In re Journal Register Co.

• Decision Date: 07 July 2009
• Docket Number: No. 09-10769 (ALG).,09-10769 (ALG).
• Citation: 407 B.R. 520
• Parties: In re JOURNAL REGISTER COMPANY, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

407 B.R. 520

In re JOURNAL REGISTER COMPANY, et al., Debtors.

No. 09-10769 (ALG).

United States Bankruptcy Court, S.D. New York.

July 7, 2009.

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Willkie Farr & Gallagher LLP By: Marc Abrams, Esq., Shaunna Jones, Esq., Jennifer Hardy, Esq., Terence McLaughlin, Esq., Rita Mitchell, Esq., New York, NY, for the Debtors.

Otterbourg, Steindler, Houston & Rosen, P.C. By: Jenette A. Barrow-Bosshart, Esq., Jessica M. Ward, Esq., New York, NY, for the Official Unsecured Creditors Committee.

Milbank, Tweed, Hadley & McCloy LLP By: Dennis C. O'Donnell, Esq., Lena Mandel, Esq., Jeremy S. Sussman, Esq, New York, NY, for JP Morgan Chase Bank, N.A.

Cohen, Weiss & Simon LLP By: Richard M. Seltzer, Esq., New York, NY, for Newspaper Guild/Communication Workers of America.

Central States Pension Fund By: Brad R. Beliner, Esq., Cathy L. Rath, Esq., Rosemont, IL.

State of Connecticut Office of the Attorney General, By: Denise Mondell, Esq., Assistant Attorney General, Hartford, CT.

Philip P. Kalodner, Esq., Gladwyne, PA, pro se.

Richard M. Freeman, Scranton, PA, pro se.

United States Trustee's Office Southern District of New York By: Serene K. Nakano, Esq., New York, NY.

MEMORANDUM OF OPINION

ALLAN L. GROPPER, Bankruptcy Judge.

Journal Register Company and 26 affiliates (collectively, the "Debtors") filed for bankruptcy protection under chapter 11 of the Bankruptcy Code on February 21, 2009 (the "Petition Date"). The Debtors have moved for confirmation of their Amended Joint Plan of Reorganization, dated May 6, 2009 (the "Plan"). The Plan is in part the result of prepetition negotiations between the Debtors and JP Morgan Chase Bank, N.A., acting as the administrative and collateral agent (the "Administrative Agent") for the Debtors' prepetition lenders (the "Secured Lenders"), who have a perfected first priority lien on substantially all of the Debtors' assets. The Plan was subsequently amended as the result of negotiations with the Official Committee of Unsecured Creditors appointed in these cases (the "Creditors Committee"), and the Secured Lenders and the Committee both support confirmation of the Plan.¹

Three of the Debtors' unsecured creditors filed objections to confirmation of the Plan: (i) Central States, a multiemployer pension plan and member of the Creditors Committee, which has filed proofs of claim against the Debtors in the aggregate amount of $4.3 million on behalf of approximately 46 of the Debtors' employees; (ii) the Newspaper Guild/Communication Workers of America (the "Guild"), a collective bargaining representative for employees of the Debtors and also a member of the Creditors Committee; and (iii) the State of Connecticut, which has asserted a tax deficiency claim against the Debtors for approximately $21.5 million. Confirmation is also opposed by two pro se shareholders (the "Minority Shareholders"), who in the aggregate claim to own 7% of the Debtors' outstanding common stock.

Based on the evidence of record and upon the following findings of fact and conclusions of law, the Court confirms the Plan.

BACKGROUND

The Debtors' Business and Capital Structure

Formally established in 1997, the Debtors are a national media company that own and operate daily newspapers and nondaily publications, news and employment websites, and commercial printing facilities. The Debtors operate in six geographical "clusters": greater Philadelphia; metropolitan Detroit and other areas of Michigan; Connecticut; Ohio; and the Capital-Saratoga and Mid-Hudson regions of New York. As of the Petition Date, the Debtors operated 20 daily newspapers, 159 non-daily publications, 148 local news and information websites, and 14 printing facilities. They had 3,465 employees, 18% of whom were employed pursuant to collective bargaining agreements.

The Debtors have approximately $695 million in outstanding prepetition indebtedness to the Secured Lenders under credit agreements (the "Credit Agreements") secured by first priority liens on substantially all of the Debtors' assets. The validity and enforceability of the Secured Lenders' liens are undisputed. In March 2009, the Court approved a stipulation for the use of cash collateral in which the Debtors stipulated that the Secured Lenders' liens were properly perfected and valid, and provided the Creditors Committee with a period of time after its appointment to investigate and challenge the liens. The Creditors Committee, appointed on March 3, 2009, did not challenge the validity or perfection of the Secured Lenders' liens, and the time to do so has lapsed.

