The Political Whore

Ben Eason, whose family started Creative Loafing in Atlanta in 1972, was vindicated in a federal bankruptcy court in Tampa today, as a judge ruled against a lender’s effort to take control of the nation’s second-largest chain of alt-weekly newspapers.

Judge Caryl E. Delano said despite contradictory (and flawed, in her estimation) reports about the chain’s value since going into Chapter 11 bankruptcy protection in September 2008, there was no evidence given that Eason’s management of the media company is harming its value, as lender Atalaya Capital Management had maintained in its effort to dislodge Eason and the current management.

To the contrary, Delano read from the bench, three days of hearings showed that Eason’s management had done a lot to preserve value, by making budget cuts and introducing an emphasis on web publishing models, including one in Tampa that has produced a sharp increase in web traffic while making the print edition a break-even proposition instead of a money-losing one.

“I find that Atalaya has not met its initial burden of proof and is not entitled to relief [from court stays against it foreclosing on the company's debt] at this time,” Delano said.

For Eason, who has been slagged by some former employees and in anonymous blog comments, the ruling was more than satisfying, even if the company still has a long way to go in winning confirmation and release from bankruptcy court.

“I’m psyched,” Eason said as he exited an elevator on the ground floor of the Sam Gibbons Federal Courthouse. “Just to have it over with. She came to a pretty solid decision at this point.”

Delano, in fact, said from the bench that she heard no evidence that Creative Loafing’s woes are anything beyond those being experienced by all newspaper and news media companies in this recession. And as for the disputed employee morale in CL newspapers, Delano said, “Employee morale at all newspapers is is probably at an all-time low” with layoffs and contraction in the industry. If it does exist at CL, she said, it is likely for those reasons, and no evidence was given that Eason is the cause.

Likewise, Delano said that Atalaya’s financial experts had plenty of information about the start of declining revenues at Creative Loafing, which began in July 2008 and not after the bankruptcy filing. Delano said both sides’ expert valuation witnesses had impressive credentials but produced flawed values for different reasons. For Creative Loafing’s side, she said the idea that the value of the company had actually doubled since bankruptcy was filed “just defies belief.”

Atalaya loaned Creative Loafing $30 million in 2007, in a deal to pay down company debt and purchase the Washington City Paper and Chicago Reader. Another investment fund, BIA Digital, provided a secondary loan of $10 million.

But in 2008, as the impacts of the recession were felt by advertisers, Creative Loafing’s revenues began to fall sharply, down by 20 percent across the six newspapers. Much of the dispute at the heart of the three days of hearings on Atalaya’s motion went to how much the lender knew about the decline and how forthcoming the company was about it. Delano ruled that company financial reports provided at the time to Atalaya painted a clear picture of the problem, and if there was any verbal misunderstanding between the two parties about the impact of such a decline, it was only the normal “tension” between a borrower and a lender.

Although it was a strong win for the current CL management, Delano also struck a cautious tone, saying that she believed the company has “an uphill battle” ahead to have any reorganization plan confirmed by the creditors since Atalaya is far and wide the biggest creditor and could choose to vote against any plan. Delano suggested mediation for the two sides, but after a 30-minute recess in which the two sides’ lawyers talked by telephone, the idea of having a mediator appointed was tabled for now, at least until April 20 when Creative Loafing reveals more details of its reorganization plan, including possible new investors.

One of those could be BIA Digital, another lender owed $10 million in bankruptcy court. BIA’s lawyer listened in on the hearing by telephone, a rare appearance by the fund. Eason said of BIA: “They’ve been great. They’ve been very supportive through all of this.”  The lender could be among the investors announced in the April 20 court filings, Eason said during the recess.

Eason cautioned that a lot more work remains ahead of the company in bankruptcy court but that with backers like BIA and others, he believes the company will emerge stronger from Chapter 11 and transformed as a web-first news publishing firm.

Print will come back a little after the recession abates, Eason said after the ruling, but never to the levels that it once held and with the profit margins it once enjoyed. The transformation to digital daily news publication online provides a better future for the company, he added. “We’ve fallen in love with the distribution platform [of the Internet], if not yet the content” being put on it.

[UPDATE] See video of Wayne Garcia talking with Ben Eason just hours after the decision came down:

Part 1:

Part 2:

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