smb Doc 12 Filed 09/05/12 Entered 09/05/12 13:51:42 Main Document Pg 1 of 27

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1 Pg 1 of 27 Neil E. Herman Rachel Jaffe Mauceri Patrick D. Fleming MORGAN LEWIS & BOCKIUS LLP 101 Park Avenue New York, New York Telephone: (212) Facsimile: (212) Proposed Counsel to the Debtors and Debtors in Possession Michael R. Nestor Kenneth J. Enos Andrew L. Magaziner YOUNG CONAWAY STARGATT & TAYLOR, LLP 1270 Avenue of the Americas Suite 2210 New York, New York Telephone: (212) Facsimile: (212) Proposed Counsel to the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: Journal Register Company, et al., 1 Debtors. Chapter 11 Case No ( ) Joint Administration Requested MOTION FOR INTERIM AND FINAL ORDERS (A) AUTHORIZING, BUT NOT DIRECTING, THE DEBTORS TO PAY CERTAIN PRE-PETITION WAGES, COMPENSATION AND EMPLOYEE BENEFITS AND CONTINUE PAYMENT OF WAGES, COMPENSATION AND EMPLOYEE BENEFITS IN THE ORDINARY COURSE OF BUSINESS; AND (B) AUTHORIZING AND DIRECTING APPLICABLE BANKS AND OTHER FINANCIAL INSTITUTIONS TO PROCESS AND PAY ALL CHECKS PRESENTED FOR PAYMENT AND TO HONOR ALL FUNDS TRANSFER REQUESTS MADE BY THE DEBTORS RELATING TO THE FOREGOING 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, are: Journal Register Company (8615), Register Company, Inc. (6548), Chanry Communications Ltd. (3704), Pennysaver Home Distributions Corp. (9476), All Home Distribution Inc. (0624), JR East Holdings, LLC (N/A), Journal Register East, Inc. (8039), Journal Company, Inc. (8220), JRC Media, Inc. (4264), Orange Coast Publishing Co. (7866), St. Louis Sun Publishing Co. (1989), Middletown Acquisition Corp. (3035), JiUS, Inc. (3535), Journal Register Supply, Inc. (6546), Northeast Publishing Company, Inc. (6544), Hometown Newspapers, Inc. (8550), The Goodson Holding Company (2437), Acme Newspapers, Inc. (6478), 21st Century Newspapers, Inc. (6233), Morning Star Publishing Company (2543), Heritage Network Incorporated (6777), Independent Newspapers, Inc. (2264), Voice Communications Corp. (0455), Digital First Media Inc. (0431), Great Lakes Media, Inc. (5920), Up North Publications, Inc. (2784), Greater Detroit Newspaper Network, Inc. (4228), Great Northern Publishing, Inc. (0800), and Saginaw Area Newspapers, Inc. (8444). The mailing address for each of the Debtors is Lower Makefield Corporate Center, 790 Township Road, 3rd Floor, Yardley, PA

2 Pg 2 of 27 Journal Register Company and its affiliated debtors and debtors-in-possession in the above-captioned cases (collectively, the Debtors ), by and through their undersigned counsel, hereby file this motion (the Motion ) for entry of an order pursuant to sections 105(a), 363(b), 507(a)(4) and 507(a)(5) of title 11 of the United States Code, 11 U.S.C. 101 et seq. (the Bankruptcy Code ) for entry of an order: (i) authorizing, but not directing, the Debtors, in accordance with their stated policies, to: (a) pay certain prepetition Employee Obligations (as defined below), (b) continue to honor certain Employee Obligations postpetition in the ordinary course of business; and (ii) authorizing and directing the applicable banks and financial institutions (the Disbursement Banks ) to receive, process, honor and pay all checks presented for payment in connection with the foregoing and electronic payment requests relating thereto. The Debtors seek this authorization because the Employees (as defined herein) are essential to the operation of the Debtors business, and, absent an order granting the relief requested by this Motion, the Employees will suffer undue hardship and, in many instances, serious financial difficulties, as the amounts in question are needed to enable the Employees to meet their own personal financial obligations. Moreover, the Debtors believe that without the requested relief the stability of the Debtors on-going business operations may be undermined irreparably, as the Debtors Employees remain crucial to the success of the Debtors and the ultimate success of these proceedings. In support of this Motion, the Debtors rely on the Declaration of William J. Higginson in Support of Debtors Chapter 11 Petitions and First Day Motions, filed concurrently herewith (the First Day Declaration ). In further support of this Motion, the Debtors respectfully state as follows: 2

3 Pg 3 of 27 JURISDICTION 1. This Court has jurisdiction to consider this Motion pursuant to 28 U.S.C. 157 and This matter is a core proceeding pursuant to 28 U.S.C. 157(b)(2). Venue is proper in this Court pursuant to 28 U.S.C and The statutory and legal predicates for the relief sought herein are 105(a), 363(b), 507(a)(4), and 507(a)(5) of the Bankruptcy Code, and Rule 6003 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ). BACKGROUND A. Introduction 2. On the date hereof (the Petition Date ), each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 3. The Debtors continue to operate their business and manage their properties as debtors-in-possession pursuant to Bankruptcy Code 1107(a) and No trustee, examiner or official committee of unsecured creditors has been appointed in these cases. 4. Information regarding the Debtors history and business operations, their capital structure and primary secured indebtedness, and the events leading up to the commencement of these chapter 11 cases (the Chapter 11 Cases ) can be found in the First Day Declaration, which is incorporated herein by reference. THE EMPLOYEES 5. The Debtors have a current workforce of approximately 2,107 employees, located primarily in Pennsylvania, New York, Michigan, Ohio, Connecticut, New Jersey, with a small number of employees located in various other states (collectively, the Employees ). The Employees encompass both hourly-wage non-union employees (the Hourly Employees ) and salaried non-union employees (the Salaried Employees ), as well as approximately 477 3

