Philadelphia Newspapers: lenders made DIP loan repayment impossible

By Caroline Salls

Pittsburgh, March 23 - Philadelphia Newspapers, LLC filed a lawsuit Tuesday against Citizens Bank of Pennsylvania, Wells Fargo Foothill, Inc. and Credit Suisse Loan Funding LLC, arguing that the secured lenders' conduct has made it impossible for the company to repay its debtor-in-possession financing by the March 31 maturity date.

Specifically, the company is asking the court to stop the lenders from declaring an event of default and to excuse the company from its obligations to repay the loan on March 31 because of the lenders' alleged breach of an agreed upon schedule by obtaining a stay of the auction process and "frustration of performance."

As previously reported, Philadelphia Newspapers' plan of reorganization was delayed by the lenders' appeal of a U.S. District Court ruling that the lenders have no right to credit bid for the company's assets at auction.

According to the lawsuit filed Tuesday with the U.S. Bankruptcy Court for the Eastern District of Pennsylvania, the U.S. Court of Appeals for the Third Circuit affirmed the district court's credit bid ruling on Tuesday.

At the time that the DIP agreement was negotiated, Philadelphia Newspapers said in the lawsuit that it intended to have emerged from bankruptcy by now, giving it enough time to pay off the DIP loan before the maturity date.

However, the company said the auction is now scheduled for April 27, and the plan confirmation hearing will be held within a reasonable time thereafter.

"The senior secured lenders' conduct in delaying the bankruptcy proceedings, in contravention of the agreed-upon schedule, has made it impossible for the debtors to repay the DIP loan by the maturity date (except by a replacement DIP loan from a third party on a priming basis to which the defendants will not agree)," the company said in the complaint.

Taping investigation

In addition, Philadelphia Newspapers said the lenders refused to extend the DIP loan maturity date unless the company agreed to the denial of its motion to reconsider appointment of special counsel to conduct an investigation in connection with alleged lender steering group misconduct.

The company said it wants the special counsel to investigate the steering group's alleged attempts to conceal the facts surrounding an illegal recording of a pre-bankruptcy restructuring alternatives meeting.

"This is the third attempt by the senior secured lenders to leverage issues relating to DIP financing in order to thwart the taping investigation," the company said in the lawsuit. "Twice before, the debtors gave in to the senior secured lenders' demands.

"Now that the Third Circuit has ruled on the credit bid issue and the auction and confirmation hearing are no longer stalled, the debtors cannot, consistent with their fiduciary duties, agree to further postpone the taping investigation."

Philadelphia Newspapers alleged that the lenders' refusal to extend the maturity date or allow refinancing of the DIP loan maturity is directly related to its pursuit of the taping issue.

The company said it does not intend to use cash collateral or DIP loan proceeds to conduct the taping investigation.

Philadelphia Newspapers, based in Philadelphia, owns the Inquirer, the Philadelphia Daily News and Philly.com. The company filed for bankruptcy on Feb. 23, 2009, and its Chapter 11 case number is 09-11204.

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