Owners fight credit bid in Philly newspaper sale

The owners of Philadelphia's two major dailies are waging a late-stage battle to keep the newspapers from creditors in a looming bankruptcy auction.

Under a key ruling in the case, senior lenders have the right to use the $300 million owed them to win The Philadelphia Inquirer and Philadelphia Daily News at the Nov. 18 auction. That gives them enough clout to beat the opening $67 million bid posted by current and new investors.

However, the local owners went to court Tuesday to try to overturn the decision to allow "credit bidding." They argued that only cash bids should be allowed to ensure a level playing field.

At times, U.S. District Judge Eduardo C. Robreno seemed inclined to agree with them, but he did not immediately rule.

"Why would anybody bid if you have $300 million in your pocket?" Robreno asked a lawyer for the secured creditors, who include the Royal Bank of Scotland Group PLC and the CIT Group Inc., which itself filed for bankruptcy protection this week.

The debtors - local investors who bought Philadelphia Newspapers in 2006 for $515 million, most of it borrowed - say credit bidding would have a chilling effect on the auction, keeping other potential bidders away.

But creditors say the debtors have crafted an unusual reorganization plan designed to shed their massive debt while retaining control. The plan includes the auction and an opening "stalking-horse bid" by a group comprised mostly of company insiders, including housing developer Bruce Toll, who served as company chairman.

Chief U.S. Bankruptcy Judge Stephen Raslavich, in the key ruling last month that allowed credit bids, called the stalking-horse bid "manifestly an insider transaction."

"This (bankruptcy) was an effort by inside management to settle its debt ... to the detriment of creditors," Ben Logan, who represents unsecured creditors owed another $100 million, argued Tuesday.

His clients stand to recover less than $1 million under the stalking-horse bid, while secured creditors would get perhaps 22 cents on the dollar.

The company asked Robreno to overturn Raslavich's decision.

"The credit-bid argument is only a question of law. This court should not be distracted by questions of motivation," argued Larry McMichael, who represents Philadelphia Newspapers.

The company is currently led by Chief Executive Officer Brian Tierney, a former advertising and public relations executive who has waged an aggressive fight to retain control amid the newspaper industry's sharp downturn.

The senior lenders have pledged to keep both the broadsheet Inquirer and tabloid Daily News operating if they take over, and to emerge from bankruptcy quickly.

Robreno did not indicate when he would rule.