A contentious court day for newspapers
Judge says creditors' offer could have led to a breach of the owners' fiduciary obligations.
The new judge overseeing the bankruptcy of Philadelphia Newspapers L.L.C. warned both sides yesterday that their infighting put the company at risk, as details of their competing plans for the company emerged.
"In your desire to obtain control" of the company, Chief Bankruptcy Judge Stephen Raslavich said, "you may see the ship sink."
Raslavich said his sense of the case was that the company and its creditors had been continually taking steps that each knew would incite the other.
He cited several examples. One was the company's decision to seek a new lender for short-term financing - a move, he said, certain to anger senior creditors. Another was the creditors' counteroffer for the same loan, which would have required the company to submit any reorganization plan to the creditors for approval. That could amount to the company's violating its fiduciary responsibilities, he said.
His remarks came on a day when the outlines of the competing reorganization plans became clearer.
According to interviews and court documents, a reorganization plan to be proposed by the company would leave its current owners at the helm and settle its $300 million in debt in exchange for $36 million in cash and the company's building at 400 N. Broad St. The plan values the building at $30 million.
A competing plan by the senior lenders would give them control with $60 million debt. There would be an additional $25 million line of credit to cover costs in emerging from bankruptcy. Lawyers for the lenders say they would put in place a new management team.
Both plans call for two papers, The Inquirer and the Philadelphia Daily News, to continue to be published. That last point was emphasized yesterday for the first time by the senior lenders, by way of one of their lead attorneys, Fred S. Hodara.
"There is one thing everybody agrees: We have two daily newspapers in Philadelphia, and we need to continue to have two daily newspapers in Philadelphia," Hodara said in an interview. "And they will continue in their current format."
Hodara reiterated the point again in court during the first hearing in the case since Raslavich replaced Judge Jean K. FitzSimon, who stepped aside for health reasons.
The hearing dealt with the company's requesting permission to pay $300,000 to Republic First Bank to do the necessary research for a $15 million loan to sustain Philadelphia Newspapers during the coming months. Under bankruptcy rules, that loan would be the first to be paid off upon reorganization.
The company's lenders objected to the expense and the loan. They have offered to finance a similar loan - called debtor-in-possession financing - but its terms would require the company to get the lenders' prior approval of any reorganization plan.
Raslavich said both sides' positions were naturally contentious. The company's senior lenders could be expected to object to a plan that would put another creditor - Republic First - ahead of them, he said. And why would the company want to give the lenders control of its reorganization plan? he asked.
He ultimately allowed the company to spend up to $100,000 on the research to be done by Republic First. The decision as to whether the bank will be permitted to issue a loan, however, is still in the balance. A hearing on that issue - which Raslavich called "the battle royal" - is set for next week.
Just how contentious it might be was seen in an exchange in court yesterday.
Christie Comerford, a lawyer for Philadelphia Newspapers, said Republic First had not been able thus far to secure a Philadelphia law firm to represent it. She said the "word was" that lawyers were being warned away from the case by Citizens Bank, one of the company's senior lenders.
David Abernethy, who represents Citizens Bank, said the bank had done nothing to interfere with Republic's attempt to find a firm to represent it.
In another action related to the case, the senior lenders have sought permission to begin negotiating with the company's 16 unions. The unions' contracts expire at 12:01 a.m. Sept. 1. Hodara said the lenders hope to "hit the ground running" if they get control of the company. Having the ability to start contract negotiations would aid that, he said. The company said it would oppose the request.