The incumbent management of the bankrupt company that owns the Philadelphia Inquirer and the Philadelphia Daily News won a significant, but likely short lived, victory in the Third Circuit Yesterday. The Daily News reports that a three judge Thgird Circuit panel has upheld bankruptcy Judge Steven Raslavich’s ruling prohibiting the company’s creditors from using the debt that they are owed as a credit with which to bid in the upcoming bankruptcy auction. I would expect that the creditors will seek en banc review of this decision which, if upheld, would substantially increase the possibility that the bid backed by current management could prevail at the auction. I would be surprised, however, if this decision were to survive en banc review. As Judge Thomas Ambro noted in his dissent, the decision appears to run contrary to 30 years of precedent, and the legislative intent underlying the bankruptcy code, that supports the rights of creditors to “bid their credit” in bankruptcy court auctions. While no doubt encouraging to those – including current Philadelphia Newspapers CEO Brian Tierney – who want to see the Inky and Daily News stay in local hands, the decision, in my view, rests on a very shaky legal foundation and ought to be, and likely will be, overturned.

That’s the general thesis of a very interesting article in the Winter 2008 issue of The City Journal. The criminalization of bad business decisions, previously dealt with in civil courts through claims for civil fraud or other liability theories, has been a troubling trend since the spectacular collapse of Enron. If recent reports concerning the conduct of the Justice Department’s Enron Task Force in the prosecution of Ken Lay and Jeff Skilling, Enron’s former chairman and CEO, respectively, turn out o be true, it would appear, in fact, that the zeal for imposing criminal liability on businessmen with poor judgment has gone beyond zealous into the realm of unseemly and, perhaps, unethical. And, if the author of the City Journal article is correct, all to the detriment of the shareholders. It is, perhaps, time to rethink the way our legal system deals with business failures.

Courtesy of the WSJ’s Law Blog earlier this evening came the news that Barry Diller has prevailed in his litigation with John Malone’s Liberty Media concerning Diller’s plan to split internet company IAC into 4 separate pieces. Neither guy is all that likeable, but when two new media kingpins square off in court its always news.

In an earlier post I criticized the government’s case against Lord Conrad Black and labeled its prosecution a “jihad” against business. In the interest of being fair and balanced, I commend to you this post by Professor Bainbridge, which makes a cogent argument that Lord Black plundered his company and its shareholders.

Chancellor William Chandler, in a very pointed opinion, denied Maxim Integrated Products’ motion to dismiss most of the backdating related claims brought against it by shareholder William Ryan (you can access a copy of Chancellor Chandler’s opinion here.) Noting that a majority of the board of directors approved each of the backdated options grants in question, Chancellor Chandler dismissed Maxim’s argument that Ryan’s derivatove suit should be dismissed because he did not ask the board to take action before he brought the suit – typically a requirement for such claims. Given the significant influence that the Delaware Chancery Court carries in the corporate law world, and the esteem in which Chancellor Chandler is especially held, this ruling is very significant, and may very well pave the way for a substantial number of future backdating related cases.

After reading today’s New York Times article on Apple’s latest pronouncement related to its internal proble of its options dating issues, one would conclude either that the company is trying to put the best face on a very bad situation or is simply sticking its head in the sand. Simply stating that the CEO knew about the backdating but did not personally profit begs the question of whether the company itself might face any liability, and wholly avoids the question of whether recently disclosed irregularities surrounding an options grant to Jobs himself might ultimately lead to an liability for the company or for Jobs himself. As I said yesterday, this situation will get a whole lot worse before it gets any better, unless Apple steps up and is far more forthcoming.

Joan Heminway, a law professor at the University of Tennessee, has written a book entitled “Martha Sewart’s Legal Troubles,” that is due to be published in a week or so. You can order a copy here.