By: Mark Fitzgerald
Unsecured creditors who are likely to walk away with nothing after the auction of Brown Publishing Co. asked Bankruptcy Court Monday to stop the chain’s biggest lender from submitting a so-called credit bid for the newspaper chain when bids are due Friday.
This was the second time the official committee of unsecured creditors have attempted to delay the auction, in which a company owned by three Brown Publishing top executives, including CEO Roy Brown, have made a “stalking horse” bid of $15.9 million for the owner of 15 dailies, 32 paid weeklies and numerous other business and niche publications.
When Brown Publishing filed for bankruptcy May 1, it declared debts totaling $104.6 million and said its properties had a book value of $94.1 million.
Brown Publishing’s biggest lender, PNC Bank, has said in court filings it intends to make a credit bid — using debt instead of new cash — of $20 million for the company. PNC is owed more than $74 million. Under a previous ruling by U.S. Bankruptcy Judge Dorothy Eisenberg, PNC will not have to put up a 5% cash deposit with its bid.
The unsecured creditors say allowing PNC to bid up to $74 million in credit alone has a chilling effect on other potential bidders for the newspapers.
In their court filing, the unsecured creditors claim that in August 2007 – when Roy Brown, Brown Publishing General Counsel and CFO Joseph Ellingham formed “Brown Media” – the new company improperly took on about $75 million in PNC debt from Brown Publishing.
The transaction amounted to a “fraudulent conveyance,” the creditors say, that is, a deal in which the company was insolvent from day one.
From the filing:
Media and its subsidiaries received no value– much less reasonably equivalent value – for becoming direct obligors on the approximately $75 million of pre-existing debt of BPC and pledging their newly acquired assets as security for the debt of BPC– and were either insolvent when they entered into the September 2007 Loan Transactions or, undoubtedly, rendered them insolvent by the assumption of the debt of BPC. Furthermore, as the facts have borne out, when entering into the debt facility with the Bank Group, Media and its subsidiaries were about to engage in a business for which their remaining property and capital was insufficient to support operations. As such, the liens and claims asserted against Media and each of its newly formed subsidiaries, for BPC’s (Brown Publishing Co.) already existing debt, were fraudulent transfers that can be avoided and thus the Bank Group’s liens and claims are subject to a bona fide dispute – indeed they are in serious doubt.”
Because of that doubt, the court should not allow a credit bid for the Brown newspapers, the unsecured creditors say.
“In addition to the chilling effect the Bank Group has caused by having an unfettered right to credit bid its $74+ million claims on other potential bidders (on assets the Debtors and its insiders acknowledge are worth dramatically less), “cause” is present here to prevent the Bank Group from credit bidding as the validity of the Bank Group’s liens (at least with respect to those assets of Media) is in dispute and with respect to its liens and claims as a whole, has not yet been determined,” the filing says.
In previous documents, lawyers for Brown Publishing have argued the “deeply subordinated” unsecured creditors are desperately trying to stir up litigation in hopes of a financial settlement. There is not enough money in the bankruptcy estate for even senior creditors, they argue.