U.S. judge reverses ruling on Philly news bidding

By Jessica Hall

NEW YORK, Nov 10 (Reuters) - A federal judge on Tuesday reversed a bankruptcy court ruling that would have allowed creditors of Philadelphia Newspapers LLC to use their debt to bid in an auction to buy the owner of the Philadelphia Inquirer and the Daily News.

Under Tuesday's ruling by U.S. District Judge Eduardo Robreno for the Eastern District of Pennsylvania, the newspaper owner now can bar creditors owed roughly $300 million from using the debts owed to them as part of their bid.

Robreno wrote that the bankruptcy court erred in allowing lenders to make a "credit bid" at the Nov. 18 auction. The right to a credit bid by senior lenders "cannot be found to exist at this juncture," Robreno said.

The lenders had wanted to submit a credit bid to challenge the existing reorganization plan, which calls for a sale to an investor group led by former public relations executive Brian Tierney, who is now chief executive officer of Philadelphia Newspapers.

The bankruptcy court previously had ruled in favor of the lenders' right to a credit bid, saying that the company's arguments to restrict such bids were "a not-so-thinly-veiled attempt to manipulate the sale process" to help the current management team.

In August, Philadelphia Newspapers proposed a plan to emerge from bankruptcy that called for the investor group, which includes Toll Brothers Inc (TOL.N) co-founder Bruce Toll, to help finance a $92 million deal that would wipe out about $300 million in debt.

Neither Philadelphia Newspapers nor a lawyer for the lenders could immediately be reached for comment on Robreno's ruling.

The company previously argued that all bidders should be required to make cash bids to keep the auction fair and to gauge a bidder's ability to fund the business going forward.

The lenders, however, said the existing reorganization plan was an "insider transaction ... to allow Tierney and friends to keep the assets."

Without credit bids, the auction would not generate enough offers and creditors would be shortchanged of their chance to recover their losses, the lenders previously said.

Robreno said in his ruling that lenders would "retain the right to argue at confirmation, if appropriate, that the restriction on credit bidding failed to generate fair market value at the auction, thereby preventing them from receiving indubitable equivalent of their claim."

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

The case is In re Philadelphia Newspapers LLC, U.S. Bankruptcy Court, Eastern District of Pennsylvania, No. 09-11204. (Reporting by Jessica Hall; Editing by Phil Berlowitz) (For more M&A news and our DealZone blog, go to here)