Third Circuit Decision in Philadelphia Newspapers Leaves Crucial Issues Unresolved

The article discusses a recent highly controversial Third Circuit Court of Appeals decision that prevented secured lenders from credit-bidding their claims in connection with a sale of the collateral securing such claims pursuant to a plan of reorganization.

The article points out that outside of bankruptcy, a lender’s ability to exercise rights against collateral provides one of the fundamental protections for which it bargains at the time that it extends its loan to the borrower, and notes that the Bankruptcy Code has always recognized this protection when property of the bankruptcy estate is sold outside the ordinary course of business prior to the confirmation of a plan of reorganization. However, a sharply divided Third Circuit panel, based on what it determined to be the ​“plain meaning” of the statutory language, held that when a sale of a lender’s collateral actually takes place pursuant to a plan, the lender’s right to credit bid need not be provided.

In Ben Feder​’s view, Philadelphia Newspapers stands as an 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.”