By: Creditors hoping to take over Philadelphia's two main daily newspapers accused the current owners Thursday of trying to "game" the bankruptcy system with a complex plan to keep insiders in control.
They argued for the right to make a "credit bid" at a planned bankruptcy auction for The Philadelphia Inquirer and Philadelphia Daily News, using some of the $300 million owed to senior lenders.
Creditors complain the owners drew up a contorted reorganization plan designed to exclude credit bids and keep Chief Executive Brian Tierney and his team at the helm.
"It's an insider transaction," said lawyer Ben Logan, who represents lower-tier, unsecured creditors who stand to lose virtually everything. "It's an effort designed cleverly and improperly ... so Mr. Tierney and his friends are able to keep this asset."
A lawyer for Philadelphia Newspapers countered during a bankruptcy court hearing that all parties, out of fairness, should have to make bids with cash and other hard assets.
"If somebody is coming to the table with $300 million in funny money, they have an enormous advantage," lawyer Larry McMichael said. "A fair and open auction should treat all bidders the same."
Local investors pooled $150 million and borrowed the rest to buy the company in 2006 for $515 million.
Philadelphia Newspapers soon encountered sharp industrywide declines in advertising revenue and, like other newspaper publishers that borrowed heavily when the outlook for newspapers was better, the company filed for bankruptcy protection in February, hoping to shed most of its $400 million in debt.
The current owners devised the auction as part of their reorganization plan and announced an opening bid of about $67 million in cash and real estate by a group of "stalking horse" bidders. Stalking horse bids are contingent on no other higher bidder coming forward.
Two of the three bidders in that 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.
The senior creditors , which include the Royal Bank of Scotland Group PLC, the CIT Group Inc. and Angelo, Gordon & Co. , hope to use the outstanding debt to make a counterbid.
Chief Judge Stephen Raslavich of U.S. Bankruptcy Court did not immediately indicate Thursday how he would rule on the credit-bid issue.
The dispute between the local owners and their lenders has been bitter, with everything from accusations of illegal taping of a pre-bankruptcy meeting to complaints about the company's recent "Keep It Local!" publicity blitz, which creditors say demonizes them through fears of slashed news operations.
Raslavich asked aloud Thursday whether those advertisements were not designed to chill outside bidding. McMichael insisted they were only directed at readers.
The creditors would replace Tierney, a former advertising and public relations executive, with a new management team.
"The papers flourished prior to his acquisition," Logan said. "We are confident they will flourish again."
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