Creditors Seek to Slow Bankruptcy Sale of Brown Publishing to CEO Roy Brown and Insiders

Brown Publishing’s creditors allege in Bankruptcy Court filings that CEO Roy Brown and two other company insiders have essentially rigged a proposed sales process to ensure the chain of community newspapers and business publications goes to a company they own -- and at a fire-sale price.

At a hearing scheduled for Thursday morning, the creditors are hoping to slow down what one creditor calls “an incredibly expedited” sales process Brown has proposed.

In their separate court papers, three creditors sound common themes: the Brown insiders have misled creditors; have proposed a speedy auction that discourages any bid but their own; and are acting in their own interests instead of maximizing the value of the post-bankruptcy estate.

Brown Publishing’s biggest creditor, PNC Bank, which is owed $70.5 million, says in its filing that it has offered to make a $20 million credit bid for the company -- $5 million more than the so-called “stalking horse” bid made by Brown Media, a company incorporated on March 26 and 100% owned by Roy Brown, Joel Dempsey, Brown Publishing’s general counsel, and Joseph Ellingham, its CFO.

PNC states in its filing that the Brown insiders have proceeded as if it never made the offer, and it raises doubt that a restructuring executive who is functioning as the independent operator of the auction process was told of the offer.

In its Chapter 11 filing, Brown Publishing said its 18 dailies and other properties have a book value of $94.1 million. Brown Media’s stalking horse bid is for $15.3 million -- and specifies that it is buying the assets free of any claims, liens or encumbrances. In its bankruptcy filing, Brown said its debts totaled $104 million.

The Brown insiders are trying to rush the sale through to prevent other possible buyers from performing the necessary due diligence for a bid, the creditors claim in separate court documents. But that’s not the only way the insiders are seeking to ensure they are ultimately successful.

In the proposed sales process that will be the subject of Thursday’s hearing:

•    the Brown insiders are requiring any bidder to put up in cash a “good faith” deposit of 7% of their stalking horse offer, or about $1.07 million. However, that requirement does not apply to the Brown bid;
•    the Brown insiders have the sole authority to determine who is a “qualified bidder;”
•    if the Brown Media bid is unsuccessful, it will receive an $800,000 “break-up fee,” allegedly to cover the cost of financing.
 

“Although the proposed sale is termed an auction ... the  compressed schedule, the lack of requirement for marketing, the discretion of debtors to  determine the qualification of bidders and bids and the closed nature of the sale itself all demonstrate this is  nothing  more  than  a  private  sale,” states a filing by attorneys for Kevin Evans, a Texas publisher who is also suing Brown Publishing. Evans alleges Brown bought his business publication, and refused to pay him promised bonuses and profit-sharing when he expanded the publications into new markets -- and terminated his employment contract when he sought the payments.

In the bankruptcy case filing, Evans attorneys say Brown Media is proposing to hold the auction behind closed doors in the offices of its attorneys with Brown determining who can or cannot attend.

The principals of Brown Media could not be reached for comment late Wednesday. They have not responded to previous E&P requests for comments on the bankruptcy.

Also objecting to the sales process is Windjammer Mezzanine and Equity Fund II, a California investment group that is a minority shareholder in Brown Publishing, and is suing Brown in an Ohio county court alleging it shifted assets to shell companies to keep the firm from collecting at least $9 million under a stock warrant agreement.

In its Chapter 11 filing, Brown Publishing said it contacted dozens of potential buyers for its newspapers and publication and found only two parties that were even remotely interested.

Windjammer’s court filing suggests why the papers may not have seemed very attractive to potential buyers: All of Brown Publishing’s real estate is owned by CRJ Investments, which leases the property to the publications.

CRJ, the Windjammer court papers say, is owned by Roy Brown, his brother Clancy Brown and Brown Publishing General Counsel Joel Dempsey.

Last fall, Windjammer claims, CRJ increased the rents. “The terms of these lease modifications were purportedly  ‘negotiated’ between Insider Defendants Roy Brown and Joel Dempsey -- both of whom have an ownership interest in the entity receiving the increased rent payments from  debtors and both of whom are seeking to acquire an interest in the debtors through the (proposed auction),” the filing states.

“Windjammer believes there are other acts of self-dealing involving the Insider Defendants,” the filing states. “Windjammer is unable to determine whether that belief is accurate  because the Insider Defendants have withheld documents and information, have caused  Brown Publishing not to conduct board meetings for more than a year, and have  concealed information regarding their own planned acquisition of the Debtors' assets in the months preceding these chapter 11 cases.”


Windjammer is also objecting to Brown Media’s proposal that Brown Publishing be sold free and clear of liens, claims and encumbrances: “Any sale to an entity associated with the Insider Defendants should not occur  free and clear of liens and encumbrances based on the bad faith and concealment of  information by the Insider Defendants.”

Among the documents requested by Windjammer that it alleges Brown companies have failed to produce is a promissary note. The filing states: “Sometime in the Spring of 2010, Roy Brown surrendered stock in Brown  Publishing purportedly in satisfaction of his obligation to repay a promissory note he owed to Brown Publishing.  Windjammer has requested a copy of the promissory note  but the Insider Defendants have not provided it.”