Michael Miner, the media writer at our sister Chicago Reader, has a good piece with Creative Loafing CEO Ben Eason in which the once-and-possible-future owner of the online media and alternative weekly newspaper chain talks about how he plans to win a bankruptcy court equity auction to maintain control of the company.

The difficulty is that the company bidding against him, Atalaya Capital Management, could have deeper pockets. Atalaya loaned Creative Loafing $30 million in 2007 to finance the purchase of the Reader and Washington City Paper and is now owed in the area of $31 million.

Miner’s story picks it up from there:

Atalaya is in the catbird seat. The first $2 or $3 million raised in the auction will pay back small creditors and provide the company with working capital. But after that the money all goes to Atalaya until it gets back the money it’s owed, now about $31 millon. In effect, it can bid that high simply by taking money out of one pocket that it will put back in another. Under the circumstances, how can Eason compete?

I asked him. “You hit on a dilemma we think we can work through,” he said. The key date, according to Eason, is not August 25, when the auction will be held, but July 27, when Judge Caryl Delano sets the rules of the auction.

“What the issue really is,” Eason said, “is who’s going to keep their money in. Who’ll be involved in this thing for the long haul. It appears the way Atalaya is coming at this they’ll put their money in and immediately take it out. That’s part of their financial engineering, it’s a typical Wall Street hedge fund being slick with the money. But we’re looking to make sure that whoever bids at the equity auction truly wants to hold the company.”

Eason thinks control of the company will, in part, be decided through the judge’s interpretation of two words he wants to make sure are in the bidding procedures: “and best.”

Eason believes the judge should award the papers to the “highest and best” bid, which he’s ready to argue would be Creative Loafing’s. For Atalaya, he told me, “it’s just a deal. For me it’s my passion, my life, and everything. And on the business side, I have to say I think the company has really responded to making the digital transition. I think we’re a third of the way there, a half the way there, and I like the model we’ve created of sort of old media morphing over to new media and using in our sales models the strengths of both mediums. The real key here is not a financial play — it’s how everybody uses their publishing smarts and knowledge of online to fuse those models together. The game is not who’s got the most money but who’s got the most smarts to make the transition.”

And if Federal Bankruptcy Judge Caryl E. Delano doesn’t allow “and best” to be part of the bidding requirements or doesn’t see things Eason’s way about what is best for the future of Creative Loafing, what happens then, Ben?

Read the rest of Miner’s article to find that out.

And it will be on Aug. 25, during a hearing in downtown Tampa that will start at 10 a.m. Federal Bankruptcy Judge Caryl E. Delano today approved a disclosure statement for Creative Loafing’s reorganization plan after a week of intensive talks between the chain’s owners, in the form of company CEO Ben Eason, and its largest creditor, Atalaya Capital Management LP.

Atalaya is the investment fund that was owed $31 million from financing CL’s 2007 pay-down of debt and purchase of the Chicago Reader and Washington City Paper. As part of the negotiations, Atalaya has agreed to write-down its promissory note to $12 million, which would be repaid at 8 percent interest-only for five years and balloon due at that point.

According to the terms of the reorganization plan and promises made in court today, all CL creditors would be paid in full with two exceptions: Atalaya and BIA Digital Partners, which provided additional lending in the 2007 deals. BIA is now part of an Eason-led equity group that will bid for ownership against Atalaya.

Monday’s hearing found the normally adversarial Atalaya and CL relationship thawed to some degree.

“We are on board and supportive of moving forward under this process,” Atalaya’s lawyer, Tyler Brown, told the judge via telephone during the noon hearing.

That means that Atalaya is supporting the reorganization plan and auction process. It remains, however, interested in owning the nation’s second-largest alternative newspaper chain and has put in what is called a “stalking horse offer” of $2 million that will be the first bid up during the Aug. 25 equity auction, at which anybody can essentially bid to own the post-bankruptcy Creative Loafing.

Atlaya’s lawyer wrote to CL on July 10:

Atalaya submits that the Atalaya Stalking Horse Offer provides a significantly higher and better recovery for the Debtors’ unsecured creditors than the “Stalking Horse Offer” identified in the Debtors’ prior Second Plan and, together with the Court approved Bidding Procedures and the Equity Auction, a greater prospect for the employees, vendors, and customers of the Company to move forward with a properly capitalized organization having access to sufficient post-consummation working capital. Further, the Atalaya Stalking Horse Offer has the added benefit of allowing the Debtors to emerge from bankruptcy sooner and without incurring the unnecessary costs and expenses of a highly contested auction and confirmation process. Finally, the Atalaya Stalking Horse Offer will provide the Reorganized Debtors the wherewithal to fully implement their business strategy. In sum, the Atalaya Stalking Horse Offer will enable the Debtors to fulfill their duty of maximizing value for their creditors while also providing sufficient capital for the reorganized Debtors.

Atalaya’s offer is more than an initial Eason-BIA group Stalking Horse bid (about $1.5 million in cash and free office space). But Eason plans to bid at auction, as well, so the two sides will likely be locked in a competition for ownership of the chain again, as they were earlier this year during protracted hearings into the future of the media company.

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:

There’s nothing new in either closing argument, just a recitation of each side’s opinion about whether the value of CL has dropped since filing for bankruptcy court protection on Sept. 29, 2008, and whether the current management is harming the company’s value and therefore diminishing the collateral used to secure $31 million in loans from Atalaya. That money was used to retire debt and purchase the Washington City Paper and Chicago Reader.

An excerpt from Atalaya’s closing argument (download it in .pdf):

Granting relief [by giving the company to Atalaya] will best protect the companies, their employees and other creditors. Declining to grant relief leaves the Debtors in substantial risk of a further decline in value, which would adversely affect not only Atalaya but hte employees and other contituencies in this case.

An excerpt from Creative Loafing’s closing argument (download it in .pdf):

In everyday parlance, the term “GIGO” is known to mean “Garbage In, Garbage Out.” In other words, bad information begets bad conclusions. With all due to respect to Mrs. [Stamos] NIcholas [Atalaya's valuation expert who testified that the company's value dropped $7 million in the three months after the bankruptcy filing], his opinion of the Debtors’ value in this case is simply wrong due to GIGO. For some unknown (but easily inferred) reason, Mr. Nicholas either was not given the relevant and available information about the Debtors, or chose to disregard that information while formulating his opinions. One of the more obvious impacts of this deficiency is that Mr. Nicholas’ opinion of value fails to account for an actual decline of almost 20% per month in revenues that occurred following the creation of the July 2008 Budget, a fact known to the Debtors and Atalaya as of the [bankruptcy] petition date.

The Debtor believes retention of existing senior management and existing publishers, editors, directors of shared services and key online personnel are vital to successful implementation of this strategy as the markets are shifting very quickly at this time.

The reorganization plan values the company, post-bankruptcy, at being worth $8 million to $15 million. It also appears to ask creditors, especially the largest creditor, Atalaya, to accept as little as half of what they are owed as the company tries to readjust its debt load. The filing says under the reorganization plan, there would be a 100 percent chance that Atalaya would recover its $5 million-$15 million in secured debt (out of a total in excess of $30 million). The chances of getting its investment back beyond that? “Undetermined” is how the plan puts it, as it would have to split an unknown pool of money that would be left over the next three years of operations.

You can download the Disclosure Statement portion of the Reorganization Plan here. The filings include a 10-year financial forecast and an analysis of how much the company would bring if it were liquidated.

A hearing on the adequacy of the plan is set for Jan. 26 in Tampa.