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September 17, 2010 3:39 PM

Fireworks In the Philly Papers Bankruptcy!

Posted by Zach Lowe

Sounds like federal bankruptcy court in Philadelphia was the place to be Thursday. As we've reported this week, the court is set to host a second auction for Philadelphia's two leading newspapers on September 23 after an initial winning bid from key creditors fell apart due to their inability to hammer out a contract with a Teamsters union. The bidding will resume Thursday with new conditions, including this: the winning bidders will be stuck with the papers (the Philadelphia Inquirer and Daily News) even if they can't nail down new contracts with all 15 unions linked to the papers, according to the AP and our prior reporting. 

That new condition led the secured creditors, a group of hedge funds, and other investors represented by Akin Gump Strauss Hauer & Feld parter Fred Hodara, to propose their own adjustments to the bidding procedures, according to the AP. The creditors suggested that they aren't so keen anymore on agreements to set aside $1 million of the sales proceeds---which go right to the pockets of secured creditors, since they are first to be repaid--for their unsecured brethren and a small equity stake in the funds themselves for a group of mezzanine lenders. 

Judge Stephen Raslavich did not like that, and he told Hodara so, according to the AP. "If you try and squeeze every nickel in this case--at this late date--into a dime, it's going to backfire," the judge warned Hodara. "Be advised: Don't overplay your hand." 

Whoa! 

But there were even more fireworks in the hallway. Three sources tell us that Mark Thomas, a Proskauer Rose partner representing the newspapers' parent company, got into some near-fisticuffs with labor union representatives at some point during the hearing. One source described the altercation as a "shoving match," but Hodara and a third source say that is an exaggeration, and that Thomas and the union reps "exchanged some loud words." Thomas did not return messages seeking comment. James Linsey, a partner at Cohen, Weiss and Simon representing the Newspaper Guild of Greater Philadelphia, did not return a call seeking comment.

Two lawyers who were at the hearing say the dispute stemmed from a misunderstanding that was quickly resolved. The union reps mistakenly thought Thomas had asked the judge to close the auction to reporters and union members, but Thomas was in fact arguing that the auction should be open to those parties, the lawyers say. 

The senior creditors who won the first auction for $139 million include the hedge funds Angelo, Gordon & Co. and Alden Global Capital. It is unclear at this point who might submit competing bids. Raymond Perelman, the 92-year-old father of billionaire Ron Perelman, led a group of investors that bid in the initial auction, but two sources familiar with Perelman's thinking have told us it's unclear if Perelman's group will bid again. (Skadden, Arps, Slate, Meagher & Flom represent the Perelman group). The Canadian investment firm Stern Partners also bid in the initial auction; Stern's attorney, Robert Keach of Bernstein, Shur, Sawyer & Nelson, has told us it's unclear if Stern will bid again. 

Lawrence McMichael, a partner at Dilworth Paxson also representing the debtors, tells us other potential bidders have been doing due diligence this week. 

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