## Facts

- Philadelphia Newspapers, LLC and related entities (the debtors) filed for Chapter 11 protection.
- The debtors proposed to sell substantially all assets through a sale process incorporated into a Chapter 11 plan.
- The debtors entered into an asset purchase agreement with Philly Papers, LLC as stalking-horse bidder.
- Philly Papers’ chairman was also chairman of a holding company that owned or controlled several of the debtor entities, raising insider-related concerns.
- The contemplated process set a baseline purchase price in the stalking-horse agreement, invited higher bids from other parties, and provided stalking-horse protections, including a breakup fee if Philly Papers was outbid.
- The debtors sought bankruptcy court approval of bid procedures governing bidder qualification, deadlines, auction mechanics, and the stalking-horse protections.
- Prepetition senior secured lenders held liens on substantially all assets and objected to the proposed procedures, including provisions that would require them to bid cash rather than credit bid their secured claims.
- The United States Trustee and the lenders objected to the breakup fee as unnecessary or potentially discouraging competing bids.
- The court held hearings on whether the proposed procedures, including the breakup fee and the treatment of credit bidding, could be approved at the bid-procedures stage.

## Issues

1. Whether the court could approve bid procedures for a plan-based sale that limited or denied the senior secured lenders’ ability to credit bid their secured claims.
2. Whether the proposed breakup fee and related stalking-horse protections were reasonable and justified as part of the contemplated auction process.

## Decision

- The court approved the bid procedures for the plan-related sale, including procedures that required bidders (including the senior secured lenders) to bid in cash rather than by credit bidding under § 363(k).
- The court reasoned that § 1129(b)(2)(A) provides alternative ways for a plan to be “fair and equitable” to a dissenting secured class, and a plan structured under § 1129(b)(2)(A)(iii) (indubitable equivalent) need not incorporate § 363(k) credit-bidding rights.
- The court emphasized that the ultimate question—whether the plan provided the lenders the indubitable equivalent of their secured claims—was primarily a confirmation issue, and the auction process would help establish market value.
- The court approved the stalking-horse breakup fee, finding it a reasonable inducement for the stalking-horse bidder to enter the agreement and not shown on the record to deter qualified, higher bids.
- Given the relationship between the stalking-horse bidder and the debtors’ ownership/control structure, the court treated the transaction with heightened scrutiny but found that a noticed, court-supervised auction with defined procedures mitigated fairness concerns.

## Legal Principles

- A Chapter 11 plan may satisfy the “fair and equitable” requirement for a secured class under any of the alternatives in § 1129(b)(2)(A); a debtor’s use of the “indubitable equivalent” alternative in § 1129(b)(2)(A)(iii) does not automatically import § 363(k) credit-bidding rights.
- Section 363(k) credit bidding applies by its terms to sales under § 363 and is expressly referenced in § 1129(b)(2)(A)(ii); it is not mandatory in every plan-based sale if the plan proceeds under a different cramdown alternative.
- At the bid-procedures stage, the court may approve an auction framework that is reasonably designed to generate competitive bidding and test value, while reserving final determinations about secured-creditor treatment for plan confirmation.
- Breakup fees and expense protections for a stalking-horse bidder may be approved when supported by evidence that they are reasonable in amount and function as an appropriate inducement, without materially discouraging higher bids.
- Where the stalking-horse bidder has insider ties, the court applies closer review, with emphasis on transparency, notice, and an open, competitive process subject to judicial oversight.

## Conclusion

In In re Philadelphia Newspapers, LLC, the bankruptcy court approved bid procedures for a plan-based sale of substantially all assets, including a stalking-horse breakup fee, and permitted an auction structure that required cash bids despite secured lenders’ objections that they should be allowed to credit bid under § 363(k); the court held that limiting credit bidding could be consistent with a plan proceeding under § 1129(b)(2)(A)(iii), with the adequacy of the lenders’ ultimate treatment to be determined at confirmation.


In re Philadelphia Newspapers, LLC, 2009 Bankr. LEXIS 3167 (2009)