4 Pg 4 of 27 unionized employees (collectively, the Union Employees ) represented by 19 separate and distinct unions including the following: New Haven, CT Teamsters; INI Daily (Mount Clemens, MI) Guild; Typographers, Teamsters, GCIU and Mailers; The Kingston, NY Daily Freeman Guild; The Troy, NY Record GCIU; The Delaware County Daily Times Guild, Teamsters and CWA/ITU; The Norristown Times Herald Guild and CWA/ITU; The Pottstown Mercury Guild and CWA/ITU; and the Trenton, NJ Trentonian Press Association, Guild, CWA/ITU and Teamsters (collectively, the Unions ). The Debtors are parties to collective bargaining agreements entered into prior to the Petition Date with certain of the Unions, and, with respect to other Unions, are operating under expired collective bargaining agreements (collectively, the CBAs ) The Employees possess the institutional knowledge, experience and skills necessary to support the Debtors business operations during the pending Chapter 11 Cases. Because of the Debtors need for the continued commitment of their employees, the Debtors are requesting the relief set forth in this Motion to minimize any hardships to the Employees resulting from the commencement of the Chapter 11 Cases. The Debtors must take all necessary steps to retain their Employees and bolster their morale to preserve and maximize the value of the Debtors estates. 7. Accordingly, by this Motion, the Debtors seek authority, but not direction, to pay and honor their pre-petition obligations, pay Unpaid Compensation (defined below), pay employee withholding taxes and employer taxes (including but not limited to federal, state, employment, and other payroll and withholding taxes), continue to honor vacation and personal time off obligations and to pay employees for such time upon termination, continue garnishment 2 For the avoidance of doubt, nothing in this Motion should be construed as a request by the Debtors to assume or reject the CBAs. Certain of the CBAs have expired by their terms; the parties continue to operate thereunder. 4

5 Pg 5 of 27 and payroll deductions, reimburse the Employees business expenses, make certain payments to retirement plans, honor all miscellaneous Employee benefits that the Debtors have traditionally provided in the ordinary course of business, and pay all pre- and post-petition amounts owing to third party administrators and agents/brokers in connection therewith (all such obligations to the Employees and the Temporary Employees (as defined below), collectively, the Employee Obligations ). THE EMPLOYEE OBLIGATIONS A. Unpaid Compensation 8. In the ordinary course of business, the Debtors employ ADP Enterprise HR (together with the other ADP entities described herein, ADP ) to administer their payroll obligations. In the ordinary course of business, the Debtors pre-fund payroll amounts to ADP, which then issue payroll checks directly to both union and non-union hourly and salaried nonunion employees. In furtherance thereof, the Debtors prepare and submit electronic ACH and electronic check issue files to ADP, and ADP, in turn issues payment to the Employees through direct deposit and payroll checks that are drawn on an ADP account. The Debtors estimate that their monthly payroll obligations total approximately $7,035,000. The Debtors estimate that they have approximately two days of payroll outstanding as of the Petition Date. 9. Pay periods differ among the Employees, depending on location. The Debtors pay their Employees through 36 payroll codes (the Payroll Codes ) utilizing ADP. The payroll processing cycle varies per Payroll Code, and includes payments made weekly, biweekly, semi-monthly and monthly. Accordingly, the Employee Obligations for the wages and salaries of their Employees for the period from the close of the applicable pay period through the Petition Date remain outstanding as pre-petition claims. The Debtors most recent pay period closed on September 2,

6 Pg 6 of In addition to fixed compensation, certain of the Debtors Employees are entitled to receive commissions for performance based on a percentage of sales or other performance goals (the Commission Programs ). Commission Programs vary widely among the Debtors publications. Certain of the Debtors Employees are owed payments under Commission Programs (the Commission Payments ) on account of prepetition sales or other prepetition performance. Payments attributable to the prepetition period are currently outstanding. Such amounts are paid together with an Employee s hourly wages or salary. As of the Petition Date, the Debtors estimate that approximately $510,000 in Commission Payments are outstanding (the Commission Payments Balance ), all of which will become due and payable in the weeks following the Petition Date, and all of which accrued within the 180 days prior to the Petition Date. The Debtors do not believe that any Employee is owed wages, salaries and/or commissions in excess of $11,725, and the Debtors are not seeking relief pursuant to this Motion to continue any bonus or incentive plans. 11. In the ordinary course of business, the Debtors from time to time also hire temporary employees (the Temporary Employees ). The Debtors employ, on average, approximately sixty temporary employees, with varying hours, and estimate that they pay approximately $12,200 per week in wages to temporary employees. The Debtors paid all amounts outstanding to temporary employees in connection with the payroll period that closed on September 2, Because the Debtors pre-funded their payroll obligations through ADP, the Debtors do not believe that any checks drawn on accounts of the Debtors with respect to wages will be outstanding as of the Petition Date. However, due to the varied payroll cycles, certain employees may have unpaid commissions outstanding as of the Petition Date, and the Debtors entered into a new payroll period just prior to filing their chapter 11 cases. Accordingly, 6

