The owners of The Inquirer and the Philadelphia Daily News - the region's two major newspapers - made their case in U.S. Bankruptcy Court yesterday for why they should remain in charge, as dramatic details emerged of last-minute maneuverings over the papers' fate.

"This is part of the community," said Lawrence G. McMichael, the attorney representing Philadelphia Newspapers L.L.C., who, along with opposing attorneys, said the newspapers were treasures. "And we all have a responsibility to keep it that way."

But lawyers for the investors who hold $297 million in debt said they were stunned that Brian P. Tierney, chief executive of the papers, had turned away from a $20 million lifeline from current lenders in favor of a loan that would protect his job, according to a court filing and testimony at yesterday's opening hearing in Philadelphia.

Instead, Tierney and his backers lined up a $25 million loan - known as debtor-in-possession financing - from a different group that included Philadelphia Newspapers chairman Bruce Toll. It includes a provision that would put the loan in default if Tierney left the company.

Fred S. Hodara, an attorney for the lenders, called the proposed loan a "management-preservation DIP facility. Because that's really what it's about. It's a weapon."

However, Tierney and his lawyers said the lenders wanted the company to hire a chief restructuring officer to help oversee operations - something the company had resisted in negotiations leading up to its bankruptcy filing Sunday.

A bankruptcy restructuring can result in steep labor cuts, asset sales, even a complete shutdown, depending on who is in charge and what they want.

"Once we told them that we weren't interested in working for them to, in effect, damage the company we love, they had a change of heart," said Tierney, who was criticized in court for recent executive pay raises. Tierney was not in court; his remarks followed the day's proceedings.

U.S. Bankruptcy Judge Jean K. FitzSimon, who said she "wouldn't know what's going on around town without my Inquirer" to the cheers of the papers' employees, scheduled a hearing for March 9 on the competing proposals for financing the company through bankruptcy.

No matter which loan had been preferred by Philadelphia Newspapers, which owns The Inquirer, the Daily News and, the company was destined for Bankruptcy Court. The purpose of debtor-in-possession financing is getting a company through bankruptcy.

"The lenders putting up the DIP loan have confidence in current management," McMichael said. "They prefer to have current management running the company rather than lenders."

Tierney, who invested $10 million when he pulled together the group that bought the newspapers in 2006, said after yesterday's hearing that the company's major lenders had offered to keep him in his chief executive officer job and give him a chance to earn an ownership stake if he made severe cost cuts.

"They wanted me to stay and offered me a handsome compensation plan and a piece of the company, both verbally and in writing," Tierney said in a statement.

Despite Tierney's fears of potentially damaging cost-cutting, lenders reassured the court that they wanted to make the papers more profitable and sustainable.

Andrew C. Kassner, representing Citizens Bank, the agent for the senior lenders, joined Hodara in criticizing Tierney and his management of the company. In remarks outside court, he said liquidation was not on the table.

For one thing, he said, the value of the company now would be below what the creditors were owed. But the newspapers, he said, are vital to the region. "To the community, these two newspapers are very important, and these lenders recognize that," said Kassner, who earlier told the judge that he was an Inquirer subscriber.

In court, Kassner said that his clients had been committed "for months and months" to keeping the newspapers afloat, and that the issue now was to preserve a "very solid and well-regarded business and institution in this city."

The courtroom proceedings began with similarly impassioned remarks by the company's attorney, McMichael, but sentimentality gave way to harsher comments that illustrated a deep gulf between the negotiating positions.

Indeed, Mark K. Thomas, an attorney for Philadelphia Newspapers who works for Proskauer Rose L.L.P. in Chicago, said he welcomed the court's involvement as hopefully bringing "adult supervision" to negotiations.

Hodara reprised the theme later, but as a barb toward Tierney and management. "This is a company in need of parental supervision," Hodara said. "We think the court obviously will provide that."

Kassner and Hodara criticized large raises authorized in December for Tierney and two of his senior officers.

"When the lenders heard about this and advised the company that they should roll back the raises, the company refused," Kassner said.

The company later said in court that salaries for Tierney and executive vice presidents Mark J. Frisby and Richard Thayer would be rolled back to pre-December 2008 levels. Tierney's latest raise, to $850,000, was taken away, and his pay was returned to $618,000. The two others fell back to $400,000 from $475,000.

Lenders cited the raises as an example of poor management.

"Most companies would have hired a crisis manager," Kassner said. "To this company, it was business as usual."

Lenders seemed heartened that the company said it would now hire a senior restructuring adviser. But they remained concerned about whether that adviser would be given ample authority in a consulting role to Tierney, whom they portrayed as having final say on almost all decisions.

"We, too, want this to be a smooth reorganization," Kassner said. "We want this company and this enterprise to survive and thrive. But it cannot continue to be managed the way it has been."

Contact staff writer Maria Panaritis at 215-854-2431 or