Arbitrator: Authority to cease publication of Daily Mail 'did not exist'

By Chris Dickerson | Sep 7, 2017

CHARLESTON – A federal arbitrator’s nearly $4 million ruling sheds more light on how Charleston became a one-newspaper town.

In his filing, Arbitrator Edward D. McDevitt of Charleston provides some details about what happened internally at Charleston Newspapers when executives were deciding to shut down the Charleston Daily Mail and merge it with the Charleston Gazette.

In closing his 16-page order, McDevitt writes that a newspaper expert used by Charleston Newspapers determined that the authority to cease publication of the Charleston Daily Mail “did not exist.”

The petition for order confirming the arbitration award of nearly $4 million was issued Sept. 6 in federal court. The petition came days after the now-combined Charleston Gazette-Mail announced it soon would eliminate its Monday print edition.

The arbitration order says the Daily Gazette Company and the Daily Gazette Holding Company LLC 1, the companies that run Charleston Newspapers and the Charleston Gazette-Mail, must pay MediaNews Group Inc. and Charleston Publishing Company, the former owners of the former Charleston Daily Mail, $3,795,000 plus post-judgement interest for three primary claims the former publishers of the Daily Mail had made.

The damages alleged were:

* $495,000 in management fees,

* Approximately $1,800,000 of future annual fees due through the end of the joint venture in 2024, and

* Loss of the right to receive the website “” upon termination of the joint venture due to the sale of the website by respondents for the sum of $1,500,000.

“The defenses of the respondents were stridently presented and argued – often presented in enviable prose,” McDevitt wrote before he “distilled” the defenses” down to:

* Failure of consideration.

* The Joint Operating Agreement and Limited Partnership Agreement were not real operating documents but were constructed exclusively for the Department of Justice Antitrust Division.

* Impossibility and/or impracticality of performance by respondents.

* The “right of substitution” provided in the JOA.

* A combination of “claimants actions (being) inequitable” violation of the “implied covenant of good faith and fair dealing” and “the futility of the litigation,” i.e. “improper or malicious interference with contractual relations.”

* A counterclaim for an unspecified sum for bringing of an “unnecessary and unavailing litigation.”

The case originally was filed Sept. 3, 2015, in the Delaware Court of Chancery. It was dismissed by that court on April 26, 2016, by the Vice Chancellor because of the arbitration provision in the parties’ agreements. Arbitration began on April 12, 2017.

In his filing, McDevitt summarized the Gazette’s defenses of the claims.

“In 2004, claimants (MediaNews Group) wanted ‘out’ of ownership of the Charleston Daily Mail,” he wrote about the Gazette’s defense. “The documentation entered into by the parties for the 2004 transactions and the 2010 revisions were basically to satisfy the United States Department of Justice.

“Respondents (the Gazette) had a right to substitute, as they did, a ‘new’ URL for claimants ‘’ that was pledged as collateral for respondents’ loan with United Bank.

“Claimants did nothing to earn their management fees.

“Claimants are not acting in good faith by bringing this action since respondents do not have the wherewithal to pay any award, and claimants know this.

“In the current market and state of the newspaper industry, publishing (2) newspapers in Charleston, West Virginia, is not economically viable.”

McDevitt writes that he is “extremely sympathetic” to the Gazette and its positions.

“However, for the reasons hereinafter set out, I am constrained to find that these, and other defenses, including the counterclaim … are not legally sufficient to defeat the claims of the claimants.

“The fact that in 2004 claimants wanted out of the Daily Mail, no matter what the reason, was their right.”

McDevitt also says it may be true that the legal documents regarding the 2004 sale of the Daily Mail to the Gazette and the 2010 revisions were designed to “comply with” and/or “circumvent” applicable antitrust laws and DOJ mandates.

“Even if the documents reflect a case of the ‘tail wagging the dog,’ these sophisticated instruments were knowingly agreed to and executed by knowledgeable business people experienced in the newspaper industry,” he wrote.

McDevitt says the Gazette’s claim that it had a right of substitution regarding the URL sale as “spot on” on its face.

“However, the pledging of the URL came burdened with a reverter in favor of the claimant and was subject to other restrictions on disposal,” he wrote. “It was clear from the documents that claimants bargained for and wanted certain specific assets for potential, maybe even speculative, future use.”

He says the Gazette sought MediaNews’ permission to sell the URL, but MediaNews refused.

“Respondents then took the position that consent was not required and sold the URL for $1,500,000,” he wrote. “Respondents wisely used $1,000,000 to catch up on loan payments owed to United Bank.”

McDevitt writes that the Gazette claims it had a right of substitution and a right of sale in the ordinary course of business.

“This arbitrator concludes these defenses legally fail,” he wrote. “Respondents note that during these trying times, a number of newspapers, including some owned by MNG (MediaNews Group), have sold capital assets, including the very buildings they occupied. The fact of thse sales does not make them ‘ordinary course of business.’”