7 Pg 7 of 27 pursuant to this Motion, the Debtors seek to pay in the ordinary course of business any outstanding amounts owed to their Employees and Temporary Employees as of the Petition Date for accrued and unpaid wages, salaries, and commissions up to the $11,725 limit on priority claims under section 507(a)(4) of the Bankruptcy Code (collectively, the Unpaid Compensation ), and to continue to pay their Employees and Temporary Employees wages, salaries and commissions in the ordinary course of business after the Petition Date. 13. As stated above, the Debtors have contracted with ADP to provide thirdparty payroll administration services (including the additional services described herein). The Debtors pay ADP a fee based on headcount on a weekly basis, which varies but is approximately $6,500. As of the Petition Date, the Debtors believe that approximately $25,577 was due and owing to ADP in connection with payroll and benefit administration services (the ADP Balance ). The Debtors hereby seek this Court s authority (but not direction) to pay such outstanding prepetition amounts, and to make any required future payments due in the ordinary course of business to ADP in its capacity as payroll and benefit administrator. B. Vacation and Paid Personal Time Off 14. The Hourly Employees, Salaried Employees and Unionized Employees are eligible for paid vacation and personal time (the Vacation/Personal Time ). The Debtors utilize a variety of policies which are site specific and differ from site to site. The Debtors stop accruing vacation and personal time when Employees reach the maximum amount of vacation and personal time as mandated by company policy or the applicable terms of the CBAs. 7

8 Pg 8 of The Debtors ordinary course policy is to pay an eligible Employee, upon termination, all accrued unpaid vacation at his/her final rate of pay, limited to the year in which such unpaid vacation time was earned In addition to vacation time, full-time Employees are paid for anywhere from 6 to 11 holidays per year, based on site specific policies ( Holiday Obligations, and together with Vacation/Personal Time Obligations, the Leave Obligations ). 17. The Debtors request that, to the extent applicable, they be authorized, but not directed, as part of their ongoing business operations to allow Employees to use Leave Obligations accrued in respect of pre-petition periods and pay employees for pre-petition unpaid accrued Vacation/Personal Time upon termination to the extent required by law and subject to Section 507(a)(4) of the Bankruptcy Code, as well as continue to accrue Vacation/Personal Time Obligations in respect of post-petition periods, in accordance with their pre-petition policies or the applicable terms of the CBAs. 4 C. Employee Benefits 18. In the ordinary course of business, as is customary with most large businesses, the Debtors have established various plans and policies to provide Employees with various medical, dental, prescription drug, vision, life insurance, retirement savings and other benefits (collectively, the Employee Benefits, and amounts owed under these plans, the Employee Benefit Obligations ). By this Motion, the Debtors seek the authority, but not the direction, to satisfy all outstanding amounts related to Employee Benefit Obligations that arose prior to the Petition Date, including, without limitation, premiums and fees owed for 3 The payment of accrued vacation time upon termination is required under the laws of certain states and is also required in other states if company policy or an Employee s employment agreement provides for such a payout. 4 Due to the widely varied site-specific policies, it is prohibitively difficult for the Debtors to estimate the aggregate accrued and unpaid Vacation/Personal Time as of the Petition Date. 8

9 Pg 9 of 27 administrative and brokerage costs and other amounts required in connection with the Debtors Employee Benefit Obligations, as such amounts become due in the ordinary course of the Debtors business. The Employee Benefits are defined and set forth in the various benefits plans (the Employee Benefits Programs ), which are sponsored by all of the Debtors as participating employers thereunder. 19. Willis of Pennsylvania, Inc. ( Willis ) serves as the Debtors insurance agent/broker, and also manages the Debtors relationships with it insurance carriers under the applicable Employee Benefits Programs. Among other things, Willis represents the Debtors in various ongoing negotiations with the Debtors insurance carriers. The employment of Willis as the Debtors insurance agent/broker has allowed the Debtors to obtain insurance coverage necessary to provide eligible Employees with coverage under certain of the Employee Benefits Programs and to realize savings in the procurement of such policies. Under the current service agreement with Willis (the Willis Agreement ), the Debtors pay Willis an annual service fee of $166,000, which is payable in four quarterly installments of approximately $41, The Willis Agreement has a term of twelve months and is scheduled to expire on March 1, As of the Petition Date, the Debtors have no quarterly payment outstanding to Willis for services provided under the Willis Agreement. The Debtors believe that it is in the best interests of their creditors and estates to continue their business relationship with Willis. Accordingly, the Debtors seek the Court s authorization to continue their prepetition practice of paying brokerage fees to Willis. 20. The Employee Benefits Programs provides coverage for, among others, the following benefits: 5 The service fee does not include payments of annual premiums, deductible, and other payments that the Debtors remit to Willis for the benefit of Insurance Carriers. 9

