Hawaiian Telcom Inc. and its bondholders took their legal dispute before a federal bankruptcy judge yesterday in one of the last hurdles to the local telephone company's plan to emerge from bankruptcy.

Hawaiian Telcom is attempting to exit bankruptcy next year under a $460 million, stand-alone reorganization plan.

But the company's bondholders say that the plan understates the company's value by more than $200 million.

"The lenders and the debtor have proceeded to undervalue this company," said Brett Miller, attorney representing Hawaiian Telcom's unsecured creditors.

U.S. Bankruptcy Judge Lloyd King is holding hearings this week on the legal dispute, which is key to getting Hawaiian Telcom's reorganization plan approved.

Under that plan, Hawaiian Telcom will convert much of its debt into stock and will receive a new, five-year $300 million loan.

Bondholders, who invested about $500 million in the company in 2005, will be entitled to about $10.6 million when Hawaiian Telcom emerges from bankruptcy.

That recovery will be in the form of warrants.

The unsecured creditors say that their payouts are artificially driven down by the company's low valuation.

They say their consultant values the company at $682 million and that they are entitled to about $139.3 million of that.

Attorneys for Hawaiian Telcom and its bank lenders said the bondholders overinflate the value of the company's assets.

"With a healthy dose of pixie dust, they double the values," said Brian Rosen, attorney for the bank lenders.

Hawaiian Telcom, the state's largest phone company, filed for bankruptcy protection in December because of its heavy debt load and the loss of thousands of customers to wireless and other competitors.

The debt helped finance Washington, D.C.-based The Carlyle Group's $1.6 billion takeover of the phone company in 2005.