Amid an arcane legal debate over the interpretation of the U.S. Bankruptcy Code, a federal appeals panel yesterday heard arguments as to whether Philadelphia Newspapers L.L.C.'s lenders can use the money they are owed to purchase the media firm at auction.

At stake is the ultimate fate of the company, which owns The Inquirer, the Philadelphia Daily News, and

The company's senior lenders argued that U.S. District Judge Eduardo C. Robreno had erred last month when he ruled in favor of the company, which wants to bar its senior lenders from using their debt to acquire the firm.

Abid Qureshi, who represented the senior lenders, argued that Robreno, in his ruling, focused too narrowly on language within a subsection of the bankruptcy code.

Qureshi urged the three-judge panel of the U.S. Court of Appeals for the Third Circuit to take a "holistic" view of the code. If it does, it will be "crystal clear" that lenders have a constitutional right to protect the value of their loans by credit bidding, he said. The company's senior lenders include Angelo, Gordon & Co. and the CIT Group.

Lawrence G. McMichael, the lawyer who represented Philadelphia Newspapers, countered that the issue turned on three words within the code.

The first was the word or, which was used to introduce the last of three provisions in a section that spells out how to ensure that a disputed bankruptcy plan is fair to lenders.

McMichael argued that it meant the company could use any of the provisions to prove that its plan was fair. The company chose to rely on a provision that makes no mention of credit bidding but calls for creditors to receive the "indubitable equivalent" in value of their collateral.

That meant, McMichael said, that Philadelphia Newspapers must pay its lenders at least as much as the company was valued. The auction, without credit bidding, would guarantee that, he argued.

Qureshi countered that the lenders did not believe that term indubitable equivalent has "a clear meaning."

Two of the justices hearing the case - Thomas L. Ambro and D. Brooks Smith - asked Qureshi whether now was the right time to deal with the issue of credit bidding, since whatever happens at auction still must be approved by Chief Bankruptcy Court Judge Stephen Raslavich when the company's final plan comes up for confirmation.

Qureshi said it was, arguing that it would be impossible to rehold the auction if it is determined after the fact to have been wrongly conducted.

The outcome of the second auction would be all but predetermined by the first, he said.

"That would be like replaying a poker hand with the cards face up," he said.

He also contended that other potential bidders would likely skip the auction if they knew the senior lenders intended to challenge the sale at confirmation because they were denied the right to credit bid.

There was also a disagreement over how much of the company's debt was still being traded on the open market and what that might mean for an auction.

McMichael told the court that some of the current lenders appeared to have purchased the company's debt with the specific intent of eventually owning the firm. He told reporters later that such lenders would be motivated to see the company sold at the lowest, rather than highest, price.

Asked by the judicial panel if there had been much recent trading in the company's debt, Qureshi suggested it had been minimal.

That drew a spirited response after the hearing from Brian P. Tierney, Philadelphia Newspapers' president and chief executive officer, who said "tens of millions of dollars" of the company debt had been sold since the firm went into bankruptcy.

According to the company, figures provided monthly by Citizens Bank, the agent for the senior lenders, have shown that approximately $30 million in debt has been traded since October. Required court filings by the senior lenders indicate that enough debt has been traded to create changes in the makeup of the committee that represents secured lenders.

That committee is made up of lenders who control a majority of the Philadelphia Newspapers' debt.

The federal panel adjourned without ruling. McMichael said it could take from several weeks to several months to get a ruling. Until then, the company's auction is on hold.

The auction is central to the company's reorganization plan, which would pay lenders about $67 million in cash and property to settle a $318 million debt. The auction is designed to determine if $67 million is a fair price for the company.