Key ruling in Ch. 11 case favors newspapers' owner; creditors plan appeal as next week's auction approaches

A federal judge ruled yesterday that the secured creditors of the Daily News and Inquirer do not have an automatic legal right to use their IOUs to bid for the newspaper company at a bankruptcy auction scheduled for next week.

The ruling, from U.S. District Judge Eduardo C. Robreno, could be an important tactical victory for the newspapers' chief executive, Brian P. Tierney, who is struggling to maintain control of the papers against a group of hedge funds, banks and other institutions holding $318 million in debt, secured by virtually all the assets of the newspaper company.

Robreno overturned a decision by the chief U.S. bankruptcy judge for eastern Pennsylvania, Stephen Raslavich, and ruled that the company was within its rights, under federal bankruptcy laws, to prohibit credit bidding at next week's auction.

Tierney already has recruited three local investors who are willing to invest at least $52 million in cash and credit to buy the newspapers in a Chapter 11 bankruptcy reorganization.

Other potential buyers will get a chance to top that offer in a two-stage bidding process next week. Preliminary bids are due Monday, followed by a private auction Wednesday, when the future ownership of the papers may be decided.

Until yesterday's ruling, the newspapers' top lenders seemed to have an edge in the auction process - the ability to use their secured credit, up to $318 million, to outbid other potential buyers of the newspapers and their Web site, philly.com.

But Robreno's ruling will require all bidders to come up with new cash, and that could be problematic for many of the company's secured lenders. Some are closed-end funds, without the ability to raise new capital, and one significant creditor, the CIT Group, has filed for bankruptcy itself.

"It is, from our standpoint, a very important decision," said Lawrence G. McMichael, the newspaper company's lead bankruptcy lawyer. "It allows the auction to proceed in a way that treats all bidders the same, so it's very important in attracting qualified bidders to the auction."

Fred Hodara, an attorney for the secured lenders, said they would appeal Robreno's ruling to the U.S. Third Circuit Court of Appeals.

"The lenders value the Inquirer and the Daily News considerably higher than does the insider stalking-horse bidder," Hodara said in an e-mail, referring to a group of three local investors recruited by Tierney. "The lenders will continue their pursuit of a fair and open auction, which in their view requires that a secured lender be permitted to credit bid."

Most of the $318 million in secured debt was money that Tierney and other investors borrowed to buy the newspapers from the McClatchy Co. in mid-2006, a deal valued at $515 million.

Raslavich had described Tierney's auction proposal as "a not-so-thinly-veiled attempt to manipulate the sale process" in favor of his local investors. The group includes businessman Bruce Toll and the Carpenters Union pension fund, two of Tierney's original investors in 2006.

They were joined by Penn Matrix Investments, a vehicle set up by David Haas, an heir to the Rohm & Haas chemical fortune. A court filing describes Penn Matrix as the largest of the three local partners, but gives no precise amounts.

Scott Baker, general counsel to the newspaper company, said as many as 10 groups of potential investors have signed confidentiality agreements to get a closer look at the newspapers' financial records.

At least one of them is expected to submit a preliminary bid for the newspapers on Monday, in addition to the expected bids from the senior lenders and the Toll/Haas/Carpenters group, Baker said.

He said he was not permitted to identify potential investors.