Objection!: Why the US government may block sale of BC newspaper chain

PHOTO: Black Press’s papers in Honolulu, Tacoma and other US cities should be determined by a US court, federal pension guarantor says. 📷 Shutterstock

The US government has thrown a wrench into Black Press’s attempt to rid itself of debts linked to its disastrous purchase of an Ohio newspaper 18 years ago.

In January, Black Press, which owns and runs the majority of community newspapers in British Columbia, filed for creditor protection after declaring itself unable to repay debts. The company employs more than 700 workers in BC, while also operating papers in Hawaii, Washington State, and elsewhere in Western Canada

Two of its lenders, along with a small Southern US media company, have submitted a bid to purchase the company’s assets and Feb. 16 is the deadline for other potential purchasers to submit competing bids for an auction. But in a legal filing from last week, a US federal corporation has declared it objects to the process and warned potential bidders that it might try to put the brakes on any sale.

Note: As previously acknowledged, the writer has an array of personal connections to, and history with, the company at the centre of this story, resulting in conflicts of interest. (We would avoid writing about the topic entirely if it was being covered elsewhere) Also, this story involves analysis of legal filings by a reporter who is not an expert on Canadian or US bankruptcy dealings. If you are such an expert and can provide context (or tell us what we might have got wrong), please get in touch.

Black Press is based in Surrey, BC, and operates dozens of publications across the province—including all of the Fraser Valley’s community newspapers. But, as The Current described in our first story on the topic, the company’s founder also purchased small newspapers in Washington State, along with several publications in Hawaii, including a major daily. Black Press continues to operate those American papers and is now by far the largest publisher in Hawaii, where the chain eventually bought up its Honolulu competitor.

In 2006, Black Press spent $165 million—much of it borrowed—to buy the Akron Beacon Journal, a daily newspaper in Ohio’s fifth largest city. The paper lost money for more than a decade before Black Press sold it for less than one-tenth its purchase price in 2018. The loans taken out to buy the Akron paper continues to weigh down Black Press’s balance sheet and prevent it from being a profitable company.

From Jan. 18, 2024: How an Ohio newspaper sank a BC publishing empire

From Feb. 7, 2024: Black Press's stalking horse: The auction that will seal the fate of hundreds of newspapers

But there’s another massive debt related to the Beacon Journal that has drawn the US feds into the matter. When Black Press sold the Beacon for just $15 million, it notably did not transfer its pension obligations. That liability amounts to more than $45 million and has remained on Black Press’s books.

In late 2019, just before the pandemic struck, Black Press asked the US federal government’s Pension Benefit Guaranty Corporation (PBGC) for what is called a “distress termination” of the pension plan. Essentially Black Press declared itself unable to continue operating while keeping up with its pension payments and obligations. The PBGC exists to protect the pensions of workers in such cases. In the case of Black Press’s Akron pension plan, the PBGC took over running the plan to ensure pensions would keep getting paid. But PBGC, having assumed a net debt of about $45 million, wasn’t about to let Black Press just walk away.

The agency says Black Press still owes it for assuming all that pension debt. Black Press’s corporate finance director says the two parties negotiated for two years without ever coming to a resolution. (Presumably Black Press was offering to pay a portion, though not all, of its liabilities under the plan).

Which brings us to January of this year, when Black Press filed for creditor protection and announced its proposed sale to two Canadian investment houses and the US publisher.

The creditor protection process is aimed at finding an equilibrium for struggling companies; a court oversees the purchase of a company’s assets—hopefully allowing the business to continue—and the distribution of the proceeds to cover some, though rarely all, of the debt. Some, or all, of the debt is then extinguished. In the case of Black Press, the company is potentially being bought, in part, by two creditors; after its purchase it would continue paying back its lenders-turned-owners and other formal creditors—up to a total of $72 million, according to the proposed agreement. But, crucially, under the terms of the suggested deal, the new owners would have no further obligation to pay back $45 million to the US pension guarantor, PBGC.

“For the avoidance of doubt, it is not anticipated that the consideration under the Stalking Horse Bid will provide any recovery for the PBGC in respect of the PBGC Liabilities,” Black Press’s corporate finance director wrote in a signed affidavit submitted to the court. Indeed, the proposed purchase of Black Press is incumbent on that debt not being paid back, even as the company uses any new profits to repay its private creditors-turned-owners.

Perhaps predictably, PBGC does not like this development.

It still wants at least a chunk of the $45 million it is owed, and now it’s trying to do something about it.

