- The Washington Times - Monday, April 20, 2009

PHILADELPHIA (AP) - A judge told bankrupt Philadelphia Newspapers to focus on its financial reorganization while others investigate claims an investor illegally tape-recorded a sensitive meeting.

The judge Monday appointed unsecured creditors to pursue the company’s charge that a senior lender recorded a key financial meeting in November, allegedly souring the pre-bankruptcy negotiations.

“It will keep this from continuing to be one of the sideshows of the negotiations,” U.S. Bankruptcy Judge Jean K. FitzSimon said. “I want the debtors and the banks to stay focused on the reorganization.”

Philadelphia Newspapers operates The Philadelphia Inquirer and Philadelphia Daily News. The company filed for bankruptcy in February, citing about $395 million in debt.

The company had asked FitzSimon to let them hire a special counsel to investigate the allegation. Lawyers for the senior lenders _ a group that includes the alleged offender, the New York-based investment firm CIT Group Inc. _ opposed the plan as an expensive fishing expedition.

The unsecured creditors and a bankruptcy trustee took a middle ground, arguing that some investigation might be warranted, but questioning the potential expense. The judge’s decision seemed to please all sides.

“The judge agreed with us that this is a very serious matter that needs investigation,” said Brian Tierney, chief executive of Philadelphia Newspapers, who testified Monday about the meeting. “We’re thrilled about that.”

The judge denied the company’s motion to hire former Montgomery County District Attorney Bruce Castor and his firm as special counsel. Tierney wants to know whether other meetings were taped and whether any private information was distributed.

The judge instead assigned the task to the committee of unsecured lenders, who argued in court papers that hiring Castor’s firm “would be wasting the precious assets of the estate.”

The committee will now decide how much urgency the issue deserves, said their lawyer, Gary Schildhorn.

Tierney led a group of local investors that bought the newspaper company in 2006 for more than $500 million. He testified Monday that the investors put in $150 million cash and borrowed another $380 million.

He also said the company is doing relatively well compared to peers in the troubled newspaper industry. The company is profitable in terms of its operations, and recently forecast its 2009 income at more than $10 million before taxes, interest and certain other expenses, according to court papers.

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