(CN) – The 3rd Circuit blocked creditors of Philadelphia’s two main newspapers from bidding for the parent company with the $318 million they are owed. The panel voted 2-1 that Philadelphia Newspapers, owner of The Philadelphia Inquirer and the Philadelphia Daily News, can reject credit bids at its April 27 bankruptcy auction.
Bankruptcy code “unambiguously permits” a debtor to craft a plan that offers lenders fair value for their secured interest, the court ruled, and lenders have no “statutory right to credit bidding.”
Philadelphia Newspapers bought the two newspapers in July 2006 for $515 million, $295 million of which came from lenders.
The company defaulted on its loan in late 2007, due to industry-wide declines in advertising and circulation. Unable to negotiate payment plans, the company filed for Chapter 11 bankruptcy protection in early 2009.
Secured creditors then tried to take control of the company by bidding their $318 million interest at an auction of the company’s assets.
The newspaper owner refused to accept such bids, instead favoring an opening bid of about $67 million in cash and real estate as part of a plan to sell their assets free of liens. The so-called “stalking horse” bid would give secured creditors about 22 cents on the dollar, and unsecured creditors would receive virtually nothing.
Creditors objected, and the bankruptcy judge issued an order allowing the lenders to bid with their credit. The judge said the debtors’ sale plan was designed “not to produce the highest and best offer,” but to keep the newspapers in the hands of current and former management and equity holders. The debtors had advertised the auction with an extensive “Keep It Local” campaign, the judge noted.
But the district court and the 3rd Circuit viewed it differently, saying the lenders had no legal right to credit bid at auction.
Judge D. Michael Fisher said bankruptcy law “unambiguously permits a court to confirm a reorganization plan so long as secured lenders are provided the ‘indubitable equivalent’ of their secured interest.”
In other words, creditors can’t demand the right to credit bid when the debtor has crafted another legally sound plan.
In dissent, Judge Thomas Ambro, a former bankruptcy attorney, called the debtors’ auction plan a “high-stakes game of chicken.”
“If credit bidding is denied … the debtors’ insiders stand to benefit by having more leverage to steer the sale to a favored purchaser (here, the Stalking Horse Bidder),” Ambro said.
There is more than one way to interpret the relevant bankruptcy code, he said, including the interpretation that Congress meant to protect secured creditors at such an auction.
“[T]he consequences of a contrary reading include upsetting three decades of secured creditors’ expectations, thus increasing the cost of credit,” he wrote.
The senior lenders, led by Citizens Bank of Pennsylvania, include the Royal Bank of Scotland Group PLC, CIT Group, and Angelo, Gordon & Co.