Court: Philly newspaper owners can deny creditors right to use money owed them to make bid

Philly newspaper creditors can’t bid with credit

PHILADELPHIA — Philadelphia’s two major newspapers are more likely to remain in local hands after a federal appeals court on Monday halted creditors’ efforts to bid for the company by putting up some of the $300 million they are owed.

In a 2-1 decision, the 3rd U.S. Circuit Court of Appeals said the current owners of The Philadelphia Inquirer and the Philadelphia Daily News can reject such credit bids at a scheduled April 27 bankruptcy auction for the company, Philadelphia Newspapers.

A group of local entrepreneurs, including housing developer Bruce Toll, bought the daily newspapers in 2006 for $515 million, only to see the value plunge to less than $100 million amid industrywide declines in advertising and circulation. Awash in debt and unable to negotiate a new payment plan with creditors, the company filed for bankruptcy protection in early 2009.

Since then, the current owners and the lenders have fought bitterly on matters large and small. The most crucial dispute is over an attempt by the top-tier, secured creditors to take control of Philadelphia Newspapers by bidding with some of the $300 million in debt they hold. The company refused to accept such bids; it has instead backed an opening bid — from two current investors joined by one new partner — of $67 million in cash and real estate.

That “stalking horse” bid, by a group hand-picked by the owner to open the bidding, would give those secured creditors about 22 cents on the dollar. Unsecured creditors would get virtually nothing.

The bankruptcy judge presiding over the case called it an inside deal and said creditors should be able to bid with credit. But a U.S. district judge, and now the appeals court, ruled otherwise.

The lenders had argued that secured creditors are nearly always allowed to bid at bankruptcy auctions with the debt they hold. But the appeals court ruled that the bankruptcy code “unambiguously permits” a debtor to craft any plan that offers lenders fair value for their secured interest, and that lenders have no statutory right to bid with credit.

The company said more than a dozen parties have looked at the newspapers, and three have shown serious interest, not counting the creditors and stalking-horse group. To win, they would presumably have to top the opening bid.

“The fact that there is no credit bidding will result in a much more vigorous auction,” company lawyer Larry McMichael said Monday, arguing that other bidders would have been hesitant to participate if creditors are allowed to bid with some of their $300 million in “IOUs.”

The senior lenders are led by Citizens Bank and include the Royal Bank of Scotland Group PLC, CIT Group Inc. and Angelo, Gordon & Co. Lawyers Andrew Kassner, who represents Citizens, and Abid Qureshi, who argued the appeal for lenders, did not return messages Monday seeking comment.

In his dissent, Judge Thomas L. Ambro, a veteran bankruptcy lawyer, called the current owners’ campaign to retain control “a high-stakes game of chicken.”

He noted Chief Bankruptcy Judge Stephen Raslavich’s conclusions that the stalking-horse bid was an insider transaction and that the debtors’ plan was not necessarily designed to raise the most money possible for creditors.

The stalking-horse group is made up of two current investors — Toll and a union pension fund — and a new one: David Haas, an heir to the Rohm & Haas chemical company fortune. They would likely retain former advertising executive Brian Tierney as chief executive, while creditors have vowed to oust him.

Tierney said that Monday’s ruling would level the playing field and let the marketplace determine a fair value for the company.

“Time is of the essence, and we need to move forward quickly with the April 27th auction,” he said in a statement.

Dan Gross, president of the local unit of The Newspaper Guild, said writers, photographers and advertising staff in the labor union are ready to negotiate with whoever emerges as the new owners.

“I’m hoping for a quick resolution just so that our members can finally get peace of mind and everyone can just stop feeling like they’re living in limbo,” Gross said.