Publisher: Taping sank debt talks

The already contentious legal standoff between Philadelphia Newspapers L.L.C. and its creditors took a new turn Friday when the company pressed its effort to hire special counsel to investigate the unauthorized taping of a meeting between the parties.

In a filing in U.S. Bankruptcy Court in Philadelphia, the publisher of The Inquirer, the Philadelphia Daily News, and Philly.com contended that its trust was betrayed and its effort to restructure its debts poisoned as a result of the illegal recording of a meeting Nov. 17.

The company seeks to hire the law firm Elliott, Greenleaf & Siedzikowski P.C., of Blue Bell, to investigate the taping. It argues that special counsel is needed to determine if other recordings were made and if the decision to tape the meeting involved more than one creditor.

The parties will be in Bankruptcy Court tomorrow before Judge Jean K. FitzSimon for a hearing on the hiring of special counsel.

An attorney for a group of secured lenders, whose loans to the company are secured by a claim on its assets, already has dismissed the idea.

In court papers filed on behalf of a set of lenders that calls itself the "Steering Group," Fred Hodara called the proposed inquiry "a fishing expedition." He said the company wanted to investigate "unsupported and imaginary speculation" that some of the key lenders sought retribution against Brian P. Tierney, the chief executive officer of the company.

Hodara could not be reached for comment yesterday. Brad Patelli, an executive of Angelo, Gordon & Co., a primary lender with one of the largest claims, did not respond to messages left on his phone.

Philadelphia Newspapers filed for Chapter 11 bankruptcy Feb. 22 and is seeking to have its debt restructured. The owners bought the company in 2006 for $515 million in cash and $47 million in assumed pension liabilities. Last week, the company reported to the court that it had $334 million in assets and $432 million in liabilities when it filed for bankruptcy.

The company contends the relationship between the publisher and the key lenders fell apart after one of the Steering Group lenders "committed a felony by surreptitiously recording a confidential discussion" and Tierney voiced his objections and followed up with formal complaints.

A draft legal complaint prepared by Elliott Greenleaf and filed Friday in support of the argument for special counsel describes the November meeting and its aftermath in acerbic and blunt language. It contends:

Tierney interrupted the meeting when he discovered "a small tape recorder hidden behind the keyboard of a laptop computer" belonging to Vincent DeVito, an executive of CIT Group Inc., a New York investment firm.

Tierney demanded that it be turned off and warned that taping a meeting without consent of the participants was a crime in Pennsylvania.

Hodara urged Tierney not to report DeVito to officials at CIT, saying doing so would be "tattling" and "exacerbate the situation." Nevertheless, Tierney insisted that DeVito's action be reported to "internal legal and compliance officers at CIT."

After Tierney's complaints, DeVito e-mailed an undated letter from Mark van Ophem, who said he was CIT's chief counsel. The letter said that the recording of the meeting had been erased and that there were no additional recordings of business between the publisher and CIT.

The dispute "poisoned every effort" that followed by the owners of Philadelphia Newspapers "to restructure their debt in an orderly and efficient way," the draft complaint said.

It is unclear whether the recording, its aftermath, or the legal battle over whether and how it should be investigated will have a bearing on the bankruptcy case.

The company did not seek specific relief, saying the proper remedy could not be determined until an investigation had been conducted. But it said the claim could lead to an award for actual or punitive damages, or to an order penalizing the parties involved by giving them lower priority among creditors for recovering losses, or by revoking their right to vote on a proposed settlement.

The central issues in the case are who will manage The Inquirer and Daily News, who will own the company that emerges from bankruptcy, and how much money will be owed to bankers, vendors, and others with claims.