Lenders try to stop Philadelphia newspaper auction

* Lenders say publisher wants auction in April

* Lenders want "credit bidding" resolved before sale

By Tom Hals

WILMINGTON, Del., March 3 (Reuters) - Lenders to the bankrupt publisher of The Philadelphia Inquirer and Philadelphia Daily News asked a federal court to prevent an auction of the company until the issue of "credit bidding" had been resolved, according to court documents.

The lenders were responding to a request by The Philadelphia Newspapers last month in the bankruptcy court overseeing its Chapter 11 case for a schedule that would allow the publisher to emerge from bankruptcy by June.

The case is on hold until a decision regarding a key aspect of the publisher's reorganization can be resolved by the U.S. Court of Appeals for the Third Circuit.

The lenders, led by Citizens Bank, a unit of Royal Bank of Scotland Group PLC (RBS.L), want the appeals court to clarify that the bankruptcy court cannot proceed with an auction.

The appeals court heard arguments in December over whether secured lenders had to bid in cash at an auction of the company's assets. The lenders argue they should be allowed to bid the roughly $300 million they are owed, known as credit bidding.

The company has proposed a $92 million reorganization that is subject to higher bids, which the company wants to be in cash.

The publisher said in last month's letter that it is unclear when the appeals court may rule, and that "the passage of time is now a threat to the debtors' ability to reorganize."

The publisher's letter did not ask for the court to schedule an auction, but lenders said the company has since indicated that it plans to ask for an auction in early April.

Attorneys for the secured lenders and the company did not reply to requests for comment.

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

The appeals court case is The Steering Group of Prepetition Lenders and Citizens Bank of Pennsylvania, as agent for the prepetition lenders v Philadelphia Newspapers LLC et al.; U.S. Court of Appeals for Third Circuit, No. 09-4266. (Reporting by Tom Hals. Editing by Robert MacMillan)