Philadelphia Newspapers seeks own probe of recording

Philadelphia Newspapers L.L.C. ought to be able to hire its own special counsel to investigate an unauthorized recording of a meeting with some of its major lenders, rather than relying on lawyers representing other creditors in the case, a lawyer for the media company told a federal judge yesterday.

"What's at stake here are our rights," said Lawrence G. McMichael, a Dilworth Paxson L.L.P. attorney who represents the owner of The Inquirer, the Philadelphia Daily News, and Philly.com in bankruptcy proceedings. He said U.S. Bankruptcy Judge Jean K. FitzSimon committed an "abuse of discretion" when she ordered lawyers for the committee of unsecured creditors to investigate the recording of a Nov. 17 meeting by Vincent DeVito, an executive with CIT, a key lender.

Philadelphia Newspapers has been dogged in its pursuit of this investigation because if it establishes wrongdoing by some of the secured lenders such as CIT that stand first in line for payment in a bankruptcy, they could be sent to the back of the line.

McMichael told U.S. District Judge Eduardo C. Robreno that he should reverse the order by FitzSimon. He also said the two firms conducting the inquiry - Eckert Seamans Cherin & Mellott L.L.C., and O'Melveny & Myers L.L.P. - had a conflict of interest because they also represented the major lenders in other matters. While the lenders have waived the conflict, Philadelphia Newspapers has not. McMichael called the conflict "secondary" to the issue of the company's ability to evaluate its own rights.

Robreno said he would issue a ruling on the appeal early next week.

CIT has acknowledged that DeVito made the recording, but said it had been destroyed, and assured newspaper management that no others had been made. Under Pennsylvania law, making a surreptitious recording carries both civil and criminal penalties.

Gary Schildhorn, a lawyer with Eckert, which represents the unsecured or second-tier creditors and is investigating the recording incident, called proving that the major lenders should be subordinated "a high hurdle, but one we hope to meet."

David Abernethy, a Drinker Biddle & Reath L.L.P. attorney representing Citizens Bank, the agent for the major lenders owed more than $300 million, said the question for Robreno was whether the bankruptcy judge was "manifestly unreasonable" in giving unsecured creditors responsibility for the investigation so the company could focus on resolving the bankruptcy.