Oaktree declined to comment, but documents show that Oaktree was loath to set a bad precedent for other cases by caving in to the junior bondholders. Liang and his bosses knew that the same players in bankruptcy court moved from case to case like a traveling roadshow. Raising expectations for the next negotiation and the one after that could encourage settlements that might erode Oaktree's returns.
For Centerbridge, which declined to comment, and the other junior creditors, the seniors' stance only meant they had to fight harder to "educate" the judge and the other parties as to the strength of their case, Rosner said. Documents show they were demanding as much as $1 billion for their claims versus an offer from the seniors of closer to $75 million.
To build leverage, the junior creditors filed motion after tactical motion in bankruptcy court, aimed at showing Judge Carey how the senior creditors had co-opted everyone else in the case in an attempt to "cram-down" a plan the junior bondholders found unacceptable. Behind the scenes, Centerbridge waged a quieter campaign to win over Tribune Co. and push the official creditors committee to endorse a settlement based on the claims.
Much to the annoyance of Liang and the other senior debt holders, Liebentritt and his advisers responded to the Centerbridge incursion by continuing to push for a full settlement of the claims that would avoid costly litigation against anyone. Liebentritt said he believed this would be the cleanest solution for the company. But because that plan would include legal releases for Zell and company executives, fighting for it exposed Liebentritt to charges from all sides that he was trying to protect Zell, his longtime former boss.
In an interview, Liebentritt said, "I made no secret of my ties to Sam and acknowledged the criticism. But I truly believed (avoiding any litigation with a settlement) was the right thing for the company and all the other constituents."
Oh, so close
In April 2010, after the growing acrimony dragged the case into its second year, Liebentritt almost got his wish.
He and Tribune Co.'s chief negotiators, investment banker David Kurtz of Lazard Ltd. and lawyer James Conlan of Sidley Austin, came close to brokering a compromise. But its ultimate failure only underlined how little power Tribune Co. really had to determine the outcome of its own Chapter 11 case.
Oaktree's Liang had backed away from the talks with management in early 2010, and lead bank JPMorgan seemed in no mood to budge. But as Kurtz and Conlan shuttled between camps trying to soften up both sides, they began to sense that Centerbridge and Angelo Gordon might be willing to deal, Kurtz said.
Before Aronson launched Centerbridge in 2005, he had run the distressed-debt business at Angelo Gordon and was still on good terms with Tom Fuller, who had taken over the job when Aronson left. The Tribune Co. team encouraged them to speak directly, rather than through more junior executives. And though Kurtz said neither would make the first call, afraid to lose face if the other balked, Aronson finally made a move.
One morning in March as Kurtz was at the doctor preparing for a routine procedure, Aronson called. "I will call Fuller if you call him first and make sure he is willing to deal," Kurtz recalls him saying. "If I call and he isn't, this is over."
As the nurse was trying to sedate him, Kurtz was still on his cellphone with Fuller, getting the assurances Aronson wanted. Kurtz said he reached Aronson shortly before the procedure began, then passed out. When he woke up, Aronson and Fuller had cut a deal giving the Centerbridge group a little more than $450 million, or 7.5 percent of the debtor's value.
JPMorgan balked at the price but eventually signed on to a slightly lower offer. The reason: Centerbridge agreed to release the banks as well as Zell and Tribune Co.'s leadership from any liability.
Oaktree, however, responded angrily. Emails show that Liang chastised Fuller at Angelo Gordon for breaking ranks. He then fired off his own set of motions, decrying the deal as "dead on arrival" because it forced Oaktree and other senior creditors who had little liability to fund the releases for others who were exposed. That included Zell, who was getting his release for free.
This skirmish threatened to bust up the alliance at the heart of the senior lender group. Upset at Oaktree, which was recruiting allies among other investors to block the plan, JPMorgan began flexing its muscles.
Officials at the bank declined to comment, but documents show JPMorgan threatened to pull unrelated business from Oaktree and began pressuring other players on Oaktree's side to support the settlement. One of those was Avenue Capital Group, which at the time was raising money for a new fund it hoped would include a $250 million investment from JPMorgan.
Sources said Avenue Chairman Marc Lasry told Oaktree's Karsh that he'd wait a month to see if Oaktree could force a new deal. But when that didn't happen, he defected to the other side, saying he couldn't afford to lose JPMorgan's business. That elicited a biting email response from Oaktree's Liang.
"Tell Marc that he should be fitted for a skirt and play off the women's tees," Liang wrote to Karsh.
Who is winning?