• by Erik Sass  @eriksass1, November 11, 2009

The disgruntled creditors trying to take control of The Philadelphia Inquirer and Philadelphia Daily News will have to make an actual cash bid if they want to take ownership of the properties, rather than simply foreclosing on them, according to a Federal district court judge.

The ruling, issued on Tuesday, reverses an earlier decision by a bankruptcy court that promised to expedite the transfer of ownership to these creditors.

Philadelphia Newspapers, LLC filed for Chapter 11 bankruptcy protection in February, hoping to restructure about $390 million debt left from its ill-timed acquisition of the two former Knight-Ridder newspapers from McClatchy in 2006.

The $562 million deal was followed by a steep, continuing decline in newspaper ad revenues, compounded by the recession and credit crunch in late 2008. Together, they made it impossible to service this debt.

However, the Chapter 11 filing has not resulted in the hoped-for resolution, as creditors refused to budge in their negotiations with the company's owners, represented by Philadelphia ad mogul Brian Tierney. In April, the company alleged one of its creditors had illegally recorded negotiations, leading to a drawn-out investigation. Then, in August, a judge told both sides of the dispute that they were failing to present reasonable plans that would allow a compromise and continued operation of the newspapers.

At one point, the company's management said it would turn elsewhere for a $15 million short-term loan, antagonizing senior creditors, who fear losing precedence. For their part, the creditors proposed a takeover -- giving them complete control while leaving the company with $60 million in debt, which management flatly rejected.

Since then, the case has grown even more convoluted and bizarre: in October, Philadelphia Newspapers alleging that some of its creditors illegally obtained a confidential document by hacking into its computers. The confidential document related to an advertising campaign mounted by the company, with the tagline "Keep It Local." Creditors argued the move was intended to discourage bidding for the company, keeping it in the hands of its current owners.

With legal wrangling growing more acrimonious, an auction was scheduled for next week, at which creditors hoped to use the company's $300 million in unpaid debt as financial leverage, in lieu of actual cash, in their bid for ownership of the company.

However the latest ruling, by U.S. District Judge Eduardo Robreno, says the newspapers are not obliged to consider these credit bids; meaning that the creditors would have to submit cash bids in competition with another group of bidders, including investors from the company's current ownership and new allied investors.