The bruising battle for Alter CommunicationsRichard Squire in The Deal, March 09, 2012
For every business that enters the limbo of Chapter 11, confirmation of a reorganization plan is the finish line that everyone is struggling toward. Reaching it, attaining it, means that after months or years of restructuring, negotiating, perhaps even liquidating, everyone involved can finally move on. But what happens when confirmation is suddenly scrapped and a company that thought it was exiting Chapter 11 discovers itself dragged back into a bankruptcy court that, in turn, has had its own decisions reversed? The answer: It's not pretty.
For Maryland-based Alter Communications Inc., publisher of the 92-year-old Baltimore Jewish Times, that question became a cold reality, the result of a long battle with its main creditor, Baltimore printer H.G. Roebuck & Son Inc., that has lasted nearly four years now.
"It's just been completely maddening. ... That's the only way I can describe this entire thing," says Alter publisher Andrew Buerger. For Buerger, the madness spiked last summer after a seeming triumph: confirmation by the U.S. Bankruptcy Court for the District of Maryland in Baltimore of a reorganization plan that would have kept the company in the control of the Buerger family but given Roebuck what the creditor felt was less than its fair share.
Roebuck sued in the U.S. District Court for the District of Maryland, and on June 3 Judge Richard Bennett signed an order reversing the confirmation, ending Alter's exclusive right to propose a reorganization plan and sending Alter and Roebuck back to the drawing board -- and back to bankruptcy court.
Bennett's decision to reverse the bankruptcy court's earlier order is unusual: Plan confirmations seldom get overturned. Neither Maryland's bankruptcy court nor the Executive Office for U.S. Trustees in Washington, responsible for overseeing the administration of bankruptcy cases, track the number of Chapter 11 plans that are confirmed and subsequently reversed, but Richard Squire, a bankruptcy law professor at Fordham University School of Law in New York, estimated that it happens in, at most, one in 10 cases. Included in that figure, though, are not just confirmations that are reversed because of appeals, but also instances when a debtor defaults on obligations under the plan or a deal key to funding creditor recoveries, such as a sale, fails.
Joel Sher, head of the bankruptcy and restructuring practice at Baltimore-based Shapiro Sher Guinot & Sandler PA, characterizes such reversals as "extremely rare. I can't remember ever seeing that before in Maryland where a plan confirmation has been appealed and then reversed."
Charlotte, N.C., bankruptcy lawyer John Culver III of K&L Gates LLP has views as to why it is so "extraordinarily unusual." Under bankruptcy's equitable mootness doctrine, confirmation can't be appealed once a plan has been consummated, which forces creditors to move quickly if they want to see the decision reversed. Perhaps a bigger roadblock to appeal, Culver says, is what's at the heart of every bankruptcy case: lack of cash. "When cases are confirmed, it's very difficult to find a creditor that would be willing to pay for an appeal," he says.
The Alter case clearly demonstrates why so few are willing to take on the emotional and financial burden of overturning a confirmation plan.
Roebuck, which had been instrumental in putting Alter into Chapter 11, both moved quickly and proved willing to shoulder the additional costs. By now, the conflict between the two is intensely personal and damaging to both. After a brief period when the pair seemed willing to work together to come up with a new plan, the disputes erupted again, leaving both debtor and creditor as far away as ever from everyone's ultimate goal, confirmation.
For decades, Alter was the publisher of a community newspaper, the Baltimore Jewish Times, or the JT, that was also a valuable family asset. The weekly tabloid was started in 1919 by David Alter, who ran it for more than 50 years before his grandson, Charles Buerger, took it over. With the help of editor Gary Rosenblatt, Buerger expanded both the coverage and size of the publication. In the 1980s, the paper typically exceeded 200 pages, with a circulation that hovered around 20,000 readers.
Business was so good in the pre-Internet era that in 1989 Buerger launched a second publication, reaching beyond the JT's Jewish base, the seven-times-a-year Style magazine, which covers Baltimore home design, fashion, food and regional travel.
When Buerger died in 1996, his son Andrew took over. The JT was not just a profitable asset, it had some journalistic chops. Baltimore native Phil Jacobs, who had edited The Detroit Jewish News, a 40,000 circulation weekly once owned by Alter, became executive editor of the JT and oversaw an investigative series on child molestation by member of the rabbinate. These stories, he says, "needed to be told," in spite of the backlash it stirred in Baltimore's Jewish community.
