Papers' creditors can't bid with IOUs

Posted: March 23, 2010

A plan to sell the Daily News and Inquirer at auction without allowing hedge funds and other secured creditors to use $318 million worth of IOUs won approval yesterday from a divided panel of three federal appeals judges.

The result was a legal win for the current newspaper management, led by chief executive officer Brian P. Tierney, which has been fighting the newspapers' leading creditors in U.S. Bankruptcy Court for more than a year.

Tierney issued a statement praising the ruling, saying it should encourage more bids from potential buyers.

"We need to move forward quickly with the April 27 auction," Tierney said, referring to a tentative date that the parties had agreed upon last week.

There was no immediate response from lawyers representing the newspapers' biggest creditors, including Citizens Bank, Angelo, Gordon & Co., CIT Group and others.

Tierney and other local investors borrowed more than half the $515 million used to buy the newspapers in mid-2006.

At a hearing last week in U.S. Bankruptcy Court, an attorney for the secured lenders, Fred S. Hodara, said it would be "cumbersome" for them to assemble the money needed for a cash-only bid.

But, Hodara said, even if his group didn't prevail in the appeals court, "it is our intention to follow through on our interest in this company and run it."

Yesterday's decision should put that statement to the test - whether the newspapers' major creditors will find a way to raise the money needed to win an all-cash bidding contest, or whether they will appeal the court ruling, probably by seeking an en banc hearing before all 13 active judges on the 3rd Circuit.

An appeal could delay the auction and further action in the case for months.

The parties had agreed tentatively last week that if they received a speedy ruling from the 3rd Circuit, they could conduct an auction April 27.

But the federal bankruptcy judge in charge of the case, Stephen Raslavich, had not signed off on the date as of yesterday.

The top attorney for the newspapers, Lawrence G. McMichael, said he expected to see bids from at least three investment entities, in addition to a group of local investors assembled by Tierney, who agreed last summer to put up at least $52 million in cash and letters of credit, in effect setting a minimum bid for the company.

Hodara and other attorneys representing senior lenders did not return calls after the three-judge panel issued its ruling yesterday.

The appeals court decision was written by D. Michael Fisher, Pennsylvania's former attorney general, appointed to a federal judgeship by former President George W. Bush after losing the 2002 gubernatorial race to Ed Rendell.

Fisher was joined by another judge from western Pennsylvania, D. Brooks Smith.

They upheld a November decision by District Court Judge Eduardo C. Robreno, ruling that the technical language of the U.S. Bankruptcy Code permits the newspaper company to set up a cash-only auction to sell off the company's assets - even those that were pledged as collateral when a group of investors assembled by Tierney borrowed close to $300 million to buy the papers.

The third judge on the appeal panel, Thomas L. Ambro, issued a vigorous dissent, saying the majority decision ran contrary to 30 years' of bankruptcy law and would deprive secured creditors of the benefits that Congress intended when it wrote the law.

"It's a surprising decision to me," said University of Pennsylvania Law School professor David Skeel, noting that Ambro was a leading bankruptcy lawyer in Wilmington before he became a judge.

"That Judge Ambro is the dissenter is not surprising," Skeel said.

"My guess is, the first thing they'll do is ask for a hearing by the full 3rd Circuit . . . and I think there's a pretty good chance this would be overturned."