The Denver Post violated its agreement with Rocky owner E.W. Scripps when it borrowed $13 million from their jointly owned operating agency to cover The Post's newsroom payroll, Scripps wrote in a letter to Post executives last month.

"We request that this practice cease and that the Post find a way to fund its editorial payroll without resorting to this . . .," Scripps executives Rich Boehne and Mark Contreras wrote.

The letter was dated Dec. 9, five days after Scripps announced it would sell the Rocky and would pursue other options, including closure, if it couldn't find a buyer.

"We continue to reserve our rights to pursue remedies for the several breaches caused by these practices or to assert them in connection with any future legal proceedings," they added in the letter sent to top Post executives Dean Singleton and Joseph "Jody" Lodovic.

The letter also reveals that the agency's credit has dried up and the banks will not lend it any more money. And it says that Scripps does not believe that The Post is able to repay the borrowed money "promptly."

Questions to Post executives were referred to Lodovic. He called the allegations "factually inaccurate," said there have been no breaches of the agreement and said it is Scripps that will be in breach if it closes the Rocky.

"The agency owes us money, too, I assure you," he said. "We ordered all the newsprint in December - the agency owes us millions of dollars. Who cares who owes what? Money goes back and forth all the time. All the balances will get wiped out altogether in the end."

The Rocky received the letter anonymously, via e-mail, Monday afternoon. It confirms information provided to the Rocky earlier this month by a source with personal knowledge of recent financial statements from the agency. In addition, the signatures on the letter from Boehne, Scripps' CEO, and Contreras, a senior vice president, match signatures on other Scripps documents.

Scripps spokesman Tim King said, "We don't discuss private correspondence with our business partners, so I don't have any comment."

Lodovic refused to confirm the letter's authenticity. "If your own company won't confirm they sent it, I'm certainly not going to. I can't believe Rich or Mark would sign such a letter like this."

But other sources confirmed the existence of the letter.

In the letter, Scripps says the Denver Newspaper Agency borrowed money from its banks then loaned it to The Post to make its payroll. By the end of November, The Post owed the agency $13 million, according to the letter.

Scripps said the loans were "instituted without our knowledge and consent and constitute a material breach" of the 2001 Joint Operating Agreement that governs operations of the two papers.

"We request that The Post repay forthwith all loans that (the agency) was caused to make to it and that (the agency) use those funds to reduce the principal outstanding under the credit facility with the banks."

The payroll issue, previously undisclosed, sheds new light on Scripps' decision to seek an exit from the Denver market and its partnership with the highly leveraged MediaNews, which owns The Post.

The companies are each losing roughly $4 million per quarter as the newspaper industry nationally continues a rapid deterioration, based on the most recent public financial filings by Scripps. The agency, which handles business functions for the two newspapers, has a $130 million bank loan that it's attempting to renegotiate.

To help do so, Singleton told unions representing workers at the agency and The Post that he needed $20 million in contract concessions by Jan. 16. That deadline has passed with talks continuing. Scripps said bids for the Rocky were due Jan. 16, but it has not provided an update on the sale process.

A source told the Rocky in mid-January that money owed to the agency by The Post had swollen to more than $10 million by the fall of 2008. This was due to The Post's failure to reimburse the agency for its newsroom expenses, the source said.

The joint operating agreement allows for the agency to pay expenses for either partner and makes specific provision for the agency to pay newsroom costs. But it also requires the partners to reimburse the agency.

The agency's 2007 financial statements, filed by MediaNews with the Securities and Exchange Commission last year, notes the practice and says that at year-end 2007, MediaNews owed the agency $2.3 million for Post newsroom expenses.

In the past, when the Denver newspapers were generating enough cash to support both newsrooms, the agency could advance editorial costs without tapping its line of credit. Scripps' letter asserts that beginning last year, however, the agency began to borrow from its bank to cover The Post's newsroom expenses.

Both companies were asked by the Rocky, via e-mail Jan. 15, whether they were current on their obligations to the agency. Scripps responded Jan. 21, saying it had just settled a $48,000 obligation for December.

"Scripps has been funding the full cost of the Rocky Mountain News newsroom and other editorial expenses without the benefit of cash distributions from (the agency) since July. From July to year-end, that totaled $10.6 million, and we continue to fund those expenses in the early weeks of 2009."

MediaNews did not answer that e-mail or a follow-up Jan. 21.

"The issue is too complicated," Lodovic said Tuesday when asked why he hadn't responded. "It's irrelevant. Who cares?"

Lodovic insisted MediaNews has not breached the agreement with Scripps.

"The JOA has been operated the same way since Day One - years and years and years," he said. "If they are in the middle of a process that may result in the closing of the Rocky, they are going to be in breach of the agreement," he added. "They are getting ready to leave the market, and to the extent they do not provide content, they are in breach."

In the letter, the Scripps executives said the agency's banks "will no longer advance funds under (its loan)," so MediaNews began borrowing against future distributions from the agency in order to fund payroll.

The practice is allowed under the JOA, the Scripps executives wrote, but "was not intended to benefit one partner (i.e. The Post) at the expense of the other or to the potential detriment of the creditors of (the agency), if, as we believe the case to be, the partner is unable to repay these amounts promptly out of its current distribution."

Agency spokesman Jim Nolan said, "If such a letter indeed exists, agency management hasn't seen it, much less been made aware of its contents."

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