"It was very difficult to report on some of the perpetrators because these were men that were household names and they bar mitzvahed and bat mitzvahed you, and they married you and they buried your grandparents, and [the feeling was] how could you report on something that would cast them into a terrible light?" he says. Jacobs' experience during the controversy became the subject of a 2010 documentary entitled "Standing Silent."
Jacobs left Alter last June to become editor of Washington Jewish Week, just as the tabloid was undergoing a redesign that turned it into a glossy weekly magazine with 50,000 readers that publishes everything from wedding announcements to hard news.
By then, Alter had been in Chapter 11 a year. The cause: a soured, decades-long relationship with its printer, H.G. Roebuck, which ended in litigation that left the company strapped for cash. Alter blamed its April 14, 2010, bankruptcy filing on an inability to pay a $326,125 judgment awarded to Roebuck by the Circuit Court for Baltimore County.
Like so much else at Alter, the break with Roebuck has a long backstory. Roebuck, like Alter, was a family company with nearly a century of history in Baltimore. Andrew Buerger says his company began working with Roebuck in the late 1950s. "Before that, my great-grandfather had the paper printed in Pittsburgh and shipped down by train, so Roebuck was the first printer in Baltimore that we used, and the relationship was OK for a number of years," he says.
Buerger became publisher of Alter in 1997, around the time the company was growing increasingly frustrated with Roebuck's service. Buerger argues that Roebuck was "light years behind the rest of the industry" in its technology and the quality of the printing had deteriorated to the point where advertisers and subscribers complained. Alter shared its concerns with Roebuck just before the 2008 financial crisis, and in the same year the publisher attempted to negotiate lower pricing, despite the fact that it had an exclusive printing contract that didn't expire until April 1, 2011.
"We looked at the market rate, and we knew we were paying 40% too much for our printing. We said, 'You're going to put us out of business,'?" says Buerger, who argues that Alter's relationship with Roebuck was costing the company $250,000 a year.
Calls to Roebuck were not returned, and counsel to the creditor William L. Hallam of Baltimore-based Rosenberg Martin Greenberg LLP declined comment, but in court papers, Roebuck said Alter violated a March 1, 2001, exclusive printing agreement a full two years before it expired. In February 2009, Roebuck sued Alter, seeking $1.7 million in damages for past-due printing and lost profits. For his part, Buerger says the contract was the result of little more than an earlier "vague and unclear" letter between the two companies and that he offered Roebuck $175,000 for unpaid printing fees and $225,000 more to get out of the contract. Roebuck refused.
A judge in Maryland circuit court entered a final judgment against Alter on April 8, 2010. Alter then filed for Chapter 11 in the bankruptcy court six days later. From the start of the case, the printer battled with Alter, objecting to everything from the request to use cash collateral to paying critical vendors, including its new printer.
On Oct. 14, 2010, Roebuck filed a motion to terminate Alter's exclusivity period, which barred other parties from submitting competing reorganization plans. Four days later, Roebuck submitted its first objection to Alter's confirmation plan.
Roebuck argued in court papers that the debtor's plan, which had the Buerger family retaining at least 85% in Alter equity, violated the absolute priority rule, a requirement for plan confirmation in bankruptcy court. (Andrew Buerger holds a 16.86% equity interest in the company, and his mother, Ronnie Buerger, 44.29%, while the estate of sister Jodi Buerger, as well as siblings Kevin Buerger, Danielle Bunting and Lauren Buerger Holub each have 9.71% stakes.) Under the absolute priority rule, all creditor classes must either accept the plan or be unimpaired, meaning they do not get to vote and are deemed to have accepted the plan. If a creditor class does object, the plan may still be confirmed through a "cramdown," which requires that the plan "does not discriminate unfairly, and is fair and equitable." A plan can be considered fair and equitable only if claims are paid in full or if the plan complies with the rule, which says "the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property."
That's where Alter got into trouble. Under Alter's original plan, if the Buerger family did not retain all the equity in the reorganized company, then $42,000 of unpaid principal and accrued interest on Buerger's unsecured claim related to an earlier loan to Alter would be immediately due and payable. Under the plan, which would be funded by Alter's cash flow, Roebuck would have received 85% of Alter's profits after expenses from 2011 to 2015.
But Roebuck argued that the price placed on the aggregate value of Alter's equity, $14,000, had not been tested in the market and gave the Buerger family an unfair edge. If unsecured creditors decided to buy the 15% equity interest available under the plan, the immediate payment of Buerger's claim would drastically reduce the recovery.
