Bankruptcy judge approves McClatchy funding, rejects challenges from government trustee
McClatchy Co. won a series of court decisions in a hearing Wednesday that cleared the way for short-term financing and kept alive the local news organization’s hope for a fast exit from bankruptcy.
But the hearing also sharpened the focus on an investigation into transactions between the media company and its largest creditor, as a key government attorney warned that the case likely hinges on the results.
Forced into a nearly two-hour telephonic hearing by the coronavirus that has turned New York City into a ghost town, Judge Michael E. Wiles ruled against two motions: one that sought to remove McClatchy’s outside legal counsel and one to block a second law firm from investigating the transactions, which restructured the company’s debt in 2018 and 2019.
In another piece of good news for McClatchy, the judge approved $50 million for the company to use during the bankruptcy process. McClatchy had faced an April deadline to secure this so-called debtor-in-possession financing.
The motions about the law firms came from Benjamin J. Higgins, the Justice Department’s bankruptcy trustee appointed to the case, which is being heard in U.S. Bankruptcy Court for the Southern District of New York. A trustee operates as a court-ordered referee to ensure that a company seeking protection from creditors is submitting accurate information.
Higgins told the judge that the case essentially comes down to whether debt restructuring done by McClatchy and its largest and most protected creditor, Chatham Asset Management, was fraudulent. The transactions, he said, are “one of the, if not the, major issue in this case.”
Wiles last month authorized a group of less-protected creditors to investigate the transactions. Higgins on Wednesday unsuccessfully sought to remove McClatchy’s lead outside counsel, Skadden, Arps, Slate, Meagher & Flom LLP, from the bankruptcy case, arguing that Skadden had a conflict of interest and failed to fully disclose that it had issued legal opinions on the transactions.
“The debtors proposed (bankruptcy) plan hinges on the validity of those transactions, and Skadden’s involvement in those transactions is not mere minutiae that can be glossed over with boilerplate language,” Higgins argued. “It shouldn’t be the case that my office has to ferret out this issue.”
In another motion, Higgins argued unsuccessfully that a second law firm retained by McClatchy Co. — Togut, Segal & Segal LLP —should not be allowed to conduct the investigation into the transactions because it is being done on behalf of McClatchy, whose board members and executives had approved or were aware of the transactions.
Attorney Alfred Togut objected, noting that his firm is acting independently, with no direction from McClatchy or Skadden attorneys.
Wiles agreed with Higgins that Skadden should have been more forthcoming about its role in the transactions but said it only issued opinions about the accuracy of information presented at the time and did not play a role in the debt negotiations.
“I don’t find it so outrageous as to say that the results should be visited on everybody else and Skadden should not even be retained,” Wiles said on the call, as roughly 30 lawyers listened. “I don’t really find it … quite as big as you think.”
The allegation that fraud occurred during the transactions was raised Feb. 14, during the first bankruptcy hearing. The Pension Benefit Guaranty Corporation, which is being asked to take on McClatchy’s $1.3 billion qualified pension plan as part of the bankruptcy settlement, wants to slow McClatchy’s desired timeline so the federal agency can examine emails and other communications between the company and its creditors.
The PBGC contends that McClatchy might have been insolvent at the time the transactions occurred, allowing Chatham to improperly leap ahead of other creditors and gain a protected status once McClatchy filed for bankruptcy.
Under McClatchy’s proposed restructuring, Chatham would emerge as the new owner.
McClatchy executives have noted that the company was publicly traded at the time, that information about the transactions was made public, that no concerns were raised and that the company twice sought to merge with another before it declared bankruptcy. Chatham lawyers have also defended the transactions as proper.
The investigation of the transactions is the main issue in a mediation process that began earlier this month.
Lawyers told Wiles on Wednesday that parties were briefing the mediator this week and March 30, with the next full mediation session scheduled for April 7.
The mediator is Judge Kevin Carey, a recently retired bankruptcy judge who presided over media giant Tribune Co.’s bankruptcy.
Wiles also rejected on Wednesday an attempt by a group of former employees of McClatchy and Knight Ridder, the newspaper chain it purchased in 2006, to secure special investigative rights to look into McClatchy termination of a supplemental pension program.
An estimated 450 former employees received pensions worth more than the maximum government-backed amount. Led by former Knight Ridder CEO P. Anthony Ridder and several other former top executives, this group has said it is considering filing a lawsuit after McClatchy stopped the supplemental pension payments in January ahead of filing for bankruptcy.
Attorney Israel Goldowitz of The Wagner Law Group told the judge the newly formed Former Knight Ridder and McClatchy Salaried Employees Association has filed paperwork with the IRS to become a non-profit organization. He said that it might consist of as many as 200 members and that a class-action suit is being discussed.
Van C. Durrer II, the Skadden attorney representing McClatchy, told the judge the group had taken a “ready, fire, aim” approach, first asking for documents and then seeking investigative powers before the information could even be provided.
Wiles agreed and implored the two sides “to just work together to see if you can resolve this.”
This story was originally published March 25, 2020 at 2:44 PM with the headline "Bankruptcy judge approves McClatchy funding, rejects challenges from government trustee ."
