Philadelphia Orchestra seeks bankruptcy reorganization

Musicians protest the Philadelphia Orchestra Association voting to file for bankruptcy. Clockwise from left, Davyd Booth, Pamela Fay, Lloyd Smith, and Nancy Bean perform. (April Saul / Staff Photographer)
Musicians protest the Philadelphia Orchestra Association voting to file for bankruptcy. Clockwise from left, Davyd Booth, Pamela Fay, Lloyd Smith, and Nancy Bean perform. (April Saul / Staff Photographer) (Joshua Mellman)
Posted: April 16, 2011

The board of the 111-year-old Philadelphia Orchestra Saturday voted in favor of Chapter 11, sources say. Papers will be filed within hours or days in U.S. Bankruptcy Court, Eastern District of Pennsylvania, asking for reorganization, according to orchestra leaders.

The move makes the Philadelphia Orchestra the first major U.S. ensemble known to file for bankruptcy, according to orchestra industry groups and veteran observers.

The orchestra's concerts and business operations continue unfettered. In fact, orchestra leaders in the next few days expect to roll out a $214 million fund-raising campaign - their largest and riskiest ever - to save the orchestra from they say is the worse-case scenario of liquidation.

Citing the orchestra's current "fantastic imbalance" between income and expenses and the scale of the rescue plan, board chairman Richard B. Worley on Friday said:

"It isn't going to be easy. But I believe we can do it."

Orchestra management has retained Brian Tierney, former publisher and CEO of now-defunct Philadelphia Media Holdings LLC, former owner of The Inquirer, to handle its public relations; and, as bankruptcy consultant, Tierney's successor, Joseph Bondi, who was interim CEO of the former media company.

Musicians strongly opposed the filing of any category of bankruptcy, which could jeopardize funding to their pensions, and they staged a showy (if genteel) objection Saturday. As orchestra board members filed into the ground-floor entrances to 1701 Market Street and up to the offices of law firm Morgan, Lewis & Bockius, a string quartet serenaded them with Schubert and Mozart.

Musicians handed them leaflets encouraging a "no" vote.

The crowd of about 60 orchestra members and retirees were repeatedly asked to leave by guards, but the music continued. Security guards told musicians that police were on their way, but the briefly tense climax dissolved. No police arrived, and the play-in ended as the board meeting began.

Management has weighed bankruptcy for more than a year after deciding it no longer wanted to participate in the musicians' current defined-benefit pension fund. No one was forcing a sudden withdrawal from the plan, which would trigger a payment of about $25 million, but it is an obligation of about $3 million annually which leadership believes it can shed in bankruptcy proceedings, along with other contractual obligations it claims will save it more than $40 million over five years.

Among the relationships likely to be reconsidered under the jurisdiction of bankruptcy court is the orchestra's lease agreement with the Kimmel Center, which owns the orchestra's primary venue, Verizon Hall.

Orchestra leaders Friday said they have recently asked for a reduction in rent, which the orchestra pays as part of a deal in which the Kimmel programs and retains income from shows in the Academy of Music.

The orchestra's cash position has steadily worsened in recent months, management says. Even after applying a special $8 million raised in emergency philanthropy the orchestra believed could get it through this season, the group is now projecting a $5 million deficit, according to chief financial officer Mario Mestichelli.

At least one of several major Philadelphia philanthropies had encouraged the bankruptcy solution for several years, suggesting that support hinged on reorganization.

Another major philanthropist and orchestra board member had opposed the move, but has reconsidered.

"I was not in favor of it, but I don't see any other solution at this point. We're running out of money," said Carole Haas Gravagno (whose husband, Emilio Gravagno, is an orchestra retiree). "There are people in the community who want to help this process, and we're not not going to let them down."

Initial listener reaction was less enthusiastic - especially given the suggestion by the musicians' union that a bankruptcy filing could lead to players taking auditions for other ensembles.

"I am deeply saddened by the current situation," emailed Terry Champion, who was in the audience Thursday night when musicians leafletted the hall with fliers detailing their position. "If we lose individuals like [oboist Richard] Woodhams, [clarinetist Ricardo] Morales, [cellist Efe Baltacigil] and [violinist] Juliette Kang, I shall think twice about renewing my subscription. I mean, what would be the point? We are not just talking about orchestral morale but audience morale."

"Let's face it. There are very few things left in Philadelphia that are still world class. The Philadelphia Orchestra tops the list," wrote Stuart E. Hirsch in a note to Worley and CEO Allison B. Vulgamore. "In my opinion, the orchestra members, past and present, did their job. They performed music at the highest level and represented the city and country as the Fabulous Philadelphians for well more than a century. We need a board that can do the same. With the resources and endowment, there should be no excuse for bankruptcy. We need creative ideas to preserve this treasure."

Orchestra leaders say that's just what they've done. But several bankruptcy and charity lawyers said they were puzzled by an organization entering bankruptcy court with assets ($140 million in endowment) more than triple liabilities.

If the players' union, the American Federation of Musicians, opposes the bankruptcy, they might succeed in blocking it.

"They may have a decent argument that the filing is not in good faith if the orchestra does not seem to be in bankruptcy," wrote David Skeel, a University of Pennsylvania Law school professor, in an email. "There's no requirement that a debtor be insolvent, but if the debtor (the orchestra) clearly is solvent, the court might be persuaded that the case should be dismissed as not having been filed in good faith."

It is management's position that the $140 million in orchestra and Academy of Music endowment is donor-restricted, earmarked to remain forever in endowment, and is therefore untouchable.

Others weren't so sure.

"I don't know that I've ever had a case in which a group with these kinds of assets has come in with anything like these kinds of resources and claimed poverty and gotten away with it," said one of the musicians' lawyers, who asked that his name not be used.

But a bankruptcy court has wide latitude in coming up with plans to emerge from reorganization, says Marie T. Reilly, associate dean for Academic Affairs and law professor at Penn State, who grew up listening to Philadelphia Orchestra recordings.

"The beauty of Chapter 11, what makes it so interesting, is that the lawyers and all of the parties custom-make a solution," she said. "It's like commissioning a piece of music. You make a symphony that is appropriate for this group of people."

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