Despite Roebuck's protestations, on Dec. 1, 2010, Judge James Schneider of the Maryland bankruptcy court dismissed the creditor's request to end exclusivity and confirmed Alter's plan two weeks later on Dec. 15, 2010.
THEN the fight got serious. Incensed by Schneider's decision, Roebuck took its case to a different judicial arena. Two days after the decision, Roebuck appealed Alter's right to exclusivity in Maryland district court, and then, on Dec. 30, appealed the confirmation decision itself, claiming that it violated absolute priority.
After six months of arguments, Bennett reversed the bankruptcy court's decision. In his opinion, he said Alter had failed to accurately test the market for the equity. The judge said that placing fewer than 10 advertisements in local publications from Dec. 1, 2010, the date of the exclusivity hearing, to Dec. 15, the date of the confirmation hearing, did not constitute proper market testing, especially since no competing plans could be submitted to the court. The judge called the ads far too "bare bones" and "cryptic." Most of the ads contained only this text: "Weekly publication [incentive stock option] buyers/investors," alongside a Maryland phone number.
For its part, Alter contends that it did reach out to a targeted group of potential investors, mainly those involved in other Jewish publications, before filing the plan, but that none of them showed any interest.
"What [Alter's] case does is emphasize the importance of market testing," K&L Gates' Culver says. Culver served as counsel to creditor Sprint Nextel Corp. during DBSD North America Inc.'s massive 2009 bankruptcy. It was Sprint's complaint and assertion that DBSD violated another aspect of the absolute priority rule, which eventually led to confirmation in that case to be reversed by the U.S. Court of Appeals for the 2nd Circuit in December 2010. "It's the importance of making sure that when existing equity holders are buying interest, the price being used is correct," says Culver. "It's a fairness issue."
Squire echoes Culver's assessment, pointing out that it's "pretty standard" for confirmation to be reversed when it looks like shareholders have "tried to sell themselves shares of the company on the cheap." He adds: "It becomes a question of, 'Are they getting a sweetheart deal?'?"
Once Bennett determined that the Buergers were in fact getting an excessively favorable deal under the original plan, Alter and Roebuck went back to duking it out in bankruptcy court.
Buerger says that the fight has been draining for everyone, particularly Alter employees. Alter slashed a third of its workforce when the recession began in 2008, has not given raises to its 40 remaining employees and had to implement furloughs for the third time in February, he says.
"That's the frustrating part about this," Buerger says. "These are hardworking, dedicated, talented people. ... They want to be here because they believe in what we're trying to do. They're just trying to do their jobs. It's very distracting, and it's very hard to concentrate on the task at hand with all the madness going on."
An Alter manager, Linda Yurche, describes the company's staff as fiercely loyal -- at least 30 employees have attended bankruptcy hearings.
For a short time late last year, it seemed that Alter and Roebuck might resolve their differences. Exasperated by the infighting, Schneider on Sept. 28 ordered the two to work better together -- or else. He set an Oct. 21 deadline for them to file a joint reorganization plan, and said he would consider the appointment of a Chapter 11 trustee. Just after the judge's order, Yurche says Alter was "optimistic" the pair would reach a mutual agreement.
Schneider then extended the deadline twice, first to Nov. 25 and then to Dec. 31 at the request of Alter.
Buerger says Schneider admonished both companies, telling Alter to give up on a $1 million recovery and majority control and saying that Roebuck should receive a fixed amount of money, not a share of profits, and that claims stemming from shareholder loans of $42,000 and $181,000 owed to Andrew and Ronnie Buerger, respectively, should not be paid until other unsecured claims were fully satisfied.
During negotiations, Buerger says the company offered Roebuck $400,000 over a five-year period, which the printer countered with a $700,000 figure. Buerger says Alter made a final offer of $525,000 over six years, and after 10 days Roebuck came back demanding $1 million. "There was no gap," Buerger says. "We weren't monkeying around with our offers. We offered them every penny we could offer to continue running the business."
The creditor, however, told a different story in a motion requesting the appointment of a trustee. Roebuck alleged that Alter agreed to meet only once to discuss the possibilities of filing a joint plan, and on condition that minority shareholder Charles Roebuck III participate as the printer's only representative.
Squire terms Roebuck's request for a trustee as "aggressive."
"When a creditor filed a motion seeking a trustee, [the creditor] is saying, 'We think management is not just incompetent, but dishonest or corrupt in some way.' ... That does suggest that this has become rancorous," he says.