McDevitt also writes that United Bank was “lenient” on Charleston Newspapers when it fell behind on loan payments. He quotes an exchange between attorney Richard Neely, who represents Charleston Newspapers, and CN President and CFO Trip Shumate during hearings.

“Are you currently in compliance with United Bank’s loan covenants,” Neely asks.

“No, we have been out of compliance with several of the financial covenants,” Shumate responds.

“While respondents repeatedly filled the record with statements as to their poor financial conditions and missed payments, there is not one instance where respondents state that United Bank has declared a ‘default,’” McDevitt wites. “This is especially true of the November-December 2013 timeframe when the URL at issue was sold by respondents. …

“There is nothing in the record to suggest that the idea for the sale of the URL and/or the substitution of the ‘new URL’ came from the United Bank. To the contrary, it is clear United Bank did not conceive the idea. Thus, the sale of the URL was not ‘forced’ upon respondents by their lender.”

McDevitt also says the Gazette has “vigorously and consistently contended” that MediaNews did not earn its management fees for controlling editorial content of the Daily Mail.

“Such defenses have been mooted by virtue of Stipulation No. 17 of the parties,” he writes. “Going forward, it is clear that claimants will not be in a position to perform further services to earn the management fees that had been bargained for.”

McDevitt notes that the Gazette consulted with James W. Hopson, a retired newspaper publisher and group executive for several large publishing companies, regarding the plan to close down the Daily Mail.

In an affidavit, Hopson said he recommended three things to bring Charleston Newspapers’ profitability into line. Those were discontinuing publication of the Daily Mail, outsourcing production to another publisher or begin printing other newspapers and increase subscription and newsstand prices.

“CN has implemented each of these recommendations, as well as taking additional steps to reduce its operating costs,” Hopson wrote. “Despite continued revenue losses, profit margins have improved. Of all the actions I recommended, discontinuing publication of the Daily Mail was the most impactful.”

McDevitt questioned whether the Gazette could do so without consent from MediaNews. He cites a brief in the case that addresses how the joint venture couldn’t discontinue publication of the Daily Mail without MediaNews’ approval “unless the incremental revenue from Mail fails to cover Mail’s incremental costs and the discontinuation of Mail can be effected by satisfying the failing firm test” as applicable to the joint operating agreement and “the U.S. Department of Justice approves.”

McDevitt says his review of the case “does not provide the arbitrator with sufficient evidence to find that the ‘incremental revenue/costs’ test … can be met.”

McDevitt provides more details of Hopson’s recommendations to the Gazette regarding increasing profitability.

“Specifically, the report, while sufficient for a bank review and analysis, raises a number of reliability concerns,” McDevitt wrote. “Mr. Hopson notes that he relied upon certain unspecified potential modifications of the publishing model. He did not ‘have access to production accounting,’ ‘did a back-of-the-envelope calculation’ and used management’s estimates of the benefits of changing the Daily Mail publishing model.

“Finally, the report clearly sets out that respondents’ own newspaper expert determined that the authority to unilaterally cease publication of the Daily Mail did not exist or that the conditions needed to do so under the JOA had not been met.”

In ruling for MediaNews, McDevitt also notes that the Gazette shall receive nothing on its counterclaim and that the parties will equally share the fees and costs of the arbitration.

Shumate told The Record he is disappointed with McDevitt's ruling, and that he doesn't agree with it.

"Some of the details in his ruling are wrong," Shumate said. "He mentions that we were behind in our loan payments in 2013. We weren't. I confirmed that with United Bank.

"We acknowledge the fact that we owe $1.8 million. The bottom line is that it's impossible to operate under that contract, especially here in southern West Virginia."

Shumate said he disagreed with McDevitt's ruling on the sale of the URL.

"Our own counsel said it was permissible under the contract and under the law," he said. "We wouldn't have done it otherwise. And the U.S. Department of Justice gave us the OK to sell it."

Shumate said the Gazette is looking at all options, including appeal.

"Our arbitration agreement does have an appeal clause," he said. "So we can appeal this decision to U.S. District Court, then to the Fourth Circuit. We have 30 days."

In 2004, MediaNews sold its economic interest in the joint venture to the Daily Gazette Company, which published the Charleston Gazette. In 2010, the limited partnership agreement was revised as part of an antitrust lawsuit settlement after the Department of Justice had challenged the 2004 sale.

A 2010 consent decree required MediaNews and the Daily Gazette Company to adhere to terms of the limited partnership agreement for Charleston Newspaper Holdings L.P. and an amended joint operating agreement for five years.

In 2015, Charleston Newspapers merged the Charleston Gazette and Charleston Daily Mail into the Charleston Gazette-Mail. That came five years to the day after the federal antitrust settlement was reached.

