Lipson on Bankruptcy, the Inky and Irony
I asked Jonathan Lipson, who previously owned the credit crisis for us, for his thoughts on a really interesting story involving the Philadelphia Inquirer’s bankruptcy process. His (pretty cool, even for non-bankruptcy geeks) thoughts follow:
Like other markets for company control, the one created by Chapter 11 of the Bankruptcy Code is largely about information: If you control the story, there’s a good chance you will control the outcome.
So it’s not surprising that The Philadelphia Inquirer has used its own storied assets—the paper and website–to try to sell readers on management’s plan to save the company from rapacious hedge funds and, in their words, “keep it local.”
As you may recall, Brian Tierney, who owns an advertising firm in the Philadelphia suburbs, acquired The Inquirer and its related properties (The Daily News and Philly.com, their collective website), from the McClatchy papers in 2006 for about half a billion dollars.
Like several other newspapers, including The Chicago Tribune, The Inquirer could not service its massive acquisition debt. Thus, in February 2009, the paper (and its affiliates) filed a Chapter 11 case in Philadelphia. In August, management filed a proposed reorganization plan where Tierney (who manages the papers and owns some equity) and some of his supporters would buy the papers out of bankruptcy, for about $90 million, leaving most large creditors—i.e., the ones holding the acquisition debt–with a very small recovery. The management buyout would be subject to higher and better offers.
According to the official Creditors’ Committee in the case, the Inquirer’s “keep it local” campaign is designed to make sure there are no better offers. Management’s ad campaign warns of dire consequences “[i]f out-of-towners were to seize control.” Allegedly hailing from such illiterate venues as New York, Beverly Hills “and even Lausanne, Switzerland, these out of towners would feel little commitment to, or understanding of, [Philadelphia’s] local non-profit needs.”
This may be true. But, of course, The Inquirer is at least purportedly a for-profit venture. Thus, the more realistic concern is that outside investors would further cut an already thin staff, and perhaps eliminate The Daily News entirely in order to boost their own dividends and management fees. “Keeping it local” is, at least in part, about preserving jobs in Philadelphia.
Not surprisingly, the Creditors’ Committee—which wants higher and better bids for the paper–has objected to the advertising campaign, and filed a motion asking the Court to enjoin it. “This entire campaign is designed to dissuade otherwise interested bidders, who will think twice before participating in the auction . . . . This is bid chilling, plain and simple.”
Three things are ironic about all of this.
The Committee Objection
First, the Committee’s objection is as interesting for what it omits as what it says. Thus, while it gets at the basic issue—bid chilling—it misses the easiest objection, which is that the ad campaign is a bald attempt to solicit votes on a reorganization plan before a disclosure statement for the plan has been approved.
At the risk of asking CoOp readers to become bankruptcy geeks, the basic idea here is that a plan (such as management’s) can only be approved if a sufficient number and amount of creditors vote for it. But they cannot vote on it without having first received a court-approved “disclosure statement”. Until the court approves a disclosure statement, you are not supposed to solicit votes on a plan. So, if management wants to tell the story that its plan beats any alternative, it can only do so through an approved disclosure statement. Not adjacent the editorial page.
While management has filed a disclosure statement, it has not, so far as I can tell, been approved.
Maybe the Committee omitted the argument because of the Third Circuit’s controversial 1988 opinion in a case known as Century Glove. There, Judge Roth gave a fairly relaxed interpretation to these rules, holding in essence that a creditor with a competing plan could solicit particular creditors to oppose the debtor’s plan and support its own instead. Century Glove, Inc. v. First Am. Bank of New York, 860 F.2d 94, 101 (3d Cir.1988)
But even Century Glove acknowledged that the Bankruptcy Code “bars certain solicitation activities, regardless of the intent of the actor. Whether that provision is violated is not a matter left to the discretion of the bankruptcy court, but is a matter of fact and law.” 860 F.2d, at 97. The point of Century Glove was to permit creditors and debtors to negotiate about potential plans notwithstanding the requirement that there be a disclosure statement in place. That’s not what’s happening here.
