April 10 (Bloomberg) -- Polaroid Corp., the twice-bankrupt pioneer of instant photography whose brand name may be its most valuable asset, must try again to auction off its assets after failing to win a judge’s approval for a $56.3 million sale.

U.S. Bankruptcy Judge Gregory Kishel issued the decision yesterday at a hearing in St. Paul, Minnesota, where Polaroid sought approval to sell itself to a joint-venture of two liquidation firms, Hilco Consumer Capital LP of Toronto and Gordon Brothers Brands LLC of Boston. It was the second time in a week the auction was reopened after Polaroid picked a buyer.

“Hilco Consumer Capital and Gordon Brothers Brands are confident we will prevail in the coming days and that the court will uphold the decision of April 8th as we have the highest and best offer for the creditors,” Kimberly Parker, a Hilco spokeswoman, said in an e-mailed statement.

Private-equity firm Patriarch Partners LLC, the losing bidder at an extended auction this week, filed papers yesterday saying the auction should be reopened so it could increase its bid again to $55.7 million in cash and 15 percent equity in the new company valued at $9.75 million, according to Patriarch spokesman Taylor Griffin.

Patriarch argued its offer was better for Polaroid because the liquidators planned to fire employees and halt innovation at the company, whose brand name may be its most valuable asset. Kishel said he would supervise another auction in his courtroom on April 16.

‘Fair Process’

“All we ask for is a fair process and a level playing field,” Griffin said yesterday in a phone interview. “The auction next week will be supervised by the judge and the concerns about the process we’ve continually raised will be addressed. We’re confident we will prevail.”

Patriarch claims the auction was flawed and left doubts about how much equity the bidders could include in their offers. The Hilco-Gordon bid, deemed the “highest and best” by Polaroid, included $40 million in cash and a 25 percent stake in the joint-venture valued at $16.3 million.

Patriarch, a New York-based firm with ownership interests in the Arizona Iced Tea brand and mapmaker Rand McNally, won a two-day auction that closed March 31 with a $59.1 million bid. Kishel reopened the auction a week later, citing complaints among creditors over the procedures.

Petters Charged

Polaroid, based in Minnetonka, Minnesota, sought Chapter 11 protection in December amid allegations that its owner since 2005, investment firm Petters Group Worldwide LLC, was running a $3 billion Ponzi scheme that targeted hedge funds. The firm’s founder, Thomas Petters, was charged with mail fraud, wire fraud and money laundering. His trial is scheduled to begin June 9.

In the second round of bidding, Hilco and Gordon Brothers came out ahead in a deal that valued Polaroid at $72.6 million. The sale price doesn’t include Polaroid’s art collection and other assets valued at more than $16 million.

The proposed sale of 72-year-old Polaroid has been challenged by the company’s biggest creditors, including Ritchie Capital Management LLC, which claim the bids undervalued Polaroid’s assets and violated their liens against Polaroid’s trademark rights.

“We’d see a much greater value if the company were not sold at auction, but was instead reorganized at a later date so they’d be able to maximize the very considerable value they have in the Polaroid trademarks,” Lewis Phelps, a Ritchie spokesman, said yesterday in a phone interview before the ruling.

The creditors claim Polaroid’s brand is worth as much as $266 million in North America and as much as $380 million in Europe. Ritchie says its liens on the Polaroid brand in Brazil, China and India are worth more than $300 million. Polaroid has sued to challenge the liens.

Polaroid filed lists of assets and debt showing property with a value of $28.5 million and liabilities totaling $302 million, including $72.8 million in secured claims.

The case is In re Polaroid Corp., 08-46617, U.S. Bankruptcy Court, District of Minnesota (Minneapolis).

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net.

Last Updated: April 10, 2009 00:01 EDT