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Penguins file for Chapter 11 protection

Wednesday, October 14, 1998

By Jon Schmitz and Dejan Kovacevic, Post-Gazette Staff Writers

The Penguins filed for bankruptcy protection yesterday, beginning a legal odyssey that the owners hope will lead them into a new Pittsburgh arena but that some fear could take them out of town.

The immediate effect of the team's filing for Chapter 11 protection in U.S. Bankruptcy Court is to shield it from obligations to creditors, allowing it to stay in business while it sorts out its financial problems.

Players, coaches and other team employees will be paid and games will go on as scheduled. The Penguins, who were about to run out of money but insist they were not in danger of failing to meet their payroll, will seek emergency loans as part of the bankruptcy.

Resulting legal proceedings and negotiations over the next several months will determine whether the team has a future in Pittsburgh.

"Our reason for doing this was to keep the Penguins viable and in Pittsburgh," said Roger Marino, one of the team's two owners. "When you're in protection, you're able to put money into the team rather than worrying about who else is going to come in and grab it. That's what this team needs right now in the short term."

Howard Baldwin, Marino's equal partner, agreed, but he added that in the long term, the team will need a new arena to survive here. When the Toronto Maple Leafs move into a new facility in January, the 37-year-old Civic Arena will be the NHL's oldest building.

"There's a reason why every team in the NHL has a new arena," Baldwin said, referring to the money teams make from more luxury boxes and more generous concession deals. "And what this is going to require is a spirit of cooperation. I know the way news of a bankruptcy sounds to people. It sounds more serious than it is. But this team's going to go on playing, mostly because Roger has pumped a damn fortune into it. It's time for some other people to step up."

Marino has estimated that he has spent $30 million of his own money in sustaining the franchise since spending $40 million to join the ownership group in May of 1997.

A year after saying a $12.9 million infusion of public funds would keep them in the Civic Arena, and happy, until June 2007, the Penguins, by filing for bankruptcy, raise the prospect that the court could dissolve their Civic Arena lease, leaving them free to move.

That possibility increases the pressure on city and county officials to accommodate the team's demand for a new arena.

Penguins owners yesterday continued to express their anger over a joint lawsuit filed by the Public Auditorium Authority and Civic Arena landlord SMG Pittsburgh Inc. last week, a move that asked for an injunction that bars team officials from having any discussions about moving the team before its lease commitments expire in 2007. Under Chapter 11, the Penguins can ask the bankruptcy judge to break the lease.

"It's a shame," SMG President Wes Westley said of the Penguins' bankruptcy. "I hope this works out. I have a lot invested in Pittsburgh. Not just money, but a lot of emotion. The real risk here is that the Penguins get their lease rejected. That's why it's so important that we filed that injunction. It will be much harder for them to break something like that than it would a lease."

The Penguins have made progress curing their other financial troubles. They are close to agreement with Fox Sports Network on a revised broadcast rights deal that would bring more revenue to the team, and they have reached a partial agreement with retired center Mario Lemieux in a dispute over nearly $30 million the team owes him.

But talks with SMG aimed at reducing the Penguins' annual rent and increasing its take of Civic Arena revenues have gone nowhere.

Marino said he considers SMG to be the Penguins' largest remaining obstacle toward financial viability and the main reason the team would want to leave the Civic Arena. As long as the Penguins stay there, they must share in nearly all profits in the building from such things as concessions, or on the immediate surrounding property, where various developments have been proposed.

"We could run the club better as a partnership than with SMG as the enemy," Marino said. "I think SMG has to stop looking at how they can save a penny today and look at the bigger picture."

Westley said SMG has been willing to help the team regain its financial footing.

He said he wrote a letter that was hand-delivered to the Penguins on Monday, offering concessions he said would help the team become profitable again. The letter offers Marino, "relief by granting you 100 percent of its share of naming rights, purchasing the defunct minor-league team you are holding and working closely with you to maximize your share of arena profits."

Based on a five-year, $6 million deal the Penguins had nearly struck with Allegheny Energy for Civic Arena naming rights last year, SMG's total share of such a contract would be worth roughly $3 million. The defunct minor-league team the Penguins hold is the former Cornwall, Ontario, franchise of the American Hockey League, but the Penguins have made plans to place the team in a new arena in Wilkes-Barre next season and they are expecting it to turn a profit.

