January 21, 2010
WILMINGTON – A federal bankruptcy court judge today approved a deal between Freedom Communications, its unsecured creditors and its lenders that could allow the owner of The Sedalia Democrat to emerge from bankruptcy by the end of March.
The arduously negotiated deal provides for about eight times more money for the company’s unsecured creditors – including a group of longtime current and former employees – than the company had originally proposed.
“This is a great day – for our employees, for our customers,’’ said Chief Financial Officer Mark McEachen, who was at the hearing where federal Bankruptcy Court Judge Brendan Shannon approved the Irvine-based company’s disclosure statement and set March 9 as the date for confirmation of the company’s bankruptcy plan.
Under the new plan, Freedom’s secured debt would be reduced from $770 million to $325 million.
Company officials will now send out ballots to Freedom’s creditors and if they approve the plan, it will go before Shannon on March 9. The lenders, who will take over the company, will name a new board to take over when the company emerges from bankruptcy. The names of the new board members are expected to be released sometime before March 9.
Today’s agreement, reached after what Freedom’s lawyer Robert Klyman called the most intense negotiations he’s ever had, includes several pots of money that will be set aside for those with unqualified pensions, for trade creditors and for a disputed $29.5 million claim stemming from a class-action suit by the Orange County Register’s newspaper carriers.
The company originally offered all the unsecured creditors a total of $5 million. Under the revised plan filed today, that number has swelled to an estimated $32.2 million.
The group left out in the cold under this deal is the current owners, including members of the founding Hoiles family and two private equity firms. Under the original plan, they would have gotten a 2 percent share of the company once it emerged from bankruptcy and the option to buy up to 10 percent more. Now they will get nothing.
McEachen said management will still be able to get a 10 percent share in the new company.
About 100 highly-paid current and former Freedom employees, whose unqualified pensions were terminated by the bankruptcy, will have their pensions reinstated at a 70 percent level.
Robert Feinstein, lawyer for the unsecured creditors, estimated that will net the pensioners about $12.2 million.
“We’re thrilled with the plan, ’’ said Feinstein, who participated in the hearing by phone. “This was as intense an arms length negotiation as one could imagine.’’
Alan Bell, a former Freedom chief executive and spokesman for the unsecured creditors committee called it a fair outcome that balanced all the interests.
“Anyone would like to get 100 cents on the dollar,” said Bell. “The test is whether all the parties are a little displeased. Everyone had to throw something into the pot that they all will grouse about, so I guess that makes it fair.”
In addition to the pension settlement, $14.5 million will be put into a litigation trust that will be used to settle any general unsecured claims and allow the plaintiffs in the newspaper carrier lawsuit to attempt to recoup some of their settlement.
Richard Marshack, a bankruptcy attorney with Marshack Hays LLP in Irvine, which has no involvement in the case, said the litigation trust is commonly employed in bankruptcies and is a good vehicle for unsecured creditors to get at least some payment on their claims. He called the Freedom deal “very reasonable.”
“The structure is excellent — there certainly should be money there to pay the unsecured creditors a reasonable amount and potentially a much bigger dividend,” Marshack said.
Selected trade creditors will be paid in full out of $5.5 million being set aside for that purpose.
Freedom filed for bankruptcy on Sept. 1. The unsecured creditors had denounced Freedom’s original plan as unfair and illegal, noting that under bankruptcy’s absolute priority rule; existing owners typically get nothing until the creditors are paid off. In addition, they said the take-it-or-leave-it offer “terrorized” the unsecured creditors into giving up their rights.
They asked the Delaware judge to reject the reorganization plan, an action that would have delayed Freedom’s efforts to exit bankruptcy quickly.
Asked why Freedom was willing to add so much more money into the deal, Klyman said it was a matter of what was best for the company, both in terms of the ability of executives to run the operation and for it to emerge as soon as possible from bankruptcy.
“It’s all about getting to a deal,’’ said Klyman, who wouldn’t say why the board was willing to agree to forgo the equity share in the company the original plan provided for.
Bankruptcy, Klyman said, is a “distraction for management,’’ and the company has to “operate in a fishbowl’’ while it’s still under the court supervision.
” It’s great news for the company, its employees, its retirees, its community and its business partners,” said Burl Osborne, Freedom’s acting chief executive. “We all have to be grateful to the shareholders who put the interest of the company ahead of their own interest.”
What is still uncertain is exactly how much money the newspaper carriers who sued the Register will end up with.
The dispute between the newspaper carriers and the Register dates back to 2003 when about 5,000 current and former delivery people claimed they were supervised as if they were employees but paid as independent contractors who got no benefits. The company contended the carriers signed contracts saying that they were independent contractors.
Last year the two sides agreed to a $28.9 million settlement but Freedom says the bankruptcy filing voided it.
Their share of the new Freedom plan’s $14.5 million litigation trust will provide them with some money and the agreement gives the trust the ability to sue former and current directors of the company and Osborne to try and recover more money for unsecured creditors.
Freedom officials estimate that the insurance policies held by the company directors and Osborne have a combined value of $25 million.
In addition to the Register, Freedom owns 32 daily newspapers nationwide and more than 70 weekly newspapers, magazines and other specialty publications. The company also owns eight television stations.
Freedom is just one of seven media companies that have gotten caught in the grips of the recession exacerbated by a major challenge from the Internet. Tribune Co., owner of the Los Angeles Times, filed for bankruptcy in December 2008. That case is still pending.
(Orange County Register staff writer Mary Ann Milbourn contributed to this report)