To be sure, the ad campaign contains the disclaimer you’d expect: “The statements and information contained herein are . . . not intended to solicit and are not provided for the purpose of soliciting or otherwise obtaining approval of a plan of reorganization.” (Interestingly, the disclaimer does not print from the web). And, it goes to the world—not just creditors. Still, it’s hard to see what it is if not a request to support management’s plan.
Similarly, but perhaps not surprisingly, the Committee does not identify any actual or potential bidders who might be chilled here. This may be because they don’t exist. Newspapers are not exactly hot investments these days. Moreover, it is difficult to imagine hedge fund managers in Switzerland (or Beverly Hills) saying “you know, let’s not bid for The Inquirer. True, it could make us rich. But that ad campaign has really made us think twice.”
In any case, the real play here may be for the banks that lent Tierney the half-billion dollars in 2006 to do what’s called “credit bid” for the assets. This essentially means they would foreclose on the newspapers unless someone paid them in full. Explaining whether that is likely to happen, and what it would mean, would tax the endurance of even the most-die-hard CoOp reader.
The second thing to note is that the whole case could be viewed as an ironic data point in the raging academic debate about venue choice in Chapter 11 cases.
The venue rules which govern where a company can file a Chapter 11 case are quite liberal. They permit a debtor to file where any company in the group is incorporated. So it is usually not hard to find a connection to New York or Delaware, which happen to have the two most popular bankruptcy courts, so far as Chapter 11 cases are concerned. Thus, the Chicago Tribune case is in Delaware, not Chicago; GM and Chrysler are in Manhattan, not Detroit.
UCLA law professor Lynn LoPucki has argued that, as with corporate law in Delaware, there has been a “race to the bottom” in the selection of courts that hear large Chapter 11 cases. According to LoPucki, the Manhattan and Wilmington bankruptcy courts have captured most of the large bankruptcy cases because, among other things, company managers and bankruptcy professionals in those cities believe they can get away with anything in those courts, no matter how harmful to investors or employees. These courts permit this sort of behavior because they want the notoriety and excitement of large and complex cases.
Others, in particular Penn law professor David Skeel, have responded that venue choice in Manhattan and Delaware isn’t evidence of anything nefarious. It’s just the market for Chapter 11 cases. These courts have the most sophisticated lawyers and judges, and (thus) produce the best results under the circumstances.
There is no doubt that the largest cases often do end up in Manhattan or Wilmington—and not in Philadelphia, or wherever the debtor’s “local” operations are. What we can infer from that, however, is a more complex proposition. I have avoided wading into the debate, in part because I am not sure it really asks the right questions.
But if you do think Chapter 11’s venue rules are too liberal, and the process would better serve investors and employees if conducted in the “local” venue of the debtor, then you may want to think about what’s been going with The Inquirer.
Here, we have expensive lawyers from large, far-away firms (Proskauer-Chicago and O’Melveny-Los Angeles, respectively), representing the company and Creditors’ Committee, locked in what appears to be a scorched-earth battle to control the fate of these papers. Insiders and professionals may do well in this process. The newspapers—and the “locals”? Not so much.
The third irony is that all this squabbling may not matter much. Even if Tierney and his group want to keep the papers afloat—and even if that is the best deal going—they may not succeed.
If we are to believe Philadelphia’s Mayor, Michael Nutter, the city is on the brink of experiencing its worst financial shock in modern history due to shenanigans in the state legislature that have left Pennsylvania the only state in the union without a budget. If the worst comes to pass—and it might—Nutter says he will have to eliminate 3000 jobs and severely curtail city services.
If Harrisburg tells Philadelphia to drop dead, it is hard to see who will be left to read any newspapers, whether the owners live in Philadelphia or Lausanne.