10 Pg 10 of 27 Medical, Vision, Dental and Other Related Benefits 21. Medical Benefits. The Employee Benefits Programs cover, among other things and to varying degrees, expenses related to inpatient and outpatient hospital visits, physician charges, specialized care (including hospice and home health care), mental and nervous treatment, and substance abuse treatment. The vast majority of the Employees are covered through the Company s self-insured program through Blue Cross and Blue Shield, with several Employees covered by a small fully insured plan. 22. Well-Care Coverage. The Employee Benefits Programs also offers wellcare coverage for those who enroll in the Employee Benefits Programs, and such care includes benefits for both child and adult well-care. 23. COBRA Coverage. Additionally, in compliance with applicable law, the Debtors offer COBRA coverage to certain former Employees. The provision of COBRA benefits is administered by ADP COBRA Services. The Debtors hereby seek this Court s authority (but not direction) to pay such outstanding prepetition amounts, and to make any required future payments due in the ordinary course of business to ADP COBRA Services in its capacity as COBRA administrator. 24. Prescription Drug Coverage. The Employee Benefits Programs also offers a prescription drug plan component which helps enrolled Employees pay for prescription drugs and medicines. The Employee Benefits Programs encourages the use of lower-cost generics and preferred brands and is meant to offer highly effective solutions to promote prescription benefit education and help reduce pharmacy costs. The prescription plan applies to retail pharmacy purchases as well as mail-service prescription programs. 10

11 Pg 11 of Vision Coverage. The Debtors offer vision insurance ( Vision Benefits ) to all regular full-time employees. The Vision Benefits cost the debtors approximately $6,730 per month. 26. Dental Coverage. The Debtors also offer dental insurance ( Dental Benefits ) to Employees through a fully-insured dental plan with MetLife, as well as a selfinsured plan for several Employees in Michigan through Delta Dental. The Dental Benefits cost the debtors approximately $48,300 per month. 27. In sum, the Employee Benefits Programs cost the Debtors approximately $437,000 per month. As of the Petition Date, the Debtors believe they owed approximately $437,000 to their insurance providers with respect to pre-petition premiums and other amounts due as of September 1, 2012 for the month of September (collectively, the Insurance Balance ). This number represents a combination of self insured costs averaged over five months of experience as well as fully insured premiums and administration fees on various medical, dental and vision plans, and the aggregate amounts due and owing may differ somewhat. In light of its importance to participating Employees, the Debtors request authority to pay any pre-petition amounts outstanding in respect of the Employee Benefits Programs, and to continue the Employee Benefits Programs in the ordinary course. Life Insurance 28. The Debtors offer term life insurance to all regular full-time Employees from $0 to $500,000 in basic life insurance benefit and accidental death benefit, respectively to Employees pursuant to group policies issued by Sun Life Insurance Company. The life insurance benefits vary between the Debtors publications. The Debtors hereby seek authority to maintain their life insurance programs, including paying, in their discretion, any amounts owed to Sun Life Insurance Company in the ordinary course of their business, regardless of when the 11

12 Pg 12 of 27 life insurance costs accrued. As of the Petition Date, the Debtors estimate that approximately $1,184 was outstanding to Sun Life Insurance Company with respect to its life insurance and accidental death benefits program (the Sun Life Balance ). Disability and Long-Term Care 29. The Debtors provide Employees at certain publications with short term disability coverage through salary continuation payments that are funded through payroll. The Debtors also provide Employees at certain publications with long term disability and accidental death and dismemberment insurance benefits in the event they are unable to work due to a disabling condition caused by a non-work related illness or injury (the Disability Benefits ). The Debtors anticipate that the Disability Benefit will cost approximately $5,600 per month in premiums and administration fees (which amount is included in the total monthly cost of the Employee Benefits Programs above). The Debtors hereby seek authority to maintain their disability benefits programs, including paying, in their discretion, any amounts owed in the ordinary course of their business, regardless of when the life insurance costs accrued. Retirement Savings Programs 30. The Debtors maintain the Journal Register Company 401(k) Savings and Retirement Plan (the Non-Union Savings Plan ), administered by Merrill Lynch that meets the requirements of Section 401(k) of the Internal Revenue Code of 1986, and is available only to non-union Salaried Employees and Hourly Employees. Merrill Lynch is compensated directly by the Non-Union Savings Plan. 31. Of the Debtors Employees, approximately 942 currently participate in the Non-Union Savings Plan. The Debtors do not currently match contributions. The Debtors currently hold approximately $95,500 of employee contributions made prior to the Petition Date. The Debtors seek authority (but not direction) to continue administering the Non-Union Savings 12

13 Pg 13 of 27 Plan, and turn over the employee contributions to the Non-Union Savings Plan as and when due in the ordinary course of business. 32. The Debtors also contribute to Journal Register East, Inc. Affiliates 401(k) Savings and Retirement Plan (the Union Savings Plan ), administered by Merrill Lynch, that meets the requirements of Section 401(k) of the Internal Revenue Code of 1986, and is available to union Employees. 33. Of the Debtors Employees, approximately 171 currently participate in the Union Savings Plan, and 93 of those Employees receive a company match in contributions. The annualized matching contribution by the Debtors, with respect to both Salaried Employees and Hourly Employees, is approximately $820 maximum per employee. 34. The Debtors currently hold approximately $45,000, consisting of employee contributions made prior to the Petition Date and matching funds attributable to the pre-petition period. The Debtors seek authority (but not direction) to continue administering the Union Savings Plan, and turn over contributions to the Non-Union Savings Plan as and when due in the ordinary course of business. Pension Obligations 35. As of the Petition Date, the Debtors contribute to one multiemployer pension plan (the Multiemployer Pension Plan ). 6 The Debtors contributed approximately $73,141 to the Multiemployer Pension Plans in As of the Petition Date, the Debtors estimate that the 2012 contributions to the Multiemployer Pensions Plans will be approximately $72,000 (the MEPP Balance ). The Debtors request the authority, but not the direction, to 6 The Multiemployer Pension Plan is CWA/ITU Negotiated Pension Plan. 13

