A federal appeals court ruled yesterday that Philadelphia Newspapers L.L.C., the parent company of The Inquirer, can bar its senior lenders from using their debt to try to purchase the company at auction.
The ruling results in April 27 being the likely date of the auction - a process that will determine the next owner of The Inquirer, which, after 180 years of publication, remains the region's largest and most influential newspaper. The company also owns the Daily News and Philly.com.
In a 2-1 opinion, a panel of judges from the Third Circuit Court of Appeals agreed with a lower-court ruling that the bankruptcy code requires only that the lenders receive the "indubitable equivalent" - or fair value - of their debt.
In a statement, Brian P. Tierney, the company's CEO, called the decision a major victory for "the company and our community."
Experts in bankruptcy law said the decision upends past thinking on credit bidding, and provides debtors more options while reducing lenders' rights in such sales.
The ruling was a win for the company, which had argued the outcome of the auction would be skewed if the senior lenders were permitted to "credit-bid" - use the full value of their $318 million debt in their bid to purchase the company. Other potential bidders, the company argued, would hesitate to take part if they knew the lenders could bid their debt.
"This is a huge ruling," said Lawrence G. McMichael, lead lawyer for the company. "It will enable debtors to have true auctions where there is really competitive bidding."
He said the company had seen a marked increase in interest among potential bidders once it appeared the lenders might not be able to credit-bid.
Lawyers for the lenders did not return calls for comment. Last week, Fred S. Hodara, lead attorney for the lenders, said his clients would bid for the company in cash if necessary.
The company's auction date of April 27 was agreed to by both sides in a court session last week. The company has asked Chief Bankruptcy Judge Stephen Raslavich to formalize the date.
The auction is central to the company's reorganization plan, which calls for senior lenders to be paid about $67 million in cash and property to settle about $318 million in debt. While the plan gives the company's Broad Street headquarters to the lenders as part of the settlement, it entails the papers remaining in the building, rent-free, for two years.
The auction would establish whether that was a fair price for the company.
The company's plan required that all bids be made in cash. The senior lenders - who include Angelo, Gordon & Co., CIT Group Inc., Eaton Vance Management Inc., and Credit Suisse - objected. It was an accepted tenet of bankruptcy law, they argued, that lenders could protect their loans by using their debt to bid on collateral that was put up for sale.
The company's position turned on a narrow section of the bankruptcy code that described ways by which a bankruptcy plan can be approved over the objections of lenders. One way was a sale with credit-bidding. Another was providing lenders the "indubitable equivalent" of their debt.
The term, "indubitable equivalent," was first used in 1935 by Judge Learned Hand, and read to mean "the unquestionable value" of a lender's debt.
The lenders argued that since the company's plan called for a sale, it was logical to assume that the law allowed credit-bidding. The company argued it had a choice as to which section of the code to use as a test of the plan's fairness, and it was choosing the "indubitable equivalent" standard.
Raslavich, who is overseeing the company's bankruptcy, ruled in favor of the lenders on the issue. His ruling was overturned by U.S. District Judge Eduardo C. Robreno.
In yesterday's ruling, two of the justices who heard the case, D. Brooks Smith and D. Michael Fisher, concluded, as Robreno had, that the bankruptcy code offered a debtor the option of an auction without credit-bidding.
Their decision turned in large part on the fact that the word or was used to introduce the last of the provisions that spell out how to ensure that a disputed bankruptcy plan is fair to lenders.
The use of the word or, the judges ruled, clearly meant the company could choose whatever provision they wanted.
Judge Thomas L. Ambro dissented, agreeing with the lenders that the provisions just as easily could be read to require credit-bidding.
Experts in bankruptcy law said the decision is precedent-setting and will be closely read in the bankruptcy community.
Ashley C. Keller, a Chicago attorney whose writing on the subject was cited by Ambro, said the ruling allows debtors to take a property to auction while denying lenders what has been a traditional protection, the right to credit-bid. As a result, he expected to see lenders increase interest rates on loans they make to reflect the added uncertainty created by the ruling.
"I don't want to suggest they will raise interest rates tremendously," he said. "But on the margin, they are going to charge a little more for loans."
Eric W. Anderson, an Atlanta bankruptcy attorney who recently wrote about the Philadelphia case for the American Bankruptcy Institute Journal, said the ruling means the battle over a property will shift from the auction to the confirmation hearing, where a judge passes final judgment on the fairness of sale.
"A case will turn then on whether or not the plan that is proposed does, in fact, provide the indubitable equivalent for the client," he said.