The future of Philadelphia's two major newspapers could turn on a pair of commas in the bankruptcy code.
The newspapers' creditors seized on the commas to argue in a federal appeals court Tuesday for the right to use the $300 million owed them to bid for The Philadelphia Inquirer and Philadelphia Daily News.
The company that owns both newspapers, Philadelphia Newspapers, interprets the statute to mean it can bar such credit bids at its proposed auction. The company hopes a new group _ comprised of two current and one new investor _ will win with a bid of $67 million in cash and real estate.
The lawyers for the two sides were arguing over whether the placement of the commas creates a restrictive clause. Creditors cited well-known grammar books such as "The Elements of Style" to make the case that surrounding seven words with commas means that the subsection in question should apply to all, not some, bankruptcy sales.
The bid, by a group hand-picked by the owner to open the bidding, would give top-tier, secured creditors owed $300 million about 22 cents on the dollar. Unsecured creditors would get virtually nothing.
The judge presiding over the case in U.S. Bankruptcy Court had deemed the local investor group's bid an insider transaction. He said that creditors could make a competing bid using the money owed in an auction scheduled for last month.
But a federal judge overturned the bankruptcy court decision, prompting a delay in the auction. The lenders appealed to the 3rd U.S. Circult Court of Appeals.
Philadelphia Newspapers filed for bankruptcy protection in February, less than three years after local investors bought the company for $515 million. Like many other media companies filing for Chapter 11, the Philadelphia newspapers have had trouble paying off debt amid steep declines in advertising revenue in the recession.
The three-judge panel weighing the appeal includes Judge Thomas L. Ambro, a veteran bankruptcy lawyer. He suggested the credit issue might be deferred until both sides see how the auction plays out.
Lenders reject that approach.
"Once the bids are unsealed, that is not something that can be replayed," said Abid Qureshi, a lawyer for secured lenders. "That's like playing a round of poker with one's cards face up."
The secured creditors group includes the Royal Bank of Scotland Group PLC, CIT Group Inc. and Angelo, Gordon & Co.
Publisher Brian Tierney said Tuesday that more than 20 interested parties have reviewed the company's books, but he said none would bid if it had to compete against creditors holding $318 million in IOUs.
"With credit bids, it's a waste of everybody's time," Tierney said.
Larry McMichael, a lawyer for the newspapers, said the bankruptcy code was meant to be a "flexible tool" for troubled companies.
"Congress crafted Chapter 11 to be a flexible tool to allow debtors to craft a plan specific to their industry," he argued in court.
The investors now behind Philadelphia Newspapers include Tierney and housing developer Bruce Toll. The new investment group would likely retain the high-profile Tierney, a former public relations executive, while creditors would oust him.
The appeals court did not indicate when it would rule.