U.S. judge backs Philadelphia newspaper creditors

A general view of the Philadelphia Inquirer/Daily News headquarters building on Broad Street in Philadelphia in this October 6, 2005 file photo.

BANGALORE (Reuters) - Lenders trying to seize control of the parent company of two bankrupt Philadelphia newspapers won a judge's approval to use money owed to them as part of their bid, a move that could deliver the papers to their hands.

U.S. Bankruptcy Judge Stephen Raslavich of Philadelphia ruled on Thursday that the lenders could make a credit bid in the auction of the dailies, using some of the $300 million owed to senior lenders, court documents showed.

Philadelphia Newspapers LLC, which owns the Philadelphia Inquirer and Philadelphia Daily News, owes $300 million to a senior lenders group, which includes Citizens Bank, a unit of Royal Bank of Scotland Group Plc.

The lenders want to buy the papers, taking them away from the original investor group, led by former public relations executive Brian Tierney, now chief executive officer of the company.

The lawyer for Philadelphia Newspapers had argued that all bidders should be required to make cash offers to keep the auction fair and to gauge their ability to fund the business.

Raslavich said the company's arguments were "a not-so-thinly-veiled attempt to manipulate the sale process" to help the current management team.

Philadelphia Newspapers proposed a plan in August to emerge from bankruptcy, in which real estate executive Bruce Toll would help finance a $92 million deal that would wipe out about $300 million in debt.

Toll, vice chairman and co-founder of luxury builder Toll Brothers Inc, was part of the group formed by Tierney to buy the papers in 2006 from McClatchy Co.

Philadelphia Newspapers filed for Chapter 11 bankruptcy protection in February, blaming a dramatic fall in revenue, the economic crisis and its debt structure.

The company has been running display ads in the Inquirer and Daily News telling readers what they can do in the "fight" against the "disaster" of "out-of-town corporate ownership."

The case is In re Philadelphia Newspapers LLC, U.S. Bankruptcy Court, Eastern District of Pennsylvania, No. 09-11204.

(Reporting by Ajay Kamalakaran in Bangalore, Jessica Hall in Philadelphia and Robert MacMillan in New York; Editing by Lisa Von Ahn)