14 Pg 14 of 27 continue making contributions to the Multiemployer Pension Plan in the ordinary course of business or as otherwise required and permitted under applicable law. 36. As of the Petition Date, the Debtors contribute to one single employer defined benefit plan (the Single Employer Pension Plan ). The Debtors contributed an aggregate amount of $3.9 million (of an accrued $7.1 million) to the Single-Employer Pension Plan in 2011 and have contributed $2.3 million in As of the Petition Date, the Debtors estimate that the total 2012 contributions accruing under the Single-Employer Pension Plan will be approximately $4.5 million. The Debtors are not seeking authorization in this Motion to make any contributions to the Single Employer Pension Plan. 37. The Debtors may have additional pension contribution and other obligations under the CBAs. Accordingly, the Debtors request the authority, but not the direction, to continue making contributions to such plans in the ordinary course of business or as otherwise required and permitted under applicable law. Retiree Health Benefit Plans and Obligations 38. The Company provides retirement health benefits to approximately 125 employees (the Retiree Health Obligations ), through either the Company s self-insured program with Blue Cross/Blue Shield, or one of several retiree health plans and programs that are not administered by the Company. The Retiree Health Obligations are primarily legacy obligations remaining from former affiliates. The Debtors contributed an aggregate amount of approximately $434,000 to the Retiree Health Plans in 2011 to cover benefit payments and administrative fees, and anticipate that total amounts for 2012 will be approximately $380,000. As of the Petition Date, the Debtors had approximately $133,000 outstanding and owing to the Retiree Health Plans, all of which is due or will become due and payable in the weeks following the Petition Date (the Retiree Health Balance ). The Debtors request the authority, but not the 14

15 Pg 15 of 27 direction, to continue making contributions to the Retiree Health Plans in the ordinary course of business or as otherwise required and permitted under applicable law. Severance 39. The Debtors maintain a severance policy (the Severance Policy ), which provides eligible employees with severance benefits upon such Employee s termination without cause (the Severance Benefits ). The amount of severance payable under the Severance Policy is based generally upon an Employee s level and years of service with the Debtors. Severance Benefits are not provided to Employees that retire, resign or are terminated for cause. No Severance Benefits are currently outstanding under the Severance Policy. To the extent any employees are terminated during these cases, the Debtors request authority, but not direction, to continue the Severance Policy and to pay, in their discretion, Severance Benefits to eligible Employees who are terminated without cause after the Petition Date, provided, that to the extent that Severance Benefits become payable under the Severance Policy during these Chapter 11 cases, the Debtors will seek such appropriate Bankruptcy Court relief as may required under Section 503(c) of the Bankruptcy Code. 40. Certain of the Debtors CBAs also include a retirement severance obligation (the Union Severance Benefits ). No such obligations are currently outstanding. To the extent any eligible Union Employee becomes eligible for severance, the Debtors request authority, but not the direction, to pay, Union Severance Benefits to eligible Employees who retire after the Petition Date. D. Employee Payroll Garnishments/Other Payroll Deductions 41. The Debtors deduct from their Employees paychecks certain taxes, such as payroll and social security taxes, required to be withheld by certain federal, state and local taxing authorities (the Payroll Deductions ). The Debtors forward certain of these withheld 15

16 Pg 16 of 27 amounts, as well as the necessary employer contributions, to ADP Wage Garnishment Services, which forwards the amounts to the appropriate governmental authorities, or alternatively makes direct payments to certain governmental authorities. By this Motion, the Debtors seek authority to continue to forward any Payroll Deductions not forwarded as of the Petition Date. 42. At times, the Debtors are presented with garnishment or child support orders requiring the withholding of Employee wages to satisfy such Employee obligations. Additionally, certain Employees have voluntary deductions for items such as optional health coverage for dependents, or optional dental or vision care. Payments of these obligations are made from amounts otherwise payable to the Employees and are not an incremental cost obligation of the Debtors estates. 43. The Debtors seek authority to continue making such deductions and to pay over such amounts to third parties as requested or required. E. Reimbursable Business Expenses 44. As is customary with media companies of this size, the Debtors reimburse their Employees who incur and pay a variety of approved business-related expenses, including travel and entertainment, as well as certain gas charges in connection with delivery of newspapers, in the ordinary course of performing their duties ( Employee Expense Obligations ). Most Employees initially incur and pay such expenses by using cards issued by American Express ( Amex ), and such expenses are thereafter paid by the Debtors to Amex after submission and approval of expense reimbursement requests. Amex has a separate agreement with MediaNews Group ( MNG ), a non-debtor affiliate of the Debtors, 7 whereby MNG agrees 7 Alden Global Distressed Opportunities Master Fund, L.P. and Alden Global Value Recovery Master Fund, L.P. (collectively, Alden ), which directly or indirectly hold the equity of the Debtors, directly or indirectly own equity in Media News Group, Inc. Alden owns less than a majority of the equity of MNG and does not control its board of directors. 16

