McClatchy calls creditors’ accusations ‘chicanery,’ cites its efforts at transparency
McClatchy Co. lawyers asked a federal bankruptcy judge Friday to reject as “chicanery” attempts by less-protected creditors to pursue lawsuits against the company’s board of directors, former executive leadership and its largest creditor just days before a scheduled sale.
In its filing, McClatchy rejected the creditors committee’s allegations that company leadership placed the interests of Chatham Asset Management, its biggest investor and creditor, above those of other stakeholders in an April 2018 debt restructuring.
The committee made the accusations in a late-night filing Monday that asked bankruptcy Judge Michael E. Wiles to grant it standing to pursue legal claims.
“The committee has either ignored or misrepresented the factual information contained in the multitude of documents it was provided to assert fiduciary duty claims based on incoherent theory,” McClatchy’s lawyers said in the Friday filing, citing the company’s efforts to provide the committee with information, including 150,000 pages of email communications by company directors and officers and unredacted board presentations.
McClatchy also made senior management available for “informal interviews,” the filing said.
McClatchy asked Wiles to dismiss the creditors committee motion, which the committee asked to be heard Wednesday in U.S. Bankruptcy Court for the Southern District of New York. Wednesday is a pivotal day in the bankruptcy case, as binding bids are due from potential buyers, with an auction scheduled for July 8.
McClatchy filed for bankruptcy in February, citing the twin burden of legacy debt from the purchase of the larger Knight Ridder newspaper chain and its pension obligations, which included tens of millions in supplemental payments to former Knight Ridder and McClatchy senior executives.
The creditors committee has alleged that McClatchy was insolvent two years earlier, when it sought to restructure its debt, and thus should have considered the impact of the transactions on all of its creditors.
In the restructuring, Chatham gained a favorable position in the event of a default or bankruptcy.
Van C. Durrer II, the company’s lead bankruptcy lawyer, said in the Friday filing that the creditors committee ignored the financial difficulties facing the local news industry and that McClatchy’s board and senior leadership used their best business judgment in seeking to refinance the company’s debt at a time of rising interest rates and “narrowing opportunities.”
The only goal was to save the local news company and, in doing so, protect shareholders, he said.
Indeed, Durrer noted, from April 2018 through its bankruptcy filing, McClatchy continued to pay its debts as they came due in the ordinary course of business. The company repurchased $37.1 million of its own bonds and sold off real estate to meet its pension obligations, he said.
Outside of the sizable pension obligations, McClatchy owed its less protected creditors only about $18.5 million at the time of bankruptcy, Durrer argued.
“The relatively small size of this class of trade claims further underscores the debtors’ diligence in paying debts as they came due,” he said.
McClatchy sought an IRS waiver from minimum pension contributions and, later, congressional relief to spread out its crushing pension obligations, Durrer noted.
Both efforts ultimately failed, but they demonstrated that McClatchy’s board and leadership were fighting on all fronts to avoid bankruptcy, contrary to the committee’s claim that the 2018 refinancing was done to favor Chatham, the filing said.
The allegation that McClatchy acted in the interests of Chatham or the McClatchy family is “grossly misleading,” Durrer said. “The committee throws the kitchen sink at various parties in an attempt to rewrite history.”
Like the creditors’ committee filing, McClatchy’s motion contains a number of redactions, including in a section that appears to detail the lengths to which the board went to remain independent during the refinancing transactions.
“The committee’s attempt to articulate an actual fraudulent transfer claim borders on chicanery,” Durrer said, warning that accepting the creditors committee request to bring claims will poison the ongoing mediation process designed to resolve differences without additional litigation.
In separate filings Friday, Chatham and Brigade Capital Management LP, which like Chatham is a protected creditor, echoed McClatchy’s argument that there was nothing untoward about the refinancing.
“One of the most expensive investigations in Southern District history has ended with a dud,” Chatham’s lawyers said. “After three months of extensive, court-ordered … discovery from the debtors and a robust voluntary production from Chatham, the committee cannot state a plausible claim whose prosecution will benefit the estates. The result is unsurprising.”
Chatham noted that it has been an investor in McClatchy since 2009 and said it has invested hundreds of millions of dollars “to meet the company’s goals for future success in a changing industry.”
“The committee is simply substituting its own (legally irrelevant) business judgment for that of the company’s board,” Chatham said.
Brigade urged the judge to reject the claims of creditors “who may see no downside to the no-holds-barred pursuit of claims that are wholly lacking in merit.”
The committee “asserts a theory of liability never before recognized by any court,” Brigade’s lawyers said.
In bankruptcy, the most protected class of creditors stands to lose less. Chatham and Brigade, a fellow hedge fund investor, hold the most protected status in McClatchy’s case.
Members of the less-protected creditors committee are in a more precarious position, and only one — Dow Jones & Co. — is expected to do business with McClatchy once it exits bankruptcy.
The largest claimant on the committee is the Pension Benefit Guaranty Corporation, the federal agency that administers failed private pension plans and stands to take over McClatchy’s plan. Another member is a group of former newspaper carriers who filed suit more than a decade ago claiming they were de facto employees rather than independent contractors and thus are owed money.
The committee is rounded out by several landlords who lost leases, and the group of several hundred mostly senior managers from Knight Ridder, which McClatchy purchased in 2006.
These former executives, many of whom never worked for McClatchy, have been receiving supplemental pension payments for years, paid out of the company’s operating funds. McClatchy ended the payments shortly before filing bankruptcy, and this month estimated that the outstanding balance is $118 million, which would not be covered by the PBGC.
McClatchy’s original restructuring plan called for Chatham to become the new majority owner of the restructured company, ending the 163-year ownership run of the founding McClatchy family.
That was before the pandemic. Since then, the bankruptcy has proceeded on two tracks: the original plan and a sale of the company. McClatchy is scheduled to present a buyer and sale plan to Wiles for approval July 24, a little more than two weeks after the July 8 auction.
McClatchy, the nation’s second largest local news company, owns 30 media titles in 14 states and Washington, D.C., including the Miami Herald, the Kansas City Star, the Sacramento Bee, the Charlotte Observer, the (Raleigh) News & Observer and the Fort Worth Star-Telegram.
This story was originally published June 26, 2020 at 2:08 PM with the headline "McClatchy calls creditors’ accusations ‘chicanery,’ cites its efforts at transparency."