Earlier this year, The West Virginia Record reported that a federal agency has taken over Charleston Newspapers’ pension plan. The Pension Benefit Guarantee Corporation sent letters to CN employees and retirees affected by the change.

According to the PBGC, Charleston Newspapers filed a distress termination application on June 3, 2015, and the Charleston Newspapers Retirement Plan ended on Aug. 1, 2015. PBGC officially took responsibility for the plan on Oct. 13, 2016.

“A plan that does not have enough money to pay all benefits owed to participants and beneficiaries may be terminated only if the employer and the members of the employer's ‘controlled group’ of affiliated companies each meet one of the distress termination tests,” the PBGC told The Record. “Members of a plan sponsor’s controlled group are legally responsible for funding the pension plan.”

The PBGC said Charleston Newspapers was able to prove to PBGC’s satisfaction that unless the plan was terminated, the company would be unable to pay its debts when due and remain in business.

When PBGC takes over a plan as trustee, it uses its own assets and any remaining assets in the plan to “make sure that current and future retirees of the plan receive their pension benefits, within the legal limits.”

“PBGC also tries to collect plan underfunding from employers and shares a portion of its recoveries with participants and beneficiaries,” the agency said.

According to the PBGC, the annual maximum guaranteed benefit for a 65-year-old retiree in a single-employer plan is $60,136 a year for plans that end in 2016.

Also, the single-employer guarantee formula provides lower amounts for people who begin getting benefits from PBGC before age 65, reflecting the fact that they will receive more monthly pension checks over their expected lifetime. Amounts are higher for benefits starting at ages above 65.

The PBGC said the CN Retirement Plan covered 517 people as of Aug. 1, 2015. The plan had $17.4 million in assets to cover $37.7 million in benefits. PBGC said it expects to cover $20.1 million of the $20.3 million shortfall.

PBGC protects the pension benefits of nearly 40 million Americans in private-sector pension plans. The agency is currently responsible for the benefits of about 1.5 million people in failed pension plans. PBGC receives no taxpayer dollars. Its operations are financed by insurance premiums, investment income, and assets and recoveries from failed single-employer plans.

In 2015, the PBGC filed $1.34 million in liens against CN and other entities regarding the company’s pension plans. Those entities, which had a legal responsibility to fund the pension plans, were Charleston Newspapers Holding LP, Charleston Newspapers, Daily Gazette Publishing Co., Daily Gazette Holding Co., Ridgeview Express Delivery, Abry/Charleston Inc. and G-M Properties. The PBGC typically files liens when entities miss making pension contributions of more than a million dollars.

In 2015, PBGC Press Secretary Marc Hopkins said the agency works similar to the FDIC with banks, insuring almost all private pension plans across the country.

Days before the liens were announced, the Charleston Gazette and Charleston Daily Mail announced a merger to become the Charleston Gazette-Mail on July 19, 2015. That was five years to the day after U.S. District Judge John Copenhaver approved an antitrust settlement to regulate both daily newspapers.

Copenhaver’s 2010 final judgement was in an antitrust case brought by the U.S. Justice Department against the Daily Gazette Company and MediaNews Group.

Although the Daily Mail’s and Gazette’s joint business operations were known as “Charleston Newspapers,” the Daily Gazette Company owned the Gazette and MediaNews owned the Daily Mail. Both companies had 50 percent stakes in Charleston Newspapers until 2004 when MediaNews sold out to the Daily Gazette Company for a reported $55 million.

In 2007, the Justice Department filed a suit alleging the Daily Gazette Company “planned to deliberately transform a financially healthy and stable Daily Mail into a failing newspaper and close it.”

Weeks after the merger was announced in 2015, state Attorney General Patrick Morrisey's Consumer Protection Division said it investigating CN for violations of state antitrust laws. Months later, Putnam Circuit Judge Philip Stowers threw out Morrisey's attempt to force the newspaper to produce large numbers of documents about the merger.

On Oct. 6, 2015, the previous owner of the Daily Mail, the MediaNews Group, filed suit in the Delaware Court of Chancery against the Gazette's owners, seeking to recover unpaid management fees, future management fees if the Daily Mail had continued publishing and money the Daily Gazette received for the sale of the domain name. Daily Gazette had this case dismissed based on the joint operating agreement’s arbitration clause, and the matter currently is in arbitration.

Earlier this year, MediaNews filed another suit against United Bank, saying it wrongfully induced CN to sell the rights to the domain name to the London newspaper. MediaNews seeks $1 million the bank received from that sale. In that complaint, MediaNews says it learned of the United Bank issue during discovery of the lawsuit currently in arbitration.

U.S. District Court for the Southern District of West Virginia case number 2:17-cv-03921

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Charleston Gazette-Mail U.S. Department of Justice U.S. District Court for the Southern District of West Virginia Charleston Division

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