(Updated 5:42 p.m.) Anger over corporate wallet-stuffing in hard times could spill over into bankruptcy court as a judge hears objections to paying $1.7 million in “shutdown bonuses” and other executive rewards at the New Haven Register‘s parent company.
An April 2 hearing date has been set for a move by Connecticut Attorney General Richard Blumenthal (pictured) to block the bonuses during consideration in U.S. bankruptcy court in Manhattan of the Journal Register Co.‘s (JRC) request for Chapter 11 protection from creditors.
“The growing [national] outrage about executives being rewarded for failure should … certainly help us,” Blumenthal said in an interview Monday. “It heightens the credibility of our argument.”
Two other parties, a major shareholder and a group of utility companies, have filed objections to the bankruptcy petition as well.
The Pennsylvania-based chain, which owns the Register and 19 other daily newspapers and some 180 weeklies, filed for bankruptcy protection on Feb. 21.
The filing included a proposal to give 31 “key” executives $1.7 million in bonuses — some termed “shutdown bonuses” — if they meet certain goals. Those goals mainly consist of shutting down newspapers and firing 450 more full-time employees by March 31 (for a total of 590 to date).
That outraged Blumenthal, who is also steamed that the company wants to proceed with the bonuses while owing the state $21.5 million in unpaid corporate, sales, and other taxes.
Who’s In Charge?
A separate challenge was scheduled to be heard in court Tuesday, from JRC shareholder Richard M. Freeman of Scranton, Pennsylvania. Freeman, who owns about 8 percent of the company’s stock, wants court permission to question JRC officials about who exactly is running the shop these days.
Buried in JRC filings were a termination agreement and other documents suggesting that CEO James Hall may have left the company with a golden parachute. Freeman filed a motion under Rule 2004 of the Federal Rules of Bankruptcy Procedure seeking the ability to learn more; discussion of the motion was pulled from Tuesday’s schedule pending negotiations between the parties.
Click here to read the motion.
Asked Monday afternoon who’s running the company, a woman answering the phone at JRC headquarters said it has not been determined who the chief executive officer is right now. The company’s website doesn’t list one. As has been the pattern since the bankruptcy filing, company officials failed to respond to a request for comment.
Update: In bankruptcy court Tuesday the judge approved Robert Conway as the company’s interim CEO.
A third objection to JRC’s bankruptcy petition has been filed by seven utilities from various states, including Southern Connecticut Gas Co. and Connecticut Light & Power. It is scheduled to be heard Tuesday. The utilities want Judge Allan L. Gropper to deny JRC’s bid to prevent them from demanding more than two-week advance payments, and then only under certain conditions. The utilities, saying they already have back-due bills and fearing larger unpaid debts, want the court to require six-month up-front payments. Click here to read the utilities’ motion, filed March 13.
“Retention” Masked As “Incentives”?
Blumenthal’s office laid out its legal argument against the “shutdown bonuses” in a brief filed with the court on March 4. Click here to read the motion, which was written by Assistant Attorney General Denise Mondell. Mondell calls for using the $1.7 million in proposed bonus money to keep in their jobs some of the employees targeted for layoffs.
In previous filings JRC officials argued that the bonuses are necessary as incentives to keep 31 unnamed “officers and key employees” at the company and meeting performance goals. They argued that’s the cheapest and most efficient way to protect shareholders’ investment.
Mondell’s brief attacks that argument on two legal bases.
Base one: section 503©(3) of the federal bankruptcy code. That section denies payments “not justified by the facts and circumstances of the case.”
A plan to reward executives for “eliminating 590 full-time employees in the midst of the current economic crisis not only demonstrates highly questionable judgment, poor taste, and total lack of sensitivity, but is completely unjustifiable,” Mondell writes. “The fact that the Debtors need to make significant reductions to its workforce is bad enough, but the Debtors merely add insult to injury when they ‘reward’ a select few for ‘accomplishing’ this task. It is submitted that, under the facts and circumstances of this case, the estate, as well as the interests of justice would be better served if the $1 million were used to retain even a few of the positions slated for elimination or to provide some recovery to the unsecured creditors. “
The “justification” that the bonuses are needed as incentives for execs critical to saving the company falls flat, Mondell argues, for a simple reason: The company has already hired outside “bankruptcy professionals and crisis managers … at great expense” to do that. For instance, JRC has paid more than $1.7 million (the same figure as the proposed bonuses) to just one of those firms, Conway, Del Genio, Gries & Co., LLC, to act as “chief restructuring officer.”
A second basis for Mondell’s argument rests on whether these bonuses are in fact “performance incentives,” as the company claims; or masked “retention” bonuses.
That’s an important legal distinction, according to Mondell’s argument. Under Section 503©(1) of the bankruptcy code, the bonuses can be granted only if they’re primarily for “performance incentives,” not for “retention,” unless they meet specific benchmarks.
Mondell argues that that the main purpose of the bonuses can’t logically be considered incentives to accomplish goals — because most of the goals listed have already been met, or will have been by March 31. And they’re not tagged to “rewarding [the execs] for the achievement of extraordinary results,” another benchmark.
Mondell argues that the proposed bonuses fail to meet three benchmarks laid out in Section 503©(1) for retention purposes: that the executives have “bona fide job offer[s]” and therefore might otherwise leave the company; their “services” are “essential” to the business’s “survival”; and the bonuses don’t “exceed” certain limits.
Besides, Blumenthal maintained Monday, “Why would you want to retain them if they’ve run the company into the ground?”
“Congress added this section of the code to respond to increasing public sentiment against the practice of executives of bankrupt companies generously rewarding themselves during restructuring while at the same time the rank and file workers were suffering tremendous economic blows as a result of the bankruptcy,” Mondell’s brief notes. Her challenge now is to convince Judge Gropper that the JRC bankruptcy is a prime exhibit of that practice, one more episode in the currently unfolding Chronicles of An Age of Greed.
Previous stories about the recession’s impact on old media:
• CEO Flies Off With Golden Parachute
• Courant Lays Off Top Reporters
‚Ä¢ AG Targets Register “Shutdown” Bonuses
‚Ä¢ Would You Believe, “It Sucks”?
• Can iTunes Save Newspapers?
• Register Closes Weeklies
• WTNH Slashes Workforce
• Advocate, Courant Owner Files For Bankruptcy
• Layoffs at Register, H.B. Ives
• Register Lays Off Hladky
It's good to see Blumenthal taking some decisive action on this travesty. The intricacies of corporate law and finance are well beyond me, but paying $1,700,000 to 31 people when you're preparing to fire nearly 600 just doesn't pass the BS screen.