17 Pg 17 of 27 to pay Amex if the Debtors fail to make payments. As security, MNG has control over an account funded by the Debtors with a current balance of approximately $250,000 (the MNG Account ). If the Debtors fail to pay Amex, the funds in the MNG Account would be automatically swept by MNG, causing significant harm to the Debtors estates. 45. Because a significant lag time may occur between the time such expenses are incurred and the time an expense reimbursement request is submitted, it is difficult to determine with precision the aggregate outstanding amount of such Employee Expense Obligations. The Debtors funded processed Employee Expense Obligations through the most recent payroll period; however, the Debtors estimate that unprocessed pre-petition Employee Expense Obligations of approximately $200,000 may be due and owing (the Employee Expense Balance ). 46. It would be patently inequitable to require Employees to personally bear any expenses that they incurred in furtherance of their responsibilities to the Debtors, for gas, travel and other charges, and would result in a substantial drop in Employee morale and productivity. In addition, failure to pay Amex would result in (a) the automatic sweep and loss of the funds in the MNG Account, which would cause financial disruption for the Debtors, and (b) the inability of Debtors to have their products delivered to customers and resellers, since a primary use of the Amex credit card pays for gas used in delivery of Debtors products. Accordingly, the Debtors request authority, in their discretion and in the exercise of their business judgment, to continue to honor all of their Employee Expense Obligations in the ordinary course of business, regardless of when such obligations arose, including by paying any outstanding amount due to Amex on account of or related to such Employee Expense Obligations. 17

18 Pg 18 of 27 F. Flexible Spending Programs 47. In the ordinary course of business, the Debtors maintain healthcare and dependent care flexible spending programs, which are administered by ADP and funded entirely by Employees. The Debtors hereby seek this Court s authority to continue the flexible spending programs, including payment to ADP of pre- and post-petition amounts outstanding (as previously described in this Motion). G. Miscellaneous Benefits 48. The Debtors maintain an auto allowance program with a current aggregate monthly payment of approximately $5, (the Auto Balance and collectively with the Commission Payments Balance, the ADP Balance, the Insurance Balance, the Sun Life Balance, the MEPP Balance, the Retiree Health Balance, the Employee Expense Balance, the Prepetition Employee Balances ), pursuant to which certain employees are entitled to receive payment toward the cost of their automobiles (the Auto Allowance Program ). The Auto Allowance Program is funded through the Debtors payroll. The Debtors may discover other de minimis pre-petition obligations that are owed with respect to the Employees (the Miscellaneous Benefits ), pursuant to which the Debtors incur de minimis obligations. 49. The Debtors hereby further request authority to honor postpetition obligations in connection with the Auto Allowance Program, and to continue making payments in the ordinary course of their business on account of Miscellaneous Benefits. The Debtors believe that honoring their commitments under these Miscellaneous Benefits programs is warranted, at a minimum, by public relations and Employee morale considerations. H. Outstanding Checks and Transfer Requests 50. To the extent the Debtors issued checks or automatic transfers with respect to any of the Employee Obligations for which the Debtors seek authority to pay under this 18

19 Pg 19 of 27 Motion, the Debtors hereby request that this Court authorize and direct the Disbursement Banks to receive, process and pay any and all checks drawn on the Debtors accounts and automatic transfers to the extent that such checks or transfers relate to any of the foregoing. RELIEF REQUESTED AND REASONS THEREFOR 51. The Debtors believe that authorization for payment of prepetition amounts to in connection with Employee Obligations is necessary to continue in the ordinary course of business during their orderly liquidation. The ability of the Bankruptcy Court to authorize the payment of prepetition debt when such payment is needed... is not a novel concept. In re Ionosphere Clubs, Inc., 98 B.R. 174, 175 (Bankr. S.D.N.Y. 1989). This equitable common law principle was first articulated by the United States Supreme Court in Miltenberger v. Logansport, C & S.W.R. Co., 106 U.S. 286, 1 S.Ct. 140, 27 L.Ed 117 (1882) and is commonly referred to as either the doctrine of necessity or the necessity of payment rule. In re Ionosphere Clubs, Inc., 98 B.R. at Under the doctrine of necessity, a bankruptcy court may exercise its equitable power to authorize a debtor to pay certain critical prepetition claims, where, as here such payment is essential to the debtor s business. See In re Columbia Gas System, 136 B.R. 930, 939 (Bankr. D. Del. 1992) (citing In re Lehigh & New England Rwy Co., 657 F.2d 570, 581 (3rd Cir. 1981) (recognizing that if payment of a prepetition claim is essential to the continued operation of [the debtor], payment may be authorized )). This rule recognized the existence of the judicial power to authorize a debtor in a reorganization case to pay pre-petition claims where such payment is essential to the continued operation of the debtor. Ionosphere, 98 B.R. at 176; see In re Just For Feet, Inc., 242 B.R. 821, (D.Del. 1999) ( [n]ecessity of payment doctrine recognizes that paying certain prepetition claims may be necessary to realize the goal of a chapter 11 a successful reorganization. ). 19

20 Pg 20 of In order to achieve a successful reorganization, the Debtors require their Employees to work with the same or greater degree of commitment and diligence as they did prior to the Petition Date. The requested authority to continue to pay the Debtors Employees and to maintain the current Employee Benefits Programs is necessary to ensure that the Debtors can retain personnel knowledgeable about the Debtors business, and to provide an incentive for the Debtors Employees to continue to provide quality services to the Debtors at a time when they are clearly needed. 54. To minimize the personal hardship the Employees will suffer in connection with the filing of these cases, the Debtors request entry of an order (i) authorizing (but not directing) the Debtors to pay, in their sole discretion, the pre-petition Employee Obligations as described in this Motion and all costs incident thereto; (ii) authorizing (but not directing) the Debtors to continue to honor their practices, programs and policies with respect to the Employees, including ADP administration as such practices, programs and policies were in effect as of the Petition Date, with authorization (but not direction) to pay the Employee Obligations that become due and owing during the pendency of these cases; (iii) authorizing (but not directing) the Debtors to pay, in their sole discretion, all payments as of the petition date due and owing in connection with Employee Expense Obligations, and to continue to make any payments occurring in the ordinary course of business, including any such payments to Amex and (iv) authorizing and directing Disbursement Banks to receive, process and pay any and all checks drawn on the Debtors accounts and automatic transfers to the extent that such checks or transfers relate to any of the foregoing. 55. Pursuant to section 507(a)(4) of the Bankruptcy Code, each Employee may be granted a priority claim for: 20

