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In re Philadelphia Newspapers

November 10, 2009

IN RE: PHILADELPHIA NEWSPAPERS, LLC


The opinion of the court was delivered by: Eduardo C. Robreno, J.

BKY. No. 09-11204

MEMORANDUM

TABLE OF CONTENTS

I. BACKGROUND................................................3

A. Factual Background...................................3

B. Procedural History...................................9

II. JURISDICTION..............................................10

III. STANDARD OF REVIEW........................................15

IV. DISCUSSION................................................15

A. Applicable Law.......................................16

1. The plain meaning rule..........................16

2. Bankruptcy Code provisions relied upon by the Appellees................................23

B. Opinion of the Bankruptcy Court......................31

C. Plain Meaning of Section 1129(b) Controls............35

D. Objections of Appellees..............................40

1. Resort to section 1111(b) does not inform the meaning of section 1129(b)(2)(A)............41

2. The canon of interpretation that a specific provision should prevail over the general provision is inapplicable.......................43

3. The case law cited by the Bankruptcy Court is unpersuasive.................................46

4. Resort to legislative history is inappropriate and insufficient to contradict the plain meaning of section 1129(b)............49

5. A finding as to whether the right to credit bid is necessary under the circumstances of the Debtors' Plan is appropriately addressed at the confirmation stage.......................55

V. CONCLUSION................................................57

This is an appeal from the order of the Bankruptcy Court denying approval of bid procedures for an auction of substantially all of the Debtors' assets. The appeal presents two issues:

(1) Whether the Bankruptcy Court erred in rejecting bid procedures which included a provision precluding the Debtors' secured lenders from submitting a credit bid at an auction sale contemplated by the Debtors' proposed plan of reorganization; and

(2) Whether the Bankruptcy Court erred in rejecting bid procedures which contained a "break-up" fee and expense reimbursement fee to be provided to the stalking horse bidder. Due to the exigency in resolving the issue of the right of the secured lenders to credit bid in the Debtors' impending auction, the Court instructed the parties to brief only that issue for the present time, and the issue with respect to the "break-up" fee and expense reimbursement fee will be addressed subsequently.*fn1

As such, this Memorandum will address only the first issue of this appeal.

The Court holds that under the circumstances of this case, the Bankruptcy Court erred in rejecting the proposed bid procedures on the ground that the Debtors' secured lenders had a right to credit bid under 11 U.S.C. § 1129(b)(2)(A)(iii). For the reasons that follow, the decision of the Bankruptcy Court will be reversed.

I. BACKGROUND

A. Factual Background

Philadelphia Newspapers, LLC and its related debtor-entities (the "Debtors") filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. § 101 et seq. (the "Bankruptcy Code") on February 22, 2009.*fn2 The Debtors' cases are being jointly administered. An Official Committee of Unsecured Creditors (the "Committee") was appointed on March 2, 2009.

The Debtors own and operate numerous print and online publications in the Philadelphia region, including the Philadelphia Inquirer, the Philadelphia Daily News, and philly.com (collectively, the "Publications"). Prior to June 2006, the Publications were owned and operated by Knight-Ridder, Inc. In June 2006, Knight-Ridder, Inc. was acquired by the McClatchy Company, which subsequently decided to divest itself of the Publications. An investor group was formed, led by Brian P. Tierney ("Tierney"), for the purpose of acquiring the Publications from the McClatchy Company. This investor group formed Philadelphia Media Holdings, LLC ("PMH"),*fn3 which entered into an asset purchase agreement for the Publications and the related businesses for a sale price of $515 million. Since this acquisition by PMH, Tierney has served as the Debtors' CEO and holder of 6.67% of the equity in the Debtors.

In order to finance the purchase of the Publications and the related businesses, PMH borrowed approximately $295 million from a group of lenders (the "Senior Lenders")*fn4 pursuant to a Credit and Guaranty Agreement dated as of June 29, 2006 (the "Senior Credit Agreement"), with appellees Citizens Bank of Pennsylvania acting as administrative and collateral agent. The Senior Lenders contend that the Senior Credit Agreement provides a first priority lien and security interests in substantially all of the real and personal property of the Debtors.

In the months leading up to the bankruptcy filing, the Debtors engaged in extensive negotiations with the Senior Lenders for the purpose of effectuating a consensual out-of-court restructuring. At a meeting held on November 17, 2008, to discuss restructuring alternatives, it was revealed that a representative of CIT Financial (one of the Senior Lenders) was recording the negotiations without obtaining the Debtors' prior consent, in an apparent violation of Pennsylvania law (the "Recording Incident").*fn5 Tierney voiced his displeasure over the Recording Incident to the Senior Lenders, and the Debtors assert that they were subject to retaliatory conduct from the Senior Lenders as a result of Tierney's negative reaction to the Recording Incident. The Debtors have obtained authority from the Bankruptcy Court to retain special counsel to advise them of their rights with respect to the Recording Incident, while the Committee has been empowered by the Bankruptcy Court to investigate the Recording Incident. On August 28, 2009, following a mediation, all parties, including the Debtors, agreed to abstain from pursuing any review of the Recording Incident until January 2, 2010, in order to pursue the "big-picture" issues involved in the Debtors' cases.

