Phila. Newspaper Owner Appeals Order Allowing Credit Bid by Lenders

The owner of Philadelphia's two major newspapers has appealed a judge's decision allowing its lenders to use the $300 million they are owed to bid on the company's assets at a bankruptcy auction.

Philadelphia Newspapers LLC argues that U.S. Bankruptcy Judge Stephen Raslavich improperly found that a provision of the Bankruptcy Code gives the lenders the right to submit a so-called "credit bid" for the company's assets.

Under such bids, a secured creditor offers to buy the assets in return for a waiver of what it is owed on its claim.

The newspaper owner insists that it can restrict the lenders from making a credit bid because it proposed its sale as part of a Chapter 11 reorganization plan, affording the creditors certain procedural safeguards not available in assets sales under Section 363 of the code.

Philadelphia Newspapers, which owns the Philadelphia Inquirer and the Philadelphia Daily News, filed for Chapter 11 protection Feb. 22 in the U.S. Bankruptcy Court for the Eastern District of Pennsylvania.

The filing came nearly three years after a group led by ex-public relations executive Brian Tierney and real estate magnate Bruce Toll formed the company and bought the two daily newspapers from McClatchy Co. Tierney currently serves as Philadelphia Newspapers' CEO and publisher of both papers.

The bankruptcy proceedings have been highly contentious, marked by a high degree of animosity between the company and its creditors, according to Judge Raslavich's opinion.

In August Philadelphia Newspapers filed a reorganization plan that contemplates the sale of its assets at a public auction.

The proposed auction procedures would install as the lead bidder a group including Toll, the Carpenters Union Pension Fund and David Haas, heir to the Rohm & Haas chemical fortune. The so-called "stalking horse" bid would allow the company to pay $67 million in cash and real estate to the secured lenders.

In addition, the debtor said it would "market" the offer in order to solicit higher and better bids.

The proposed procedures bar the bankrupt company's senior lenders, led by Citizens Bank, a unit of Royal Bank of Scotland Group PLC, from making a credit bid for the assets.

Because both Toll and the Carpenters Pension Fund were members of Tierney's original purchasing group, the stalking-horse bid, if successful, likely would allow Tierney to maintain control of the papers.

Philadelphia Newspapers sought approval of the auction procedures, and the lenders objected, arguing that Section 363(k) of the Bankruptcy Code gives secured parties the right to submit credit bids at a debtor's assets sales.

The debtor countered that the proposed auction was not a Section 363 assets sale but a sale pursuant to its reorganization plan, which must undergo the Chapter 11 confirmation process.

The company argued that secured creditors have no right to submit credit bids in sales proposed in conjunction with reorganization plans.

In addition, the company insisted that giving the lenders the right to make a credit bid would "chill the marketing and sale process."

Other bidders would have little incentive to spend the time and money to make an offer if the lenders can submit a credit bid, the debtor said. The lenders could simply bid to the limit of their $300 million claim and shut everyone else out of the process, it argued.

Judge Raslavich issued his ruling Oct. 8, finding that Section 363(k) does apply to sales proposed under a Chapter 11 plan. He found that the intent of the Bankruptcy Code is "to ensure that where an under-secured creditor's collateral is proposed to be sold, whether under Section 363 or under a plan, the secured creditor is entitled in all events to protect its rights [in] its collateral."

One of those protections afforded to such creditors is the option to make a credit bid, the judge said.

He called Philadelphia Newspapers' arguments a "not so thinly veiled attempt to manipulate the sale process in order to frustrate a credit bid which the debtors anticipate will exceed the bid of the stalking horse."

The U.S. District Court for the Eastern District of Pennsylvania will consider the appeal.

To comment, ask questions or contribute articles, contact West.Andrews.Editor@ThomsonReuters.com.

Anne Marie Aaronson and Lawrence G. McMichael of Dilworth Paxson LLP in Philadelphia; John M. Elliott and Mark J. Schwemler of Elliott, Greenleaf & Siedzikowski in Blue Bell, Pa.; Mark K. Thomas, Paul V. Possinger and Peter J. Young of Proskauer Rose LLP in Chicago; and Richard J. Corbi of the firm's New York office represent Philadelphia Newspapers.Ben H. Logan of O'Melveny & Myers in Los Angeles; Gerald C. Bender, Melanie McLaughlin and Orly Nhaissi of the firm's New York office; Jennifer M. Taylor of the firm's San Francisco office; and Bryan M. Keilson, Gary M. Schildhorn and Ronald S. Gellert of Eckert Seamans Cherin & Mellott in Philadelphia represent the committee of secured creditors.