The printer alleged that at a Sept. 28 meeting Alter proposed a plan under which all unsecured creditors, not just Roebuck, would be paid $521,000 over a six-year period. Roebuck suggested that the debtor should pay $600,000 to $700,000 to satisfy its claim. After Charles discussed the proposal with his father and brother, Roebuck decided that even its own proposal was unreasonably favorable to Alter. Roebuck contended that since Alter had closed its Chesapeake Life magazine last year, it could use those savings to fund recoveries.
Roebuck then proposed a joint plan under which unsecured creditors would be paid $1 million over six years. The creditor also said it would consider plans under which unsecureds would receive less than $1 million, if they also received stock in the reorganized debtor.
In court papers, Roebuck said that "consistent with the theme of casting [the printer] as the unreasonable villain," Alter had accused the company of negotiating in bad faith.
The two companies were unable to come to an agreement, and Alter and Roebuck blew through all three deadlines without a plan. The companies have now each submitted plans of their own.
In a three-day bloc ending March 14, Judge Nancy Alquist of the Maryland bankruptcy court will decide between the two plans as well as rule on Roebuck's trustee motion. (Sources say the case was reassigned to Alquist after Schneider fell ill.)
Regardless of the outcome, it's unclear if there will be a real winner when the mudslinging is over. Buerger says Roebuck has now spent over $650,000 in legal fees, double the amount it was originally awarded in its 2009 judgment.
Roebuck has also said in court papers it has missed out on $1.44 million in lost profits due to the termination of its Alter contract. Alter, according to Buerger, is operating with the "bare minimum."
"This is very personal. ... There's no rationale behind it," Buerger says. "[Roebuck] is hurting any investment that we're trying to make for the future. I'm always looking in the mirror and asking, 'How can I improve? What mistakes did I make?' But the bottom line is we cannot give these guys a lot of money. There's no gold in our backyard. The recession and the industry have too many challenges to write them a big check."
Meanwhile, another Baltimorean, Scott Rifkin, stepped up in December to lead a group of investors willing to put up $600,000 to fund a plan to get Alter out of bankruptcy for good. Rifkin, a physician turned entrepreneur, declined to provide any additional details about the investor group.
Under the debtor's latest plan, proposed Dec. 30, the group would retain 80% of the equity interests in the reorganized company. The Buerger family would hold the remaining 20%, and Buerger would remain publisher.
Buerger says his family is "obviously upset" at losing control of Alter, but adds, "I'm happy for our employees, our community, our publication, that [the JT] will go on."
Alter's new plan also contains provisions stating that while Buerger will remain in charge, the investor group will make final editorial decisions. According to Rifkin, the group decided to approach Alter after seeing the company struggle financially and battle with Roebuck in public. "We saw they were having this problem, and we reached out to them. This has been going on forever," he says. "You have a lot of emotion built into this, particularly from [Roebuck], and it just struck us that if it went on as long as we thought it could go on, it would get to the point where [the JT] wouldn't be able to go on."
Rifkin, who owns Baltimore sports monthly Press Box magazine and PressBoxOnline.com, says that if the court does opt for Alter's plan, the group is confident it can make the publisher more profitable. (In its most recent monthly operating report, for December 2011, Alter reported a $31,760 profit, court papers said.)
The investors plan to keep the current editorial staff in place and bring in "outside expertise" in advertising and marketing to boost margins, Rifkin says.
On Feb. 22 Roebuck submitted a plan of its own that would have all of Alter's equity go to a Roebuck-affiliated shareholder in exchange for an $800,000 investment from WJW Group LLC, the publisher of Washington Jewish Week, edited by Jacobs. Under the plan, a person designated by WJW would serve as the JT's publisher.
Roebuck would receive a 17% recovery on its judgment amount. The printer also contends it is owed $1.44 million in lost profits related to the judgment, of which it would receive a 17% recovery.
Charles Roebuck III and Richard Roebuck would each serve as Alter vice presidents, while Charles Roebuck Jr. would become secretary and treasurer. Craig Burke, chief operating officer atWashington Jewish Week, would serve as president.
In an e-mailed statement, Burke says Roebuck approached the Washington paper about partnering.
Though it remains uncertain who will end up in control of Alter, it's clear that the struggle will leave both sides hurting. "This is all just the unfortunate nature of the litigious people we're dealing with. They've created a no-win situation for anybody," says Buerger.
"This just seems like one of those cantankerous cases that comes along every once in a while," bankruptcy attorney Sher says. "The parties in this case had been fighting for at least a year before the bankruptcy, and they seem incapable of reaching any compromise."