As a result of the break-down in negotiations with the Senior Lenders, the Debtors were forced to file their respective bankruptcy petitions. On August 20, 2009, the Debtors filed a Joint Chapter 11 Plan (the "Plan") and accompanying disclosure statement. The Plan provides for a sale, by public auction (the "Auction"), of substantially all of the Debtors' assets, excluding certain real property that will be transferred directly to the Senior Lenders. The sale resulting from the Auction is scheduled to close on the same date that the Plan becomes effective. In conjunction with the Auction, the Debtors executed an Asset Purchase Agreement (the "Stalking Horse Agreement") with Philly Papers, LLC as the stalking horse and putative purchaser (the "Stalking Horse Bidder"). The Stalking Horse Bidder is comprised of several equity investors, including Carpenters Pension and Annuity Fund of Philadelphia and Vicinity, which owns an equity stake in PMH estimated to be approximately 30%. Bruce Toll is the Chairman and another equity investor of the Stalking Horse Bidder, who until recently owned an approximately 20% equity stake in PMH. Penn Matrix Investors, whose controlling partner is David Haas, is the third entity comprising the Stalking Horse Bidder and has never held an equity interest in PMH and does not have any prior affiliation with the Debtors.

The Plan contemplates that the Stalking Horse Bidder will pay a cash purchase price of $30 million, plus a combination of payment of certain expenses and assumption of liabilities that will yield gross proceeds to the Debtors' estates of approximately $41 million. After payment of administrative and priority claims as well as outstanding debtor-in-possession financing facility advances, the Debtors anticipate a distribution to the Senior Lenders of approximately $36 million.*fn6

The Debtors contend that the purchase price set by the Stalking Horse Agreement represents fair market value for the Debtors' assets.

The Plan further provides for the creation of a $750,000 liquidating trust*fn7 in favor of general unsecured trade creditors and a 3% distribution of equity interests in the Stalking Horse (or other successful bidder) to holders of unsecured prepetition claims other than general trade creditors.*fn8

A key component of the Plan is that the distribution provided for each class of creditors, other than the Senior Lenders, is not contingent on the outcome of the Auction and all proceeds of a cash overbid will flow directly to the Senior Lenders. Thus, each dollar above the bid submitted by the Stalking Horse Bidder resulting from the Auction will go directly toward satisfying the Senior Lenders' secured claim.

On August 28, 2009, the Debtors filed a motion with the Bankruptcy Court seeking authorization of certain bid procedures (the "Bid Procedures") to be employed in conjunction with the Stalking Horse Agreement and Auction. The key terms of the Bid Procedures for purposes of this appeal are that all bids submitted must be in cash and that the Senior Lenders are precluded from submitting a credit bid in connection with the Auction.*fn9 The exact provision of the Bid Procedures at issue states as follows:

Credit Bid: The Plan sale is being conducted under sections 1123(a) and (b) and 1129 of the Bankruptcy Code, and not section 363 of the Bankruptcy Code. As such no holder of a lien on any assets of the Debtors shall be permitted to credit bid pursuant to section 363(k) of the Bankruptcy Code.

The Debtors contend that structuring the Auction without credit bidding will spur competitive bidding. The Debtors submit that they have engaged in extensive nationwide marketing to ensure that the results of the Auction generate the highest and best offer for the Debtors' assets.*fn10

B. Procedural History

On October 1, 2009, the Bankruptcy Court heard oral argument with respect to approval of the Bid Procedures.*fn11 On October 8, 2009, the Bankruptcy Court issued an Opinion and Order denying the Bid Procedures due to the provision which prohibited the Senior Lenders from credit bidding at the Auction (the "October 8 Order"). The October 8 Order denied the Bid Procedures, but provided that the Bid Procedures could be resubmitted if altered in accordance with the October 8 Order, i.e., the prohibition on credit bidding was removed. To that end, the Debtors submitted revised Bid Procedures which removed the credit bidding restriction, and the Bankruptcy Court approved the revised Bid Procedures on October 15, 2009.

Based upon the denial of the Bid Procedures by the October 8 Order, the Bankruptcy Court continued the respective deadlines for the Auction as follows: (1) Bid deadline: November 16, 2009; and (2) Auction date: November 18, 2009.

On October 13, 2009, the Debtors filed an emergency motion with this Court seeking an expedited appeal regarding the October 8 Order. On October 14, 2009, the Court granted the Debtors' motion for an expedited appeal, and a hearing was ...


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