21 Pg 21 of 27 allowed unsecured claims, but only to the extent of $11,725 for each individual or corporation, as the case may be, earned within 180 days before the date of the filing of the petition or the date of the cessation of the debtor s business, whichever occurs first, for (A) wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual; or 11 U.S.C. 507(a)(4). (B) sales commissions earned by an individual or by a corporation with only 1 employee, acting as an independent contractor in the sale of goods or services, for the debtor in the ordinary course of the debtor s business if, and only if, during the 12 months preceding that date, at least 75 percent of the amount that the individual or corporation earned by acting as an independent contractor in the sale of goods or services was earned from the debtor 56. Likewise, under Section 507(a)(5) of the Bankruptcy Code, Employees may ultimately be granted a priority claim for: allowed unsecured claims for contributions to an employee benefit plan (A) arising from services rendered within 180 days before the date of the filing of the petition or the date of the cessation of the debtor s business, whichever occurs first; but only (B) for each such plan, to the extent of (i) the number of employees covered by each such plan multiplied by $11,725; less (ii) the aggregate amount paid to such employees under paragraph (3) of this subsection, plus the aggregate amount paid by the estate on behalf of such employees to any other employee benefit plan. 11 U.S.C. 507(a)(5). 57. The Debtors believe that the Employee Obligations that they seek to pay are entitled to priority status under sections 507(a)(4) and 507(a)(5) of the Bankruptcy Code and individually do not exceed $11,725. The Debtors would therefore be required to pay these claims in full in order to confirm a plan of reorganization. See 11 U.S.C. 1129(a)(9)(B) (requiring payment of certain allowed unsecured claims for wages, salaries, and commissions, 21

22 Pg 22 of 27 and certain allowed unsecured claims for contributions to an employee benefit plan). Thus, granting the relief requested herein would only affect the timing, and not the amount, of the payment of the Employee Obligations to the extent that they constitute priority claims. 58. Additionally, the failure to pay the Payroll Deductions could result in tax liabilities and penalties for both the Employees and the Debtors, and potentially to the Debtors directors and officers. Likewise, the failure to transmit garnishments and other similar deductions can cause hardship to certain Employees and an administrative burden for the Debtors. Indeed, if the Debtors were to be prohibited from transmitting such deductions, the Debtors would expect inquiries from garnishors regarding the Debtors failure to submit, among other things, child support and alimony payments that are not the Debtors property, but, rather, have been withheld from Employees paychecks on such parties behalf. Further, if the Debtors cannot remit these amounts, the Employees may face legal action due to the Debtors failure to submit such payments. 59. Other than as described in this Motion, the Debtors do not by this Motion seek to alter their compensation, incentive, vacation, and other benefit policies at this time. This Motion is intended only to permit the Debtors, in their discretion, to make payments consistent with those pre-petition policies to the extent that, without the benefit of an order approving this Motion, such payments would be inconsistent with the Bankruptcy Code. 60. Preservation of the value of the estates depends upon a stable work force. Thus, any significant number of Employee departures or deterioration in morale at this time will substantially and adversely impact the Debtors business and result in immediate and irreparable harm to the estates and their creditors. There is a real, immediate risk that if the Debtors are not authorized to continue to satisfy Employee Obligations in the ordinary course, Employees would no longer support and maintain the operations of the Debtors, thereby crippling the Debtors 22

23 Pg 23 of 27 business operations and instantly destroying the prospects of realizing maximum value for the Debtors assets. 8 Consequently, it is critical that the Debtors continue in their ordinary course personnel policies, programs and procedures that were in effect prior to the Petition Date, except as otherwise set forth herein, for all of their Employees. Cause therefore exists for the Court to grant the relief requested herein immediately, as permitted by Bankruptcy Rule Authorization to pay any amounts under this Motion shall not be deemed to constitute post-petition assumption or adoption of any contract, program or policy pursuant to section 365 of the Bankruptcy Code. The Debtors are in the process of reviewing these matters and reserve all their rights under the Bankruptcy Code with respect thereto. Moreover, authorization to pay all amounts under this Motion shall not affect the Debtors right to contest the amount or validity of any Employee Obligations, including without limitation Employer Taxes or other underlying payroll tax obligations (the Payroll Tax Obligations ) that may be due to any taxing authority. 62. Accordingly, as authorized by sections 363(b) and 105(a) of the Bankruptcy Code, the Debtors seek authority to pay the Employee Obligations that become due and owing during the pendency of these Chapter 11 Cases and to continue at this time their practices, programs and policies with respect to the Employees, as such practices, programs and policies were in effect as of the Petition Date. The Debtors submit that the relief requested herein is essential and critical to their ability to maximize value for their creditors. 8 For example, as described above, Debtors provide Amex credit cards to numerous parties to use for charging gas needed to deliver certain newspapers and products of the Debtors to customers and resellers. 23

