The ruling could determine who takes over The Philadelphia Inquirer, Philadelphia Daily News and the Philly.com Web site.
CEO Brian Tierney and other company officials had hoped to block creditors from making a credit bid in the bankruptcy auction they proposed.
"We very much want these newspapers to survive and thrive," lawyer Andy Kassner, who represents Citizens Bank, the agent for the senior lenders, told The Associated Press late Thursday. "The agent will be consulting with the lending group, and its advisers, on how to proceed in the auction, and what position to take in connection with bids."
The senior creditors include the Royal Bank of Scotland Group PLC, CIT Group Inc. and Angelo, Gordon & Co. The auction date has not yet been scheduled.
Creditors had complained in court that the company drew up a contorted bankruptcy reorganization plan designed to exclude credit bids and keep Tierney and his team at the helm. The plan includes a proposed auction along with an opening or "stalking horse" bid of $67 million in cash and real estate from a new ownership group that includes two of the existing owners.
In his ruling, Judge Stephen Raslavich agreed the proposed auction rules looked like "a not-so-thinly veiled attempt to manipulate the sale process."
Tierney led a group of local investors who bought the company in 2006 for $515 million, borrowing about $400 million. They filed for bankruptcy in February amid a steep industry-wide decline in advertising and circulation.
"All eyes are now on Citizens Bank, the agent (for senior lenders). Who will they support?" the company said in a statement. "We will continue fighting for our newspapers and for our employees."
Two of the three bidders in the "stalking-horse" group - Bruce Toll, co-founder of the luxury home builder Toll Bros., and the Carpenters Union Pension Fund - were among the 2006 investors. They are now joined by David Haas, an heir to the Rohm & Haas chemical company fortune.
Tierney has led a local-ownership publicity blitz that decried the possible takeover by creditors, and the tone continued in the company's reaction to Thursday's ruling.
"We know how terrible it will be for these papers, our employees, and our community if these out-of-town hedge funds take over," the statement read. "In contrast, the community-based investors want to protect and nurture these treasures for the long haul."
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