Philadelphia Newspapers L.L.C. can bar its senior lenders from using the $300 million they are owed to try to purchase the company at auction next week, a federal judge ruled yesterday.
U.S. District Judge Eduardo C. Robreno ruled that bankruptcy statutes permit the company, which owns The Inquirer, the Philadelphia Daily News, and Philly.com, to conduct the auction under a section of the federal code that does not require the lenders be given the right to bid their debt, known as "credit bidding."
The senior lenders - which include Angelo, Gordon & Co., the CIT Group, and Eaton Vance - will appeal to the Third Circuit Court of Appeals, according to Fred Hodara, their lead attorney.
The decision reverses a ruling by Chief Bankruptcy Judge Stephen Raslavich and poses a potential impediment to the lenders' plans to try to seek control of the media firm at the auction, now set for Nov. 18.
Now, any bid by the senior lenders would have to be in cash, a requirement that could preclude the participation of some of the lenders, according to one of their attorneys.
The auction is central to the company's reorganization plan, which calls for paying the senior lenders about $67 million in cash and property to settle $300 million in debt. The auction is being conducted, in part, to determine whether the company's offer is fair.
The company, in setting rules for the auction, had sought to require that all bids be made in cash. It argued that if the lenders were permitted to credit bid, other potential bidders might be cowed from participating and the company would not see its full value at auction.
The senior lenders argued it was inherently unfair that they be required to put up more money to retrieve property on which they already had a lien. Abid Qureshi, another of the lenders' attorneys, has previously said some lenders could be barred from bidding in cash because of the rules of the financial vehicles they used in their original investments.
The lenders argued that they had an absolute right to credit bidding under the U.S. Bankruptcy Code.
The argument before Robreno turned on a particular section of the code that offers a three-part test to determine whether an auction such as the one planned by Philadelphia Newspapers was fair.
The lenders argued that the sale had to meet all three portions of the test, including a section that required credit bidding.
The company countered that the sale need only meet one of the three tests, which it did by assuring that the lenders received "the indubitable equivalent" of the value of their collateral.
Robreno ruled that the company was right, that the statute required that the sale meet only one of the three tests, and that it had done so.
"Obviously, we are delighted with this result," said Lawrence G. McMichael, the company's attorney. "I think this will help the company achieve the fairest price for the assets being sold."
Brian Tierney, Philadelphia Newspapers' chief executive officer, agreed. "This will lead to the highest value for the enterprise," he said.
Hodara, in an e-mail statement, said the auction would be "fair and open" only if the his clients were permitted to credit bid.
Monday marks the deadline for bids for the company to be submitted. The actual auction is scheduled to take place in New York next Wednesday at the offices of Proskauer Rose, a law firm that represents the company.