The weekend bankruptcy filing by Philadelphia Newspapers LLC, parent company of the Daily News and Inquirer, signals rocky times ahead for the papers, their management and some 1,800 full-time workers.
For several months, some of the company's top creditors have been pushing to close the Daily News and void union contracts, seeking major cuts in labor costs, according to reliable sources.
The company's chief executive officer, Brian Tierney, has resisted the pressure, the sources said, putting him at odds with creditors who hold about $395 million in underperforming loans - the money that Tierney and a group of local investors borrowed to buy the newspapers in mid-2006.
A document filed with the U.S. Bankruptcy Court describes months of efforts to renegotiate the debt.
But the negotiations, involving Citizens Bank and several hedge funds, apparently collapsed in mid-February, leading the newspaper company to seek protection in a Chapter 11 bankruptcy filing.
Tierney tried yesterday to cast the filing in positive terms. "The words 'Chapter 11' sound pretty ominous, but in fact the process exists to protect companies and help them survive and thrive," Tierney said in a podcast made available on philly.com.
He said that the company's operations produced about $36 million in earnings in 2008, not counting interest on its debt, taxes, depreciation and amortization. Projected earnings this year - not covering the debt - will exceed $25 million.
"We're profitable. We're not going out of business," Tierney said.
But experienced bankruptcy lawyers warned that going into Chapter 11 without an agreement between the company's management and its major creditors would have unpredictable consequences, allowing the creditors to question labor contracts, management pay and other basic issues, including the continued existence of the Daily News.
The company's bankruptcy filing disclosed that Tierney's salary had been raised 37.5 percent in December, from $618,000 to $850,000 annually.
U.S. Bankruptcy Judge Jean K. FitzSimon scheduled the first hearing in the case this morning. Several major airlines have used Chapter 11 in recent years, as well as the Boscov's department-store chain.
Michael Temin, an attorney at the Wolf Block firm who also teaches bankruptcy law at the University of Pennsylvania law school, said that Chapter 11 bankruptcies permit businesses to continue operating while their debts are restructured.
"They can also be a forum to try to get an agreement with your creditors," he said. "If some creditors will agree and others won't, the court has the power in certain circumstances to force them to go along."
But in Boscov's case, and most other Chapter 11's, Temin added, "mostly what's been happening is, either the business gets sold or the creditors become the equity owners. . . . There have been very few Chapter 11 cases recently in which the result is that the current owners continue to own.
"It doesn't mean it won't happen, but it hasn't happened a lot recently." *