Asked about the letter, Baldwin and Marino shared a laugh during a conference call with the Pittsburgh Post-Gazette.

"It's like giving a grain of serum to a dying man," Baldwin said.

"In legal terms," Marino added, "it's like asking someone to sell their first-born, then offering it back to them."

For now, at least, the city and county officials who negotiate with the Penguins are furious, believing the team has reneged on a commitment barely a year old.

In exchange for $12.9 million from the city and county for Civic Arena improvements, the team last year signed an agreement to stay there until June 2007. Baldwin said at the time that the arena was adequate.

"A new arena was never part of the discussion," said Steve Leeper, executive director of the Public Auditorium Authority, the city-county agency that owns the Civic Arena. "Think of the absurdity of it. You have a difficult time having serious, businesslike discussions with an organization that behaves in that fashion."

Asked if the team was short-sighted in signing a long-term lease for the Civic Arena last year, J. Garvin Warden, the turnaround specialist who was named the Penguins' interim chief executive officer less than three months ago, said: "I might have recommended a different approach."

Leeper said the city and county won't even consider a new arena or other financial aid to the Penguins until the team solidifies its commitment to stay in Pittsburgh.

A conference about the suit brought by the Public Auditorium Authority and SMG is scheduled today with Allegheny County Judge Paul F. Lutty Jr.

Westley said that the Penguins have no reason to fight the court order unless they are interested in leaving.

"That's all we're trying to do," Westley said. "We don't want them to leave."

In the meantime, Leeper said, the city and county "will take every legal measure and every step available to make sure the team stays here."

Two elements had kept the Penguins from declaring bankruptcy as early as two months ago. First, Baldwin vowed in early August that as long as he was an equal partner in the franchise, he would not allow it to go into bankruptcy. Then, NHL Commissioner Gary Bettman made it clear he would exercise his right to seize the franchise should it declare bankruptcy.

Both changed their minds.

Bettman, who had been deeply involved in the Penguins' negotiations with their various creditors the past few weeks, was able to perform an about-face on the subject because the NHL bylaws say that an owner "risks forfeiture" of a franchise in the event of bankruptcy. After reviewing the Penguins' situation, however, Bettman chose not to act, an option which also is permitted under the bylaws.

"While we are disappointed that this step has become necessary," Bettman said from the league's New York headquarters yesterday, "it results from the inability of the team to negotiate satisfactory arrangements to continue to operate in a financially viable manner under current conditions."

Baldwin explained his decision in similar fashion.

"I'll make no bones about it," he said of changing his stance. "But you should know that Roger also opposed bankruptcy. None of us wanted this. But here we are. This is what it came to."

Bill Daly, the NHL's vice president for legal affairs, explained, "It was an evolving process. We got more and more involved in Pittsburgh's efforts to work with its financial partners and lenders, and we saw that the progress being made was not sufficient to keep bankruptcy from happening."

Three corporate entities that own the Penguins filed for the bankruptcy protection: Pittsburgh Hockey Associates, Pittsburgh Sports Associates Holding Co. and HBRM LLC.

The latter acronym is a combination of Baldwin's and Marino's initials, and "LLC" stands for limited liability company.

Filing for Chapter 11 protection shields a debtor from its creditors while it reorganizes business operations, typically by seeking to trim costs and renegotiate onerous contracts.

The documents filed by the three corporate entities yesterday revealed little new information about the Penguins' finances.

Pittsburgh Sports Associates Holding Co. and Pittsburgh Hockey Associates each reported assets and liabilities of $50 million to $100 million. Pittsburgh Hockey Associates said it had 200 to 999 creditors; the holding company did not list a figure.

HBRM said it had 100 to 199 creditors; assets of $500,000 to $1 million; and liabilities of $50 million to $100 million.

Lemieux was the largest creditor listed in the filings, which said he was owed nearly $28.7 million. The NHL was second, at nearly $1.5 million.

Attorneys for the Penguins said they would be in U.S. Bankruptcy Court later this week with several emergency motions related to the case, including a request that the team be allowed to continue meeting its pre-bankruptcy payroll.

Robert Sable, the team's bankruptcy attorney, said the case was filed yesterday because "the season is starting and payroll demands become heavy at the start of the season." He said the team would have been unable to meet its payroll this week without protection from creditors.

Warden said players and employees would have been paid even if the team hadn't filed for bankruptcy protection. "We would've not paid some other things," he said.



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