Judge OKs Philadelphia Orchestra's exit from bankruptcy

After becoming the first major U.S. orchestra to file Chapter 11 14½ months ago, the Philadelphia Orchestra Association is leaving bankruptcy.

On Thursday U.S. Bankruptcy Court Judge Eric L. Frank approved the orchestra's reorganization plan, which drew no opposition at a hearing attended by most of the major interested parties. His action clears the way for full emergence from bankruptcy by the end of July. About $5.5 million will be distributed to creditors based on a sliding-scale formula.

The April 16, 2011, bankruptcy petition sought rent relief from the Kimmel Center and lower musician labor and pension costs, and while the case raised "some very significant legal issues," Frank noted, contracts were revamped or rejected with little of the case growing truly adversarial.

"The orchestra is an important cultural and civic institution, and any Chapter 11 case comes with the risk of failure," he told the courtroom. "Had that occurred, it would have been a great loss for Philadelphia, the region, and the music world." He expressed hope that the changes would put the orchestra in a position to "continue to perform for audiences for many years to come."

Orchestra lawyer Lawrence G. McMichael led staffers, board members, and others in a "traditional orchestra thank you" for the judge: a round of applause.

Though expenses were outpacing income by a substantial amount, the bankruptcy route was not taken in response to mounting unpaid bills. Rather, the association used the maneuver as a "hammer," in McMichael's words, to extract a 20-percent pay cut from musicians; to get a break in rent for Verizon Hall; to shift preexisting pension burdens to the federal agency that insures defined-benefit plans; and to jettison a merger-in-process with the Encore Series, Inc., which operates the Philly Pops.

The process took longer than expected - and professional fees, at just under $10 million, were triple the forecast - but the orchestra achieved its major objectives.

"This has been an incredible effort on the part of many, and, as the judge said, to get to where we were able to do this consensually required the cooperation of many," said orchestra chairman Richard B. Worley after the hearing.

Getting out of bankruptcy is only a mile marker, if a major one, in the arduous march to recovery, he noted. Ticket sales must be revived, donor confidence restored.

"We feel tremendous responsibility to make it work and to deliver on our goal of revitalizing this orchestra for Philadelphia and the music world at large," Worley said.

The orchestra's new business plan lowers some costs, but does not foresee the disappearance of deficits for several years. In fact, the orchestra must finish raising $60 million to underwrite shortfalls for several seasons ($37 million has been given) while it plans an endowment drive that eventually will provide investment income to help cover the budget gap. The goal is still unknown but is expected to be well above $100 million.

"We have a lot of work to do over a long period of time," said Worley, who testified Thursday that he and his wife had contributed $10 million. "There is more work ahead of us than behind us."

The bankruptcy set off alarm bells for the orchestra's largest existing donor, the Annenberg Foundation, and as a result the two entities revised their donor agreement. The Annenberg's $50 million gift - which accounts for half the orchestra's total endowment - was put in trust, the orchestra received greater flexibility on how to spend investment income, and the foundation secured additional oversight powers.

"They had a lot at stake," said Worley. "Fifty-odd million dollars is a lot. They didn't give us the money to become just any old regional orchestra. The donation was to support a great orchestra."

He testified that during this process he made a donation to the foundation. Asked about it after the hearing, he said it reimburses the foundation for legal fees incurred as a result of the bankruptcy; he declined to specify the amount.

Worley and three other witnesses took the stand in the two-hour hearing during which Frank heard testimony about the orchestra's settlements with the Kimmel, Pops, musicians' union, national pension fund, and others. In questioning, McMichael and his team outlined the orchestra's future financial viability.

Totals for ticket sales and donations are projected to increase - in large part, Worley said, in response to the pending arrival of a new podium personality.

"In October we welcome Yannick Nézet-Séguin as the orchestra's eighth music director. He is an amazing, magnetic, talented young musical leader. I believe we're already seeing the beginning of a love affair between the audience and this young man."

Worley, orchestra CFO Mario Mestichelli, and others testified that the orchestra's reorganization plan - its budget projections and revenue goals - was feasible.

Thursday's outcome was inevitable when the case was filed more than a year ago. Faced with deeply concessionary contract offers, musicians threatened to strike. Only after Frank turned over talks to a colleague, Chief Judge Stephen Raslavich, was a new deal reached. When the orchestra withdrew from the national pension fund, the American Federation of Musicians and Employers Pension Fund, the group threatened prolonged litigation that could have held up a bankruptcy exit; instead, a $1.75 million settlement was reached. Encore Series Inc. agreed to a split from the orchestra after a $1.25 million payment was negotiated.

Each of these steps involved motions, responses, objections, requests for payments to lawyers - more than 1,100 filings on the court docket to date.

"When this case was filed, there was a lot of skepticism about whether we would reach this day," said Claudia Z. Springer, lawyer for the committee of creditors. "Creditors made a lot of sacrifices in order to see the orchestra survive, and the goal wasn't just to see it survive, but thrive."

Concurrent with the orchestra's exit, the Academy of Music's reorganization plan also was also approved. The Academy a wholly owned orchestra subsidiary; its president, Joanna McNeil Lewis, testified that the academy's creditors will receive 100 percent of what they are owed.

Governance of the academy will continue much as before - owned by the orchestra, managed by the Kimmel, with major restoration undertaken by the academy itself.

(Two related items linger. The orchestra attempted, and has so far failed, to collect from a Korean presenter that did not pay for a concert during an Asian tour. And Encore Series Inc., which filed for Chapter 11 concurrent with the orchestra for legal rather than financial reasons, still has not emerged from bankruptcy, and is involved in a contract dispute with the Peter Nero, the Philly Pops' founding music director.)

"Relief" is what Worley said he felt to reach this point.

"Involved in this process were discrete hurdles that, if we hadn't gotten over, would have blocked our ability to survive and move forward," he said. "We've gotten past a lot of things that could have blown us out of the water."

The bankruptcy done, Worley said the orchestra was ready to make fund-raising calls it had put on hold. The fate of the orchestra, for 14½ months a ward of the court, now passes into the hands of its public.

"There are lots of conversations to have with Philadelphians," Worley said.