Philadelphia Orchestra goes to bankruptcy court

Posted: April 20, 2011

Arguing that there are aspects of the musicians' contract "we can no longer afford," lawyer Lawrence G. McMichael Wednesday ushered the Philadelphia Orchestra Association's chapter 11 petition into U.S. Bankruptcy Court.

In opening statements, McMichael invoked the orchestra's history and stature, saying the ensemble's economic ripples were in the "hundreds of millions," and calling it "one of the three or four premiere orchestras in the world."

However, the orchestra's labor and pension costs, its relationship with the owner of its hall, the Kimmel Center Inc., and its obligations to Peter Nero and the Philly Pops were burdens, he said.

"Things have to change, and they are going to change - the kind of change to put the Philadelphia Orchestra, the Academy of Music and [Encore Series Inc., the Pops' legal name] on a sound financial platform," he said.

Musicians of the orchestra strongly opposed the Association's Saturday filing in U.S. Bankruptcy Court, Eastern District of Pennsylvania, and their attorney Wednesday called the action "unnecessary" and "a mistake."

The "Orchestra of Firsts" is "now the first major cultural institution in this county to file chapter 11," lawyer Bruce Simon told Judge Eric L. Frank and a courtroom of about 60 participants and observers, including lawyers, orchestra staff and board, and a few musicians.

Lawyers for management and musicians had agreed a few minutes before the start of Wednesday's hearing that the afternoon's proceedings would not include a motion by management to impose a new contract on musicians.

Negotiations for a new deal with players continue - as do all concerts.

Much of the hearing was devoted to procedural matters, but both sides quickly outlined one of the central issues in the case: whether the orchestra, which is seeking to wipe the slate clean on tens of millions of dollars that it may be obligated to pay for the musicians' pension plans, could be compelled to use some of its $140 million in endowment to satisfy that obligation.

The nest-egg ($120 million belonging to the orchestra, $20 million owned by the Academy of Music) is money meant to be kept in perpetuity, the income from which is spent for various projects or general operating costs.

The orchestra says it has spent nearly all its unrestricted endowment - that is, funding that had no restrictions placed on it by donors. Only donor-restricted endowment remains, and the association's position is that it cannot be spent.

Simon, the musicians' lawyer, suggested that bankruptcy supersedes such agreements. "Restrictions are not restrictions in this court," he said.

The case combines the bankruptcy petition of three organizations: the orchestra, the Academy of Music (which the orchestra owns), and Encore Series Inc.

Judge Frank will have to navigate a complex series of relationships and contracts, including the now-expired merger agreement between the orchestra and the Pops and the still-current contract between the orchestra and Peter Nero; and the contract between the orchestra and the Kimmel Center that grants the orchestra a lowered rent ($2.3 million a year) in the Kimmel's Verizon Hall, in exchange for giving the Kimmel the right to book and the responsibility to maintain the Academy of Music.

The orchestra's position on whether it wants to keep its relationship with Nero, and the question of whether it wants to keep the Pops, are not entirely clear.

But the orchestra refused to announce a 2011-12 season for the Pops, and Nero exercised a clause in his contract calling for mediation and arbitration.

Last Thursday Nero took away a victory from JAMS Arbitration, the private dispute- resolution group, in which Judge Diane M. Welsh ordered the association to commit to concert and rehearsal dates, and to "publicly announce same and issue notice to the Philly Pops subscribers within 15 days of the date hereof."

That order was superseded by the association's chapter 11 filing, and will now become part of the proceedings.

"We can't afford what the injunction requires us to do," McMichael said.

Pops lawyer Paul R. Rosen told the court that the association has consistently neglected its relationship with Nero and the Pops.

He also said he would object to the association's choice of a law firm because of a conflict of interest: McMichael is a partner at Dilworth Paxson, of which Philadelphia Orchestra board member Joseph H. Jacovini is chairman. Dilworth would then be representing the Pops in bankruptcy, while opposing it in certain matters.

McMichael called the issue a "red herring," but even apart from Rosen's objection, Judge Frank raised the question himself, and said rulings had been divided. He will consider the matter further after Rosen files his objection.

The association's filing yielded a cache of information about its business operations. Among them:

The orchestra will put in escrow money being sent in by subscribers to its 2011-12 season as a gesture of reassurance.

Orchestra management is paying McMichael $750 an hour, and paid Dilworth Paxson $319,000 in the 90 days prior to Saturday's filing.

Orchestra president Allison Vulgamore could be the recipient of certain incentives under the terms of her employment contract.

The association listed only about $1.1 million in debt due to its vendors at the moment of the filing. But the bankruptcy move was not only - or even primarily - about its short-term cash position.

What the orchestra seeks, long-term, was spelled out in a declaration in support of first-day motions by orchestra chairman Richard B. Worley:

"The Debtors seek in the chapter 11 process to achieve the following outcomes: (1) relief from pension obligations, (2) relief from current contractual obligations to Peter Nero and others, (3) renegotiated contractual agreements with KCI , (4) a new collective bargaining agreement with Local 77 and (5) a court-approved plan with all these elements that will attract donor support."

McMichael told the court he hoped to work with Nero and the Pops on a resolution with "the maximum amount of consent and the minimum amount of hostility."

Contact music critic Peter Dobrin at pdobrin@phillynews.com or 215-854-5611. He blogs at www.philly.com/philly/blogs/artswatch.

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