The split 2-1 decision makes it more likely that The Philadelphia Inquirer and the Philadelphia Daily News would remain in local hands after a bankruptcy auction, now scheduled for April 27. Creditors have bitterly fought to take the reins of the company during the yearlong bankruptcy proceedings.
A local ownership group - composed of two current investors and one new partner - has opened the bidding with $67 million in cash and real estate. That "stalking-horse" bid, by a group hand-picked by the owner to open the bidding, would give top-tier, secured creditors about 22 cents on the dollar on the $300 million debt they hold. Unsecured creditors would get virtually nothing.
The secured creditors, including bank companies and hedge funds, argued that creditors are nearly always allowed to bid at bankruptcy auctions with the debt owed.
But the 3rd U.S. Circuit Court of Appeals in Philadelphia upheld a lower court ruling and said the bankruptcy code "unambiguously permits" a debtor to craft any plan that offers lenders fair value for their secured interest. The lenders have no statutory right to bid with their IOUs, the appeals court said.
Philadelphia Newspapers, which owns the two newspapers, had proposed the auction as part of its Chapter 11 reorganization.
Local investors led by Brian Tierney, a former advertising and public relations executive, and housing developer Bruce Toll bought Philadelphia Newspapers in 2006 for $515 million. The value fell sharply amid industrywide declines in circulation and revenue, and the company filed for bankruptcy protection in February 2009.
The new local investment group is made up of Toll, a union pension fund and David Haas, an heir to the Rohm & Haas chemical company fortune who is the only new investor. They would likely retain Tierney as chief executive, while creditors have vowed to oust him.
The bankruptcy judge presiding over the case, Chief Judge Stephen Raslavich, deemed the local investor group's bid an insider transaction and granted creditors the right to use the money owed them to bid. But a federal judge overturned his ruling, putting the auction on hold while lenders appealed.
There has since been considerable interest in the company by potential bidders, but only if creditors have to bid with cash as well, company lawyer Larry McMichael said Monday.
"The fact that there is no credit bidding will result in a much more vigorous auction," McMichael said.
Lawyer Andrew Kassner, who represents Citizens Bank, the agent for the secured lenders, did not immediately return a message Monday. The senior lenders include the Royal Bank of Scotland Group PLC, CIT Group Inc. and Angelo, Gordon & Co.
In issuing a dissent, Judge Thomas L. Ambro, a veteran bankruptcy lawyer, noted Raslavich's conclusions that the stalking-horse bid was an insider transaction and that the debtors' plan was not necessarily designed to raise the most money possible for creditors. Ambro referred to the current owners' campaign to retain control as "a high-stakes game of chicken."
But Tierney said that Monday's ruling would level the playing field and let the marketplace determine a fair value for the company, which also owns the Philly.com Web site.
"Time is of the essence, and we need to move forward quickly with the April 27th auction," he said in a statement.
