Judge in Philadelphia Newspapers Case: Stop Bluffing, or Risk Folding

By: Philadelphia Newspapers hopes to use $35 million in new capital to settle nearly $400 million in debt and emerge from bankruptcy.

An opposing creditors' plan would leave the newspapers saddled with up to $85 million in debt, making it difficult for The Philadelphia Inquirer and Philadelphia Daily News to survive, a company lawyer said Tuesday.

Lawyer Larry McMichael offered broad outlines of the competing reorganization plans after a hearing Tuesday, but neither has been filed in court.

A new judge handling the case chided various parties involved Tuesday for offering ''untenable'' options to resolve the company's finances, which McMichael described as ''under water.''

''To one degree or another, everyone involved ... is overplaying their hand,'' Chief U.S. Bankruptcy Judge Stephen Raslavich said.

He ordered all sides -- the company, creditors and the union representing writers and photographers -- to stop bluffing or risk having the city's two largest dailies fold.

Philadelphia Newspapers filed for bankruptcy in February, less than three years after a group of local investors bought it for $515 million. Like its industry peers, the company has seen its value plummet since then as advertisers and readers move to the Web.

Philadelphia Newspapers has reported better-than-expected cash flow this year but has made little progress addressing the gargantuan debt.

According to McMichael, the company hopes to raise $35 million in new money from current investor Bruce Toll, the housing mogul, and others, and use the money to try to settle those debts. He offered few specifics but said the plan would leave the company with no more than $35 million in remaining debt, including $25 million in exit costs related to the bankruptcy.

The secured creditors' plan, he said, would leave the company with $60 million in remaining debt plus the $25 million in exit costs. That would apparently mean they would get less than 20 percent of the $315 million owed them. The remaining debt is owed by unsecured creditors.

Several deadlines are looming fast.

The company has an Aug. 31 deadline to file its reorganization plan, the same day its contract expires with the guild that represents writers, photographers and advertising staff. Teamsters and other unions have agreed to month-to-month contract extensions, but the guild has so far balked, citing the company's refusal to start negotiations.

The bankruptcy has proven contentious, with the owners and lenders locking horns over who will ultimately control the company, who should provide interim financing and who should engage in upcoming labor talks.

Much of the conflict involves whether Publisher Brian Tierney and his team should stay at the helm.

''You have more or less presented each other with untenable offers that could hardly be expected to be accepted,'' the judge said Tuesday.

Fred Hodara, a lawyer for the secured creditors, said his group wants to start negotiating with the unions so it can ''hit the ground running'' if it gains control of the newspapers.

The parties return to court Aug. 18.