The ruling Friday means the owners of The Philadelphia Inquirer and Philadelphia Daily News can almost certainly proceed with the auction scheduled for April 27.
The creditors had asked the full 3rd Circuit Court of Appeals to review whether they can bid for the company with the $300 million owed them instead of cash. They said that is the prevailing standard in bankruptcy law and have pledged to take their appeal over so-called "credit bids" to the U.S. Supreme Court.
"It is time to stop these endless appeals and stop wasting the company's money on new law firms," Philadelphia Newspapers said in a statement late Friday. "It's critical that the auction take place on time to set the fair market value of our company."
The Chapter 11 bankruptcy fight between the current owners and their creditors has been unusually acrimonious, with disputes large and small drawing out the court proceedings for more than a year. The company is spending about $2 million a month on legal and management fees related to the bankruptcy.
The current owners include housing company co-founder Bruce Toll and the Carpenters Union Pension Fund. Along with new investor David Haas, an heir of the Rohm & Haas chemical company fortune, they have announced a $67 million opening bid that is backed by Publisher Brian Tierney. Tierney is a current owner but would not be part of the new ownership group.
The secured creditors include Citizens Bank, Angelo Gordon & Co. and the CIT Group. They have argued strenuously that U.S. District Judge Eduardo Robreno's decision to let the company demand all-cash bids at the auction sets a dangerous legal precedent by tossing aside creditors' right to bid with credit.
"Credit bidding is one of the key mechanisms Congress devised to ensure that a secured creditor is never forced to accept less than the value of its security interest in bankruptcy," they wrote in a recent filing.
If credit bids were permitted, the newspaper creditors could best the Toll-led, $67 million bid - which a bankruptcy judge called an inside deal that deserved heightened scrutiny - by bidding some or all of the $300 million they are owed.
Without it, they are left to accept the $67 million - about 22 cents on the dollar - if no other bidders appear, or find new cash to mount a higher bid and take over the company. They have pledged to do just that.
The current owners bought the newspapers for $515 million in February 2006, only to see its value slide to $100 million or less amid industrywide declines in circulation and advertising. They have said they decided to auction the company to determine the fair market value and repay creditors what they can. According to Tierney, several other entities have expressed serious interest in bidding. The company also owns the Web site Philly.com.
The 3rd Circuit panel that upheld the company's all-cash auction rules last month voted 2-1, with the lengthy dissent coming from Judge Thomas L. Ambro, a former bankruptcy lawyer. The order issued Friday suggested that Ambro may have been alone among the six available judges that wanted to rehear the creditors' emergency appeal.
Lawyers Andrew Kassner and Fred Hodara, who represent the secured creditors, did not immediately return messages left after business hours Friday.