The Debtors' unsecured debt is estimated at $27 million, $6.6 million of which is allegedly owed to trade creditors. Equity is comprised of one class of common stock, with approximately 48 million shares outstanding. The Debtors' common stock was publicly traded until July 2008, when SEC registration terminated.

Events Leading to Bankruptcy

The Debtors have sustained net operating losses for at least the last two years. They attribute the losses to an industrywide decline in readership, circulation and revenue, caused by increased competition from other forms of media (such as the internet), the global recession, and weak advertising demand. In the fall of 2007, the Debtors began efforts to reduce operating costs, and by early 2008 they had closed 53 unprofitable publications and eliminated approximately $6.4 million in annual expenses. Between 2006 and 2008 the Debtors reduced their labor force by approximately 1,475 full-time positions.

In spite of their cost-cutting efforts, the Debtors were unable to comply with certain financial covenants under their Credit Agreements. In July 2008, the Debtors and the Secured Lenders entered into a forbearance agreement that required the Debtors to retain a restructuring advisor and deliver a five-year business plan along with a term sheet setting forth the terms of a comprehensive restructuring plan for the company. In exchange, the Secured Lenders agreed to waive the Debtors' defaults until October 31, 2008. The Debtors retained Conway, Del Genio, Gries & Co., LLC ("CDG") to provide restructuring management services and Robert Conway to act as their chief restructuring officer. On the Petition Date, Robert Conway became the Debtors' interim chief operating officer.

Assisted by CDG, the Debtors delivered a five-year business plan and negotiated an extension for the completion of the term sheet to February 6, 2009. On February 13, 2009, after further negotiations with the Secured Lenders, the Debtors delivered a term sheet, which served as the basis for a plan support agreement entered into with a super-majority of the Secured Lenders (the "Consenting Lenders"). This support agreement, in turn, led to the chapter 11 plan of reorganization the Debtors filed with the Court on the Petition Date, and indirectly to the amended version presented for confirmation.

The Reorganization Plan

As more fully explained below, the Debtors' Plan proposes, among other things, to (i) deleverage the Debtors by converting the Secured Lenders' debt into 100% of the new equity of the Reorganized Debtors and new tranche A and B secured loans; (ii) make certain distributions to the unsecured creditors class; (iii) cancel the old equity; and (iv) establish a Post-Emergence Incentive Plan. As one of the "means of execution" of the Plan, but not as a matter of Plan classification and distribution, it is also proposed that there be a further payment to certain of the unsecured creditors, the so-called "trade creditors," from a purported "gift" of the Secured Lenders.

i. classes and distributions

Claims and interest are divided into six classes. Classes 1 and 3 are comprised of Priority Non-Tax Claims and Other Secured Claims in the estimated amounts of $0.59 million and $2.6 million, respectively.² Under the Plan, both classes would receive full payment. Existing Equity Interests and Existing Securities Laws Claims are classified in classes 5 and 6, respectively.³ The Plan provides no distribution to these two classes and for the cancellation of the existing shareholders' stock.

Class 2 of the Plan encompasses the Secured Lenders, who, as previously stated, hold estimated claims of approximately $695 million, which aggregates approximately 96% of the total debt, secured by substantially all of the Debtors' assets. The members of this class are to receive the following distribution under the Plan in full satisfaction of their claims: (i) 100% of the new common stock of the Reorganized Debtors;⁴ (ii) assumption by the Reorganized Debtors of new indebtedness, consisting of tranche A and B loans in the aggregate amount of $225 million, secured by first and third liens on all the assets of the Reorganized Debtors, bearing interest of up to 15% per annum and maturing in four and five years from the effective date of the Plan, respectively; and (iii) payment in cash of any fees due to the Secured Lenders' professionals in connection with these cases. The Debtors' financial advisor, Eric R. Mendelsohn, a managing director of Lazard Frères & Co., LLC, testified without contradiction at the confirmation hearing that the mid-point of the estimated enterprise value of the Reorganized Debtors was at most $300 million. It is therefore undisputed on the record of the confirmation hearing that based on these values the package of consideration made available to the members of Class 2 would constitute a recovery of only 42% of their claims. Using the liquidation analysis that the Debtors included as part of their Disclosure Statement and that was also unchallenged, in a chapter 7 liquidation the Secured Lenders would receive a distribution on their claims of less than 20%.

The Plan provides for a pro rata distribution of $2 million to all of the Debtors' general unsecured creditors, who are classified in Class 4. It is estimated that the general unsecured creditors...