Judge's order allows Star Tribune to avoid liquidation

The Star Tribune skirted bankruptcy’s equivalent of a roadside bomb on Tuesday when it won permission to tap funds to pay operating expenses while it tries to reorganize.

U.S. Bankruptcy Court Judge Robert Drain said in an order filed late Tuesday that the newspaper can spend money at its disposal to make its payroll and pay vendors, suppliers and others engaged in the “orderly continuation” of the business.

But Drain put the newspaper on a fairly short leash. Creditors will get another say about paying the bills on Feb. 6 when Drain has scheduled another hearing on the matter in the Southern District of New York where the case was filed.

For now, though, the permission was crucial, said bankruptcy experts. Without it, the employees and the people who sell the newspaper ink, reporters’ notebooks, etc. would have had even more reason to worry about their next checks. The Minneapolis-based newspaper could have faced liquidation within a few weeks.

The life blood of a company in the version of bankruptcy the Star Tribune has filed, Chapter 11, is cash to keep operating while it reorganizes, said Jack Williams, resident scholar at the American Bankruptcy Institute and also a professor specializing in bankruptcy law at Georgia State University.

Until recently, most companies in Chapter 11 proceedings secured the equivalent of bridge loans to cover operating costs for the year or so it typically takes to work through Chapter 11. In today’s financial crisis, though, that money is very difficult to get, Williams said.   

The Star Tribune’s lawyers indicated last week that the company could pay its day-to-day bills if the court gave it permission to use funds that were frozen when the newspaper filed its case last Thursday.

The newspaper had been profitable, though less and less so. Its problem was the debt the current owners took on when they bought the paper in 2007. Buyers led by the New York-based private equity group Avista Capital Partners put up just $100 million of the $530 million they paid for the newspaper and borrowed the rest.

Chris Harte, the Star Tribune’s publisher and chairman, said Drain’s order solves the company’s immediate needs for cash unless revenues worsen, the newspaper reported.

The revenue plummeted last year pulling down net earnings before debt payments and taxes to $31 million compared with $59 million in 2007 and $115 million in 2004, David Montgomery, the Star Tribune’s chief financial officer, said in an affidavit filed with the court last week.

Drain’s order did not itemize the sums the newspaper is allowed to spend for the particulars of its ongoing operation. MinnPost’s David Brauer reported here  that one item cleared for payment was the buyout money former employees got in severance deals they accepted earlier this month.

In other court action on Tuesday, the Star Tribune moved to set up rules suppliers would have to follow if they tried to repossess items the newspaper bought on credit before the bankruptcy filing - everything from office supplies to the little plastic bags that keep the paper dry on your doorstep. Many of those unsecured creditors may get paid in the normal course of operation; but some are likely to take a haircut on bills that were due at the time of the filing, experts said.

Sharon Schmickle reports on foreign affairs, science and other topics. She can be reached at sschmickle [at] minnpost [dot] com.