are in dispute Credit bid would prejudice other secured

parties with equal priority to the credit bidderbidder

Creditor fails to comply with court-approved bidding procedures

- 4 -

approved bidding procedures

Credit Bids by Lender Groups:Credit Bids by Lender Groups:Running the Traps

Problems arise when a lender Problems arise when a lender group / syndicate attempts to credit bid What is the strategy? Creditors = owners?

Wh t f th ? Who can act for the group? How to deal with dissident

lenders?lenders?

- 5 -

Challenge to agent’s credit bid

In re GWLS Holdings, Inc., In re Metaldyne Corp., In re GWLS Holdings, Inc., 2009 WL 453110 (Bankr. D. Del. 2009) “credit bid is an integral part

f th l f t hi h

y p ,409 B.R. 671 (Bankr. S.D.N.Y. 2009) adopts GWLS and

Chrysler interpretationsof the sale of assets which is a core proceeding”

interprets provision of Collateral Agreement

Chrysler interpretations of “rights and remedies of a secured party” languageg

provides that Agent has “all rights and remedies of a secured party under New York UCC or any applicable

declines to adjudicate rights of dissident creditor to receive pro rata distribution, again y pp

law” and applicable law includes the Bankruptcy Code in general, and §363(k) in particular

gciting to Second Circuit’s decision in Chrysler

- 6 -

( ) p

In re Metaldyne August 12, 2009: “The Second Circuit in Chrysler recently g , y y

interpreted a contract provision substantially identical to §9.02(b) and held that it did not give a dissenting lender rights to prohibit the collateral agent from acting on its behalf…” What the Second Circuit said: “The § 363(b) Sale did not entail amendment of any loan

document. To the contrary, the § 363(b) sale was effected by implementing the clear terms of the loan agreements-implementing the clear terms of the loan agreementsspecifically, the terms by which (1) the lenders assigned an agent to act on their behalf, (2) the agent was empowered, upon request from the majority lenders, to direct the trustee to act and (3) the trustee was empowered at the direction of theact, and (3) the trustee was empowered, at the direction of the agent, to sell the collateral in the event of a bankruptcy. Because the Sale required no amendment to the loan documents, Chrysler was not required to seek, let alone receive the Pensioners’ written consent ”

- 7 -

receive, the Pensioners written consent.

What about Chrysler? August 5 2009 Second Circuit decision August 5, 2009 Second Circuit decision In re Chrysler LLC, 576 F.3d 108 (2d Cir. 2009)

D b 14 2009 U S S C t December 14, 2009 U.S. Supreme Court vacates and remands to the Second Circuit with instructions to dismiss the appeal aswith instructions to dismiss the appeal as moot Indiana State Police Pension Trust v. ChryslerIndiana State Police Pension Trust v. Chrysler

LLC (In re Chrysler LLC), Dkt. No. 09-285

- 8 -

Credit Bids Under the Bankruptcy Code§ 363 (k)§ ( )

At a sale under subsection (b) of thissection of property that is subject to a lienthat secures an allowed claim, unless thecourt for cause orders otherwise theholder of such claim may bid at such sale,and, if the holder of such claim purchasessuch property such holder may offsetsuch property, such holder may offsetsuch claim against the purchase price ofsuch property.

§ 1129(b)(2)(A)(ii)For the purpose of this subsection, 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—

(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, 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

- 9 -

proceeds under clause (i) or (iii) of this subparagraph

Credit Bidding Under a Plan To be fair and equitable with respect to a To be fair and equitable with respect to a

dissenting class of secured creditors, a plan must provide one of three treatmentsp 11 U.S.C. § 1129(b)(2)(A)

“Fair and equitable” includesFair and equitable includes if the collateral is to be sold free and clear

of liens the creditor has the right to creditof liens, the creditor has the right to credit bid pursuant to § 363(k) 11 U.S.C. § 1129(b)(2)(A)(ii)