24 Pg 24 of 27 APPLICABLE BANKS SHOULD BE AUTHORIZED TO HONOR AND PAY CHECKS ISSUED AND MAKE OTHER TRANSFERS TO PAY THE PRE-PETITION EMPLOYEE OBLIGATIONS 63. The Debtors further request that the Court authorize and direct the Disbursement Banks to honor and pay all pre-petition and post-petition checks issued or to be issued, and fund transfers requested or to be requested, by the Debtors on account of the Employee Obligations that were not honored or paid as of the Petition Date. The Debtors also seek authority to issue new post-petition checks, or effect new fund transfers, on account of the Employee Obligations to replace any pre-petition checks or fund transfer requests that may be dishonored or rejected. 64. As a result of the commencement of the Debtors Chapter 11 Cases, and in the absence of an order of the Court providing otherwise, the Debtors checks or other transfers on account of the Employee Obligations may be dishonored or rejected by the Disbursement Banks. 65. The Debtors represent that each of these checks or transfers is or will be drawn on an account of the Debtors and can be identified as relating directly to payment of the Employee Obligations. Accordingly, the Debtors believe that pre-petition checks and transfers other than those for Employee Obligations will not be honored inadvertently. 66. The Debtors hereby request that all Disbursement Banks be authorized and directed to receive, process, honor, and pay all checks presented for payment and to honor all fund transfer requests made by the Debtors related to the Employee Obligations, whether such checks were presented or fund transfer requests were submitted prior to or after the Petition Date. The Debtors represent that they have sufficient cash or funding to promptly pay all of the Employee Obligations, to the extent described herein, on an ongoing basis and in the ordinary course of their businesses. 24

25 Pg 25 of Similar relief has been provided in other chapter 11 cases in this jurisdiction. See, e.g., In re United Retail Grp., Inc., Case No (SMB) (S.D.N.Y. Feb. 22, 2012 (Final Order) and Feb. 28, 2012 (Supplemental Order)); In re Hostess Brands, Inc., Case No (RDD) (Bankr. S.D.N.Y. Jan. 27, 2012); In re Sbarro, Inc., Case No (SCC) (Bankr. S.D.N.Y. May 4, 2011); In re Motors Liquidation Co. (f/k/a Gen. Motors Corp.), Case No (REG) (Bankr. S.D.N.Y. June 1, 2009); In re Metaldyne Corp., Case No (AJG) (Bankr. S.D.N.Y. May 1, 2009); In re Charter Commc n, Inc., Case No (JMP) (Bankr. S.D.N.Y. April 15, 2009); In re Chemtura Corp., Case No (REG) (Bankr. S.D.N.Y. Apr. 13, 2009); In re Tronox Inc., Case No (ALG) (Bankr. S.D.N.Y. Feb. 6, 2009); In re Wellman, Inc., Case No (Bankr. S.D.N.Y. Feb. 26, 2008). REQUIREMENTS OF BANKRUPTCY RULE 6003 ARE SATISFIED 68. The Debtors submit that, consistent with Bankruptcy Rule 6003(b), immediate entry of an order approving payment of the Employee Obligations is necessary to avoid immediate and irreparable harm to the Debtors and their estates, in addition to the Employees. The vast majority of the Employees rely exclusively on their full compensation, benefits and reimbursement of their expenses to continue to pay their daily living expenses, and these Employees will be exposed to significant financial difficulties if the Debtors are not permitted to pay the unpaid Employee Obligations. The Debtors believe that if they are unable to honor such obligations, Employee morale and loyalty will be jeopardized at a time when such support is critical. 69. Moreover, the vast majority of the Debtors Employees rely exclusively on their compensation, benefits and reimbursement of their expenses to continue to pay their daily living expenses, and these Employees will be exposed to significant financial difficulties if 25

26 Pg 26 of 27 the Debtors are not permitted to pay and honor their other obligations to the Employees in the ordinary course of business. Accordingly, the Debtors submit that cause exists to support immediate payment of the employee obligations under Bankruptcy Rule REQUEST FOR WAIVER OF STAY 70. The Debtors further seek a waiver of any stay of the effectiveness of the order approving this Motion. Pursuant to Rule 6004(h) of the Bankruptcy Rules, [a]n order authorizing the use, sale, or lease of property other than cash collateral is stayed until the expiration of fourteen (14) days after entry of the order, unless the court orders otherwise. As set forth above, the measures proposed herein are essential to prevent potentially irreparable damage to the Debtors operations, value and ability to implement an orderly liquidation. Accordingly, the Debtors submit that ample cause exists to justify a waiver of the fourteen (14) day stay imposed by Bankruptcy Rule 6004(h), to the extent it applies. NOTICE 71. Notice of this Motion will be given to: (i) the Office of the United States Trustee for the Southern District of New York, (ii) the holders of the fifty (50) largest unsecured claims against the Debtors' estates on a consolidated basis, (iii) Otterbourg, Steindler, Houston & Rosen, P.C., counsel to Wells Fargo, N.A. as pre-petition and proposed post-petition revolving lender, (iv) Akin, Gump, Strauss, Hauer & Feld LLP, counsel for the Tranche A Lenders and Tranche B Lenders, (v) Emmet, Marvin & Martin LLP, counsel to the Tranche A Agent and the Tranche B Agent, (vi) the banking and financial institutions at which the Debtors currently maintain their accounts, and (vii) all entities that have requested notice pursuant to Bankruptcy Rule