PHILADELPHIA (Reuters) – Creditors of bankrupt Philadelphia Newspapers LLC should not be allowed to use their secured debt in a bid for the company because that would discourage cash bidders, an attorney for the company told an appeals court on Tuesday.
As the battle for control of the publisher of The Philadelphia Inquirer, Philadelphia Daily News, and Philly.com. heats up, the U.S. Court of Appeals for the Third Circuit in Philadelphia heard arguments on Tuesday about whether senior lenders could use their debt to participate in an auction for the company.
The company has sought to have all bids made in cash.
“Putting credit bidders in front of potential bidders scares them away,” the company’s attorney Lawrence McMichael told the court.
But attorneys for creditors including Citizens Bank, Royal Bank of Scotland Group PLC (RBS.L) and CIT Group Inc (CIT.N). contended that a bankruptcy judge was right to rule earlier this year against the company’s plan that would wipe out $300 million in secured debt in return for $36 million in cash and real estate the company has valued at $30 million.
The ruling by bankruptcy judge Stephen Raslavich was overturned in November by a district court, leading to Tuesday’s appeals court hearing.
“The only correct and proper reading is the reading of the bankruptcy court and not the district court,” Alfred Putnam, Jr., a lawyer for the creditors, told a three-judge appeals court panel.
The company’s plan would be “giving the secured creditors less than they are entitled to in the bankruptcy,” Putnam argued.
The creditors’ plan to buy the company’s operating assets with the value of their secured debt is called a credit bid.
Outside court, McMichael said about 20 potential investors have expressed interest in the company since Nov. 10.
The company was acquired in 2006 by local investors including public relations executive Brian Tierney and luxury home builder Bruce Toll for $515 million, but it filed for Chapter 11 bankruptcy protection last February after advertising revenue and circulation declined.
Abid Qureshi, another attorney for the creditors, rejected the company’s proposal that it be sold by a cash-bid auction, saying creditors “can’t be expected to put up more cash.”
He said secured lenders “would suffer irreparable harm if the auction proceeds without credit bidding.”
Judge Thomas Ambro said the fight over the company had become acrimonious. “This is a case of a lot of bad blood. There is some real hardball being played here,” he said.
The court is expected to rule more quickly than usual, perhaps in January, McMichael said.
The bankruptcy case is In re Philadelphia Newspapers LLC, U.S. Bankruptcy Court, Eastern District of Pennsylvania, No. 09-11204. The appeal is The Steering Group of Prepetition Lenders and Citizens Bank of Pennsylvania, as agent for the prepetition lenders v Philadelphia Newspapers LLC et al.,U.S. Court of Appeals, Third Circuit, No. 09-4266. (Reporting by Jon Hurdle in Philadelphia; Editing by Toni Reinhold)