McClatchy sale stays on track as judge delays ruling on whether some creditors can sue

A federal bankruptcy judge said Monday that he believes a group of less-protected creditors likely has met the standard to bring claims against McClatchy’s board of directors and some senior leaders related to a 2018 refinancing of the company’s debt.

But in the context of the sale of the nation’s second largest local news company, which is scheduled to be decided at auction Wednesday, it might not matter much.

McClatchy noted in a statement that Judge Michael E. Wiles allowed the company “to continue with its sales process as planned.”

In a hearing Monday, Wiles examined various allegations raised by the less-protected, or “unsecured,” creditors and deferred a final order until after Wednesday’s auction.

“I am very likely to permit many to be pursued,” he said.

Wiles, who sits on the U.S. Bankruptcy Court for the Southern District of New York, stressed that he was not deciding on the merits of the allegations, just whether they cleared the legal bar for the unsecured creditors to pursue them.

The judge said he believes the unsecured creditors likely have met the threshold to pursue a claim for their allegations that McClatchy’s leadership should have known the company was at least functionally insolvent at the time of the 2018 refinancing and thus should have acted in the interests of all stakeholders, not only shareholders that included the McClatchy family.

He summarized allegations made by the unsecured creditors that McClatchy’s leadership was “grossly negligent” and “did not act with due care in their valuation of the transactions or their consequences.”

“There is a colorable (plausible) basis to make those arguments,” he said. “That’s all I am arguing today.”

The 2018 transaction put the company’s largest creditor at the time -- hedge fund Chatham Asset Management -- in a favored position in the event of bankruptcy while protecting the McClatchy family’s control of publicly traded shares.

In a win for McClatchy, the judge also warned all parties that he would not give the unsecured creditors effective veto power over settlement of the bankruptcy claims, as it had proposed.

Wiles also shot down an allegation by the unsecured creditors that McClatchy and Chatham engaged in “fraudulent transfer” during the 2018 refinancing. Monday’s hearing focused primarily on McClatchy’s role in the transactions, and it wasn’t immediately clear if or how Chatham will be included in other areas of Wiles’ upcoming order.

Neither Chatham nor lawyers for the unsecured creditors returned requests for comment Monday.

In its statement Monday, McClatchy vowed to continue to fight the allegations against leadership.

“We continue to believe that the UCC’s claims are baseless and without merit, and we intend to vigorously defend our board and officers against them,” the statement says. “McClatchy’s board and officers take very seriously their fiduciary responsibilities and role of protecting the financial best interests of McClatchy and its stakeholders.”

The judge’s actions came several days after multiple bids for McClatchy were submitted and are not expected to directly affect the sale.

Instead, Wiles will consider the terms of the winning bid when determining whether there is value in allowing the unsecured creditors, who are fighting for a portion of the sale proceeds, to move forward with lawsuits.

In a required court filing on the day it announced the sale process, McClatchy said Chatham had offered more than $300 million to buy substantially all of the company.

McClatchy has said it won’t comment on the sale proceedings until a winner is announced.

A published report by the Nieman Lab on Monday described two additional bidders. One was described as “a non-starter” and the other was identified as Alden Capital Group, another hedge fund interested in legacy newspaper companies.

Alden has a 33 percent stake in the Tribune Co. and last week won a seat on the board.

McClatchy acknowledged earlier in the bankruptcy process that it twice tried to merge with another company, widely reported to be Tribune, as its pension obligations mounted.

Many media observers believe that the best route to survival for local news companies in the digital era is to become larger consolidated organizations that can provide economies of scale.

McClatchy filed for Chapter 11 bankruptcy in mid-February citing the twin burdens of debt from the $6.5 billion purchase of the larger Knight Ridder chain in 2006 and its legacy pension obligations. The company concluded in late December 2019 that it would be unable to meet a $120 million quarterly pension obligation coming due in September 2020.

Wiles had no issue with the 2018 restructuring of more than $300 million of first-lien debt, the most protected in a bankruptcy proceeding and held mostly by Chatham and investment fund Brigade Capital Management.

If the judge allows the unsecured creditors’ claims to proceed, it could open to lawsuits McClatchy’s CEO and other current or former executives involved in refinancing transactions in 2018 and 2019. Most corporations carry millions in liability insurance for officers and directors.

McClatchy and the unsecured creditors could also still reach a settlement through ongoing mediation, something Wiles encouraged.

Wiles must sign off on any sale on July 24 after a period in which challenges are allowed. A Justice Department review of monopoly implications could follow.

The 2018 transactions have been at issue since the day McClatchy filed bankruptcy. The Pension Benefit Guaranty Corporation, the federal agency that would take over administration of McClatchy’s pension, raised questions before it joined the unsecured creditors committee.

The PBGC has the largest claim among the members of the unsecured creditors committee. Other members include former Knight Ridder and McClatchy executives and senior employees who were owed an estimated $118 million in supplemental pensions when McClatchy filed for bankruptcy.

McClatchy 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.