* Creditors say liquidation more favorable
* "Stalking horse" deal with Najafi worth $435 mln
* Hearing set for Thursday
By Nick Brown
NEW YORK, July 13 (Reuters) - Creditors of Borders Group Inc BGPIQ.PK are attacking a potential sale to private equity group Najafi Cos, saying the bankrupt bookseller would be better off selling itself to liquidators.
The plan, under which Najafi would pay $215 million in cash and assume $220 million in liabilities, would allow the private equity firm to liquidate Borders' brick-and-mortar operations if it wanted, the unsecured creditors' committee said in court papers filed Wednesday.
Borders should instead pursue its back-up plan, the committee said -- a sale to a group of liquidators led by Hilco Merchant Resources that would bring in between $252 million and $284 million in cash through going-out-of-business sales.
The liquidation plan would let Borders sell its non-merchandise assets, including intellectual property and real estate assets, the committee said.
It added that it would support the proposed Najafi deal if the buyer revised its bid to guarantee that Borders remains a going concern.
Borders has picked Najafi, owner of the Book-of-the-Month Club, as the minimum, or "stalking-horse," bidder at a bankruptcy court-supervised auction set for July 19. A hearing on the bidding procedures is scheduled for July 14 before Judge Martin Glenn in U.S. bankruptcy court in Manhattan.
The Najafi plan "neither maximizes value" for creditors "nor provides for the other benefits of a going concern," specifically the preservation of jobs, the committee said.
The retailer, which helped pioneer the concept of book superstores, filed for bankruptcy in February after years of falling sales. It has closed 226 of the 642 stores it operated prior to bankruptcy. If the Najafi sale is approved, Borders would become a subsidiary of Najafi-owned Direct Brands, a direct-to-consumer distributor of DVDs, CDs and books.
Borders currently employs nearly 11,000, according to a spokeswoman.
If no party offers a competing bid by a Sunday deadline, the auction would likely be canceled and Najafi deemed the winner.
If a competing party were to prevail, Najafi would be entitled to a $6.45 million breakup fee, another feature the creditors' committee criticized in its filing. Back-up liquidators have not demanded any breakup fee, the committee said.
A lawyer for the committee did not return a call seeking comment Wednesday. Borders said it was optimistic it could resolve the dispute.
"We continue to work hard to satisfy the matters raised by the committee in its filing, and hope to see a successful transaction ... that delivers value to the creditors," Borders spokeswoman Mary Davis said.
The committee's filing comes on the heels of about 20 objections Friday and Monday from groups of landlords who said they were being kept in the dark by the plan with respect to the fate of their leases. Borders says it is providing as much information as it can under tight deadlines.
The case is In re Borders Group Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-10614. (Editing by Steve Orlofsky)