The Score

March 22, 2010 3:38 PM

In Philly Papers Case, a Blow to Creditors

Posted by Zach Lowe

Major bankruptcy news we felt too important to hold until our next edition of The Bankruptcy Files: A federal appeals court ruled Monday to allow the owners of the bankrupt Philadelphia Inquirer and Daily News to prohibit creditors from using the debt they hold in the company to take control of it in bankruptcy court, according to the Associated Press

The case addresses perhaps the hottest-button issue to emerge in bankruptcy law since the economy collapsed: How much power creditors--both secured and unsecured--should have in determining the course of a bankruptcy. Bankruptcy experts fretted over whether the ultra-speedy bankruptcies of General Motors and Chrysler would set bad precedents for the steamrolling of creditors rights. The case of Philadelphia Newspapers is a different animal, but the 2-1 ruling by the U.S. Court of Appeals for the Third Circuit today marks the second time in six months that a federal appeals court has approved a plan to block creditors from making a so-called credit bid in a Chapter 11 process, according to our previous reporting

In the Philly case, senior creditors, headed by Citizens Bank and represented by Drinker Biddle & Reath and Akin Gump Strauss Hauer & Feld, pitched a plan to exchange the $300 million or so of debt they hold for a controlling stake in the publishing company once it emerges from Chapter 11. But the local investors who control the company now didn't like that idea. The group, led by two investors who purchased the company for $515 million in 2006, submitted a bid to buy the paper with $67 million in cash and real estate. Under that plan, senior creditors would receive about 22 cents on the dollar and unsecured creditors would receive virtually nothing. (O'Melveny & Myers represents the creditors committee in the case; Ben Logan, one of the lead O'Melveny partners on the matter, declined to comment.) Most importantly, the local plan proposed a ban on credit bids.

Senior lenders protested and won the initial round last year, when the bankruptcy judge presiding over the case ruled that the local bid represented an "insider" transaction in violation of bankruptcy law. That judge, Stephen Raslavich, ruled that creditors should have the right to credit bid. The local investors appealed and have now gotten their way, according to the AP and court records.

Andrew Kassner, chair of Drinker Biddle's bankruptcy practice, did not return a call seeking comment on the adverse ruling for his client. Lawrence McMichael, a Dilworth Paxson lawyer representing the local bidders along with Proskauer Rose, says he expects about a half-dozen bidders to submit bids for the papers. Several potential bidders have done extensive due diligence on the papers, McMichael says, and others have indicated they would be interested provided they wouldn't have to compete against a credit bid.

Creditors attorneys either didn't return calls or declined to comment on what their next move might be. They could appeal for an en banc rehearing at the full Third Circuit or even to the U.S. Supreme Court, but McMichael says the ownership group, having won today, will "vigorously fight any efforts to delay the case."

"We have to get this over with," McMichael says. "We're going to move quickly to an auction."

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