Last Monday, Creative Loafing, the company that owns Washington City Paper and five other papers, announced that it had filed for Chapter 11 bankruptcy. At the time, Creative Loafing CEO Ben Eason said, Chapter 11 was a “natural place for the Company to go to accomplish an orderly reorganization of our finances.”
This move was occasioned by a dispute between Creative Loafing and its biggest creditor, New York- and Atlanta-based Atalaya Capital Management, which loaned Creative Loafing Inc. (CLI) $30 million to purchase City Paper and the Chicago Reader last year and to pay down $15 million in debt that CLI already held. (CLI also borrowed $10 million from BIA Digital Partners in Chantilly, Va., when making the purchase.)
As collateral, Eason pledged his voting shares (he owns 100 percent of the company’s class A stock).
Yesterday, as Atlanta Magazine‘s Steve Fennessy first reported, Atalaya filed an objection to CLI’s “emergency motion” for a temporary restraining order, claiming that Eason’s stock was owned by him alone, not the company, and as such was outside the scope of CL’s bankruptcy. Further, Atalaya contested CLI’s assertion that Eason “provides the vision and direction for the Debtors’ viewpoints of various issues, including social, political and cultural, that are occurring in each of the Debtors’ communities.”
Yesterday, Judge Caryl Delano of Tampa, Fla., where the case is in motion, disagreed with Atalaya.
Had the company been successful, it would have been able to essentially take over Creative Loafing. “It was a legal maneuver they were doing to get more control,” says Eason, speaking from his office in Tampa.
“When we filed the bankruptcy,” he says, “there was a concern that Atalaya or BIA might use the collateral as a part of the bankruptcy to come in the backdoor and use the shares to basically foreclose on the shares and function as the board of directors.”
Atalaya says Eason is not the “only employee or officer of the Debtors capable of managing the business” and that CLI hasn’t “suggested that Mr. Eason will contribute anything in the way of credit, money, or property to fund any proposed plan. Mr. Eason will contribute only his time and energies for which the Debtors have proposed that he continue to receive a significant salary and potential bonus.”
In one particularly memorable section of the filing, Atalaya gives examples of companies in Chapter 11 whose sole proprietor was “the only person who can run the business”: one was the only physician at his chiropractic clinic; another was “the only person with trade secret knowledge of how to process codfish in the Caribbean.” (Note: I am now desperately trying to work the phrase “it’s hardly processing codfish in the Caribbean” into my everyday speech.)
Eason calls this “a bit of an aggressive move.” He characterizes the first 10 days of the bankruptcy, as “Day 1” hearings, when the court unfreezes the company’s assets one by one—-its ability to use its bank account, its ability to pay employees, freelancers, vendors, etc. He characterizes these hearings as “Can we turn the lights back on?
Yesterday’s ruling was part of what Eason calls “Day 2 proceedings.” He says CLI now has “a total timeout for 110 days,” during which time CLI management will get a reorganization plan together. “Essentially…the initial set up is done,” he says.
UPDATE (FRIDAY, OCT. 10; 6:15 P.M.): Via Tyler Brown, an attorney for Atalaya, this statement.
Atalaya Administrative, LLC, (“Atalaya”) is the agent for the lenders who hold the senior secured loan outstanding to Creative Loafing, Inc. (“CLI”) and its affiliates, which are debtors in chapter 11 cases in the U.S. Bankruptcy Court in Tampa, Florida. Atalaya is owed in excess of $30 million by CLI.
Atalaya believes that the bankruptcy filing was unfortunate and unnecessary. It is very important that management of CLI continue to operate the business in the ordinary course and that the bankruptcy have as little negative impact on CLI’s operations, employees, customers and vendors as is possible. Atalaya wants the business to succeed and, despite whatever court actions may be required to protect Atalaya’s interests, wants to assure all interested parties that Atalaya has no intention of attempting to shut down the business. Atalaya believes that the business can succeed with the right management and business plan in place.