Because it operates both north and south of the 49th parallel, Black Press filed for creditor protection in Canada, while also asking the US court to recognize the proceedings north of the border. Black Press needs the US court’s participation because of the Washington State and Hawaii papers it operates. So any deal will require US courts to help enforce any court-directed sale and transfer of Black Press assets.

Now, the PBGC has filed an objection, asking the US bankruptcy court to not approve the Canadian creditor protection process, as far as it pertains to the Hawaii and Washington subsidiaries.

You can read the filing here. 

The PBGC says that after it assumed responsibility for the pensions, it declined to try to collect on the money owed by Black Press over the two years settlement discussions were taking place. The agency says it was blindsided by the company’s creditor protection filing and that Black Press never revealed that it was trying to sell its American holdings.

PBGC says that when a company like Black Press hands over its pension obligations, it becomes subject to liens if it fails to pay its liability on an agreed upon date.

So PBGC wants its money—and it wants the decision over the company’s future, or at least the future of its American subsidiaries, to take place in the United States, not Canada.

The agency’s legal argument is focused on Black Press’s American subsidiaries and where and how they do business.

Black Press has filed for creditor protection in Canada for its entire company—including its Washington and Hawaii subsidiaries. But PBGC says the two subsidiaries that run papers in the two states are independently functioning American entities, aside from their ownership.

The PBGC says the American subsidiaries “centre of main interest”—the legal term for where each company does its main business—is clearly located south of the border. And because of that, the PBGC says their fates should be decided in the United States.

“It is hard to imagine a business less likely to have a [centre of main interest] in Canada—or in any other country for that matter—than a local newspaper publisher in Hawaii,” the filing declares. “These businesses are not simply American outlets for products that are produced and marketed in Canada. Rather than being fully integrated into Canadian operations, Oahu

Publications and Sound Publishing were recently marketed as standalone entities. Their businesses are, by design, intentionally local. They generate revenue by selling advertising space, predominantly to local advertisers. They then combine those ads with locally written news articles, package it as a small newspaper, and sell it locally.”

The argument is not just about where the subsidiaries are based, but also where all its debt resides.

“Some of the creditors most affected by this bankruptcy are in the United States,” PBGC says, and points out that itself, the company’s largest US unsecured creditor, is a federal agency.

Those liabilities include, the agency notes, Hawaii residents who have initiated a lawsuit against Black Press alleging it sold subscribers’ private data to Facebook.

The agency argues the proposed purchase of Black Press would sell the company “free and clear of its…debts, even though such a sale would be unprecedented in Canada and inconsistent with U.S. law.”

In an aside, PBGC says the filing for US bankruptcy “appears to be particularly focused on PBGC’s $47 million claim.”

What comes next

It has been a week since the motion was filed in US court. No other documents have been posted online, Black Press is keeping its mouth closed, and an email to the US attorneys who filed the motion was not returned.

The deadline for new Black Press bids is set for Friday. But the court filing itself serves notice that if the original offer stands as the best bid, its fate may end up being determined in a US court.

“Because the specific terms of sale have not been filed, PBGC reserves the right to object to such a sale if and when sought,” the filing declares. “PBGC raises these concerns now to put the Debtors and other parties in interest on notice of its concerns.”

PBGC’s filing is not concerned with Black Press’s Canadian divisions and the papers it operates north of the border. But in potentially derailing the current offer that would put the entire chain in new hands, the agency has the potential to impact who ends up controlling community newspapers across Canada. The current “stalking horse” agreement envisions the entire chain being purchased. The US filing could alter that calculation. (It seems also possible that it might force the breakup of the entire chain, an outcome that could have positive or negative impacts on Canadian publications.)

Court filings don’t all end up resulting in the actions they threaten. Many serve as placeholders for potential legal action while discussions or negotiations take place out of sight of the courts. In this case, the filing may be partly intended to incentivize a bid at auction that would provide some contribution to PBGC—or intended to lend weight to which bid the Canadian court accepts. So the fate of BC’s community newspapers may be determined by the amount of money, if anything, Black Press’s new owners are willing to pay to extinguish the debts owed to the US government’s pension protection arm—and how much money that agency will accept to go away.

Or the future of the newspapers may end up in the hands of a judge in a Delaware courtroom. It’s a long way from the Williams Lake building where Black Press got its start. But it’s a lot closer to Akron, Ohio, where the chain’s fate took its fateful turn.