- 10 -

Credit Bidding Under a PlanIn re Pacific Lumber CoIn re Pacific Lumber Co.,

2009 WL 3082066 (5th Cir., Sept. 29, 2009)

In re Philadelphia Newspapers, LLC,

Third Circuit Dkt. Nos. 09-4266/4349

- 11 -

In re Pacific Lumber Co. Transfer of the collateral in exchange for Transfer of the collateral in exchange for

cash and forgiveness of debt was a “sale” within meaning of §1129(b)(2)(A)(ii)g § ( )( )( )( )

Cash payments to the secured noteholders provided for the “realization . . . of theprovided for the realization . . . of the indubitable equivalent of [their] claims” § 1129(b)(2)(A)(iii)§ ( )( )( )( )

Deprived of the right to credit bid

- 12 -

The secured noteholders protested that the

In re Pacific Lumber Co. The secured noteholders protested that the

plan – by depriving them of the right to credit bid – failed to provide the indubitable pequivalence of their claim

The 5th Circuit holds that the plan paidThe 5 Circuit holds that the plan paid noteholders the allowed amount of their secured claim and was fair and equitable under 11 U.S.C. § 1129(b)(2)(A)(iii)

- 13 -

Appeal from November 10 2009 decision ofIn re Philadelphia Newspapers, LLCAppeal from November 10, 2009 decision of U.S. District Court for Eastern District Court Pennsylvania Dkt. No. 09-MC-00178(ECR)

Appeal taken by Creditors’ Committee and pp ysecured lenders

Oral argument held on December 15, 2009 Issue: debtors’ efforts to prevent lenders

from credit bidding against stalking horse bid

- 14 -

Debtors propose a Plan that includesIn re Philadelphia Newspapers, LLCDebtors propose a Plan that includes Transfer to secured lenders of certain real

property; and p p y; Cash distribution to the Lenders

commensurate with the highest or otherwise best bid received at the open auction of substantially all of the Debtors’ remaining assetsremaining assets. The “plan sale” goes further than in Pacific

Lumber, which did not involve a public auction

- 15 -

Debtor argues:

In re Philadelphia Newspapers, LLCDebtor argues: “The plain and unambiguous terms of the

Bankruptcy Code permit the Debtors to confirm a plan of reorganization that provides for an auction sale of substantially all of the Debtors’ assets without providing the prepetition senior lenderswithout providing the prepetition senior lenders with the option to credit bid.” Citing 11 U.S.C. § 1129(b)(2)(A)(iii)

Pacific Lumber holds that secured lenders are not entitled to credit bid where a debtor can confirm a plan under an alternate clause of § 1129(b)(2)(A)

- 16 -

plan under an alternate clause of § 1129(b)(2)(A)

October 8 2009 Bankruptcy Court orderIn re Philadelphia Newspapers, LLC

October 8, 2009 Bankruptcy Court order Denied Debtors’ bid procedures motion to the

extent it sought to prohibit credit bidding and pay g p g p ybreak-up fee and expense reimbursement

November 10, 2009 District Court Opinion, p Reverses Bankruptcy Court Holds that plain meaning of §1129(b)(2)(A)(iii) g § ( )( )( )( )

permits a debtor to deprive secured creditors of right to credit bid

- 17 -

Bankruptcy Court District Court To be “fair and equitable”

a Chapter 11plan must allow secured lenders the right to credit bid

Reversed Bankruptcy Court “plain meaning” of

§1129(b)(2)(A)(iii)the right to credit bid Alternatively, the facts

represent a case “where th i ht t t d

§1129(b)(2)(A)(iii) supports finding that it is possible to confirm a plan that provides for a

the right to tender a credit bid should be an imperative

“it i f f l th t it

p psale of assets but prohibits creditors with liens on those assets from credit bidding “it is far from clear that it

would be appropriate for the Court to approve such tactic as a

from credit bidding

legitimate exercise of the Debtors’ business judgment.”

- 18 -

- 19 -

credit bidding by secured lenders in bankruptcy...

Documents