New Haven Independent

In issuing his ruling Tuesday afternoon, Judge Allan L. Gropper (pictured coming out of the courthouse late last month) overruled objections to a plan to pay about $1.3 million to managers in exchange for duties including firing scores of employees, closing newspapers (referred to as “shutdown bonuses”) and remaining with the company.

Gropper, sitting in New York, ordered the confirmation of the Chapter 11 plan filed by the Journal-Register Corp. Contracts now can be signed with lenders for the $225 million the company will receive in exchange for 90 percent of the company, though the timing of that was unclear Tuesday.

Read the ruling here.

An objection filed with the court, by state Attorney General Richard Blumenthal and the Central States Pension Fund, charged the scheme was illegal in that it rewarded executives for work accomplished before the company filed for bankruptcy protection and thus was against Section 503 of the Bankruptcy Code, passed in 2005 by Congress.

Blumenthal Tuesday castigated the judge’s ruling and left open the possibility of an appeal.

“This decision means that bankruptcy is no bar against bloated big-time bonuses. The unfortunate bankruptcy court ruling means that JRC executives will be substantially rewarded more than $1.3 million in blatantly undeserved bonuses for shutting down newspapers and laying off employees,” Blumenthal said.

“While most employees lose their jobs for poor performance, JRC executives will be paid extra for failure — causing job losses and shuttering offices.”

“My office raised strong objections because the JRC failed to justify the purpose and necessity of these payments, including who will receive them, and how much each executive will receive. While we disagree with the court’s decision, our objections compelled a more stringent and thorough review of the bonus proposal by the court and afforded all creditors and parties the opportunity to review and vote on this plan.

“My office is reviewing the decision and will determine whether further action is appropriate.”

Gropper did not publish his decision until nearly two weeks after the June 25 hearing.

Numerous calls seeking comment placed Tuesday to JRC spokesman Gary Struening and lawyers Shaunna D. Jones and Rachel Strickland of Willkie Farr & Gallagher, who represented JRC, were not returned.

Greg Hladky, the Register’s Capitol Bureau chief until he was fired and the bureau eliminated in March of 2008, said in a telephone interview Tuesday that the hatchet bonuses were “a sad but accurate reflection of what the worst of corporate America is doing to the nation.” He called it “a weird point in time for communication companies,” not just JRC.

Asked about Conway’s statement that no more layoffs were in the cards, he said managers may believe these promises when they make them, but since these continual promises keep getting broken, it’s “difficult to believe them.”

JRC, a Yardley, Penn., chain, filed for protection from creditors on Feb. 21 in a prepackaged bankruptcy that should leave a network of banks with 90 percent of the new company’s stock and the management with 10 percent.

At a confirmation hearing on June 25, Robert Conway, interim chief executive officer and chief restructuring officer for JRC, said that after emerging from bankruptcy, the company will go on and that no more layoffs were in the cards for the foreseeable future.

“There is a strong management team in place in New Haven,” he said. There will be no further layoffs at the Sargent Drive facility in the foreseeable future, he said.

Major stockholder Richard Freeman of Scranton, Penn.,said in an interview last week that he would lose all of his 10 percent stake in JRC unless the judge intervened. Tuesday he said he was planning to appeal Gropper’s decision “within days.”

Freeman, who lost his 10 percent stake in JRC to the bankruptcy, said he was disappointed in the ruling and planned to challenge it.

“I have a lot of respect for this judge and his opinion, but feel that after reviewing the case that the judge “found the argument after the fact to support” his view of the matter.

“I know reading the decision that he did not correctly characterize and direct my argument. My whole argument was unfair treatment and the judge didn’t talk about it. This company has without any major justification reduced the value of its assets by half a billion dollars in the past two years can just as easily put to back if management wishes,” he said.

“I am not in the mood to have somebody wipe out my investment because they feel like it. That is just wrong. That is what management is doing,” he said.

“The incentive plan is not unreasonable and not against even the new section of the Bankruptcy Code, so there is no reason to sustain and objection to it,” the judge said in his 32-page opinion. Even if he thought the plan was unfair, he had no authority to change it, Gropper said

“In a handwritten letter received by the Court on July 1, 2009, an employee of the Debtors {JRC} questioned the fairness of the Incentive Plan on the ground that many employees have been forced to take substantial pay cuts, and the Incentive Plan fails to reward the efforts of all of the Debtors’ employees. Although the Court understands such concerns and the sacrifices that many employees have made, it has no legal authority to order the Debtors to provide for a different Incentive Plan,” he wrote.

“Analysis of the objections of the Guild and the State of Connecticut based on {Section} 503 reveals that their underlying arguments are flawed,” Gropper wrote.

“…The Secured Lenders, who as the proposed owners of the Reorganized Debtors will bear the financial burden of the Incentive Plan, have overwhelmingly accepted the Debtors’ Plan, and the recoveries of unsecured creditors such as the Guild and the State of Connecticut are not affected by the Incentive Plan. The facts and circumstances of these cases therefore justify the Incentive Plan, ” he wrote.

“Moreover, the Creditors Committee endorsed the Incentive Plan as reasonable, and the Debtors’ chief operating officer, who is an experienced restructuring professional, testified without contradiction that the Incentive Plan is reasonable. There is no suggestion that it is not in line with the market for compensation of the top executives of similar companies. Based on the foregoing, the objections to the Incentive Plan are overruled,” Gropper wrote.

There are a number of small, housekeeping issues to be ironed out a hearings scheduled this month and next. How those will affect the timing of the emergence from Chapter 11 were not clear Tuesday.