Third Circuit Upholds Prohibition on Credit Bid in Philadelphia Newspapers Auction

The incumbent management of the bankrupt company that owns the Philadelphia Inquirer and the Philadelphia Daily News won a significant, but likely short lived, victory in the Third Circuit Yesterday. The Daily News reports that a three judge Thgird Circuit panel has upheld bankruptcy Judge Steven Raslavich’s ruling prohibiting the company’s creditors from using the debt that they are owed as a credit with which to bid in the upcoming bankruptcy auction. I would expect that the creditors will seek en banc review of this decision which, if upheld, would substantially increase the possibility that the bid backed by current management could prevail at the auction. I would be surprised, however, if this decision were to survive en banc review. As Judge Thomas Ambro noted in his dissent, the decision appears to run contrary to 30 years of precedent, and the legislative intent underlying the bankruptcy code, that supports the rights of creditors to “bid their credit” in bankruptcy court auctions. While no doubt encouraging to those – including current Philadelphia Newspapers CEO Brian Tierney – who want to see the Inky and Daily News stay in local hands, the decision, in my view, rests on a very shaky legal foundation and ought to be, and likely will be, overturned.