Creditors seek to bring claims against McClatchy leadership in bankruptcy case
McClatchy Co.’s least-protected creditors have filed a motion that seeks to expose the company’s board, its CEO and chief counsel and some former senior leaders to civil claims, adding a new complication just days before a scheduled auction of the bankrupt local news company.
The motion filed late Monday asks the bankruptcy judge to grant the unsecured creditors committee the ability to pursue claims against the McClatchy leaders who were in place at the time of an April 2018 debt restructuring. The filing asks that the judge decide that question during a July 1 hearing, which is also the day that binding bids from potential buyers are due ahead of an auction planned a week later.
McClatchy renegotiated its debt in an effort to provide “additional runway to implement its digital transformation,” the company said. As a result, its largest lender at the time, hedge fund Chatham Asset Management, obtained most-protected status in the event of a default or bankruptcy.
The unsecured creditors, represented by the firm Stroock & Stroock & Lavan LLP, allege in the filing that McClatchy was insolvent at the time of the transactions and that former board members and leadership were complicit in positioning Chatham favorably for a bankruptcy filing.
In response, McClatchy said it was “operating as a going concern in 2018,” including being current on its debt payments, actively pursuing merger opportunities and anticipating potential relief from Congress for its pension obligations.
When McClatchy filed for bankruptcy in mid-February, the plan called for Chatham to become the new majority owner of the restructured company, ending the ownership run of the founding McClatchy family, whose name has been on mastheads since the days of the California Gold Rush.
That was before the Covid-19 pandemic. Since then, the bankruptcy has proceeded on two tracks: the original restructuring plan and a sale of the company.
In Monday’s filing, the creditors committee accuses Chatham of committing a “fraudulent transfer” in the 2018 restructuring and McClatchy’s leadership at the time of acting in its interest rather than the interests of all stakeholders, allegations that both parties have denied since the beginning of the bankruptcy process.
“These recycled assertions are wholly without merit, and Chatham will defend itself vigorously,” Chatham said in a statement Tuesday. “As a supportive investor in McClatchy since 2009, Chatham is committed to preserving independent journalism and newsroom jobs, while the committee of unsecured creditors continues to jeopardize this effort without regard for the company’s future.”
For its part, McClatchy said that the board and officers take their fiduciary role seriously and that the creditors committee’s allegations risk damaging the company’s reputation.
“The UCC’s claims are baseless, frivolous, and meritless, and risk not only the value for creditors and stakeholders in the restructuring process, but also significant damage to McClatchy’s 163-year reputation,” the company said in a statement. “The company intends to vigorously dispute both the standing motion, as well as the claims more broadly.”
The broad filing lists 11 “causes of action” related to the April 2018 transactions — nine against Chatham and Bank of New York Mellon and two against McClatchy’s board and leadership.
The filing names all board members, including chairman Kevin McClatchy, as well as company officers in place at the time of the transactions, including chief executive Craig Forman and chief counsel Billie McConkey. Also named are former chief financial officer Elaine Lintecum, former vice president of operations Mark Zieman and two former editorial leaders - vice presidents Tim Grieve and Andy Pergam. Jeanne Segal, director of The McClatchy Co. Foundation and the company’s director of communications, is also named.
In bankruptcy, one common avenue to recover funds for creditors is the threat of a lawsuit that results in an insurance settlement. The unsecured creditors can still file claims outside bankruptcy, but corporate directors and officers generally take out special insurance against lawsuits in the event of bankruptcy. Kristopher Hansen, the chief lawyer for creditors, did not respond to a request for comment.
It’s impossible to know whether the filing will affect the bankruptcy timeline. All parties, including the unsecured creditors committee, agreed on the milestones, which include the July 8 auction and a July 24 hearing at which Judge Michael E. Wiles, from the U.S. Bankruptcy Court for the District of Southern New York, is scheduled to approve the buyer and the sale plan.
In addition, the allegation is not new — the Pension Benefit Guaranty Corporation, which is being asked to assume administration of the company’s qualified pensions, raised concerns about the 2018 debt restructuring in February.
The PBGC has the largest claim among the members of the unsecured creditors committee. Other members include former Knight Ridder and McClatchy executives and senior employees who were owed an estimated $118 million in supplemental pensions when McClatchy filed for bankruptcy in February.
At the time of the debt restructuring, Chatham owned nearly 20 percent of McClatchy’s Class A shares that were traded openly and was the largest debt holder. By restructuring McClatchy’s debt, it was also able to avoid a default scenario that would have left it owing money to investors on the other side of a complex bet on insurance-like products called credit default swaps.
A second filing late Monday shows that all parties, through mediation, decided on June 17 that creditors had until 11:59 p.m. Monday to take the action they ultimately did. McClatchy and Chatham have until June 29 to file a response.
This story was originally published June 23, 2020 at 1:37 PM with the headline "Creditors seek to bring claims against McClatchy leadership in bankruptcy case."
