Judge rejects both competing plans in Tribune Co. bankruptcy case
In an expansive 126-page opinion, U.S. Bankruptcy Judge Kevin Carey said he could confirm neither plan under the bankruptcy code and threatened to appoint a trustee to resolve the case if the company and its warring creditors can't come up with a viable solution soon.
A settlement at the heart of that plan, he wrote, "should be approved because it is fair, reasonable and in the best interest of the Debtor's estates."
That amounted to a defeat for the author of the competing plan, hedge fund Aurelius Capital Management, which had argued heatedly that the settlement was one-sided and unfair.
At stake is the future ownership of Chicago-based Tribune Co., the media conglomerate and parent of the Chicago Tribune that owns television stations as well as newspapers. Until the company can emerge from bankruptcy, the future structure of its ownership can't be determined, and the company is limited in business decisions it can make because the court must be involved.
Carey laid out a number of elements of the plan pushed by Tribune Co. that caused him to reject it, including the treatment of a key group of junior creditors. But he indicated that if those problems can be fixed, that plan had the best chance of approval.
Both plans sought to resolve a swirl of legal claims stemming from Tribune Co.'s $8.2 billion leveraged buyout in 2007, which preceded the bankruptcy by less than a year. Junior creditors led by Aurelius have argued that the buyout, led by Chicago billionaire Sam Zell, was a textbook case of fraudulent conveyance, meaning the debt-laden transaction left the company insolvent from the very start.
If true, the senior claims held by the banks that funded the deal could be invalidated, leaving more to pay off the junior debt. The prebuyout bondholders also teed up a host of other claims against Zell, Tribune management, board members and shareholders who sold into the deal.
The senior creditors' plan, which was also supported by the Official Committee of Unsecured Creditors, sought to settle the charges by paying Aurelius and the other junior bondholders $431 million for their nearly $1.3 billion in claims. Aurelius countered that it could recover much more through litigation and proposed a plan centered on a "litigation trust," which would allow the company to emerge from bankruptcy while the fraudulent conveyance charges were fought out in court.
Carey, however, claimed that the Aurelius plan was not as feasible as the senior plan because any returns from the litigation trust would be "highly speculative." He also said voting creditors overwhelmingly favored the plan proposed by the senior creditors.
Aurelius said Monday evening that it needed more time to study the decision before commenting.
Whether Tribune Co. and its allies are willing to fix the flaws Carey identified in their plan was unclear. Tribune Co. said in a statement that it also needed time to study the plan before commenting. Oaktree and JPMorgan declined to comment.
Carey outlined several problems. One involved a technical issue related to voting. A second and third involved provisions in the plan that would release various parties, including Tribune Co. employees, from liability related to the buyout. Tribune Co. had sought to protect employees who benefited from selling company shares owned in their 401(k) accounts and otherwise.
"Despite the Debtors' laudatory goal of protecting employees from litigation, the record before me is insufficient to support a conclusion that the (releases) meet the standard of fairness," Carey wrote.
One source close to the senior group said that may mean Tribune Co. will "have to throw those employees under the bus" in order to get a plan approved.
Another flaw Carey found in the senior creditors' plan was whether it appropriately treated a group of junior creditors that owns hybrid securities known as PHONES.
Carey made it plain that despite his own lengthy deliberations, he is in no mood to let the case drag on any longer than necessary. He suggested that if Tribune Co. and its creditors can't see their way clear to a confirmable plan, he may be forced to appoint a bankruptcy trustee to resolve the case, even if it means taking months to get the trustee up to speed.
Carey wrote that "the court is … resolute that if a viable strategy does not present itself with alacrity," he will step in. "The Debtors must promptly find an exit door to this Chapter 11 proceeding."
For Tribune Co., the three years in bankruptcy has clearly taken its toll. Cost cutting in publishing and a slight recovery in TV advertising has propped up cash flow amid a relentless falloff in print ad revenue, which is gravitating, as are readers, toward the Internet. But Tribune Co. CEO Eddy Hartenstein has argued in court that being kept in bankruptcy court has left the company hamstrung from pursuing opportunities that might help it cope with a changing future. Retaining valuable employees has been a challenge, he said, and luring talented new ones has been even more difficult.
Many legal and business experts said the case has become an especially high-profile example of how the bankruptcy process has been taken over by distressed-debt investors that buy up a company's bonds and bank loans for pennies on the dollar and then seek to profit by pressing their influence in bankruptcy court.
Those investors argue that the process provides liquidity for creditors that might otherwise lack the resolve or resources to fight for their rights. But others say the hyperlitigiousness of the modern bankruptcy system is merely a formula for gridlock that does more for lawyers than for their clients.
No one disputes that the process has become stunningly expensive: Tribune Co. has been billed for more than $305 million in legal and professional fees so far, and the tab is still growing. That number doesn't include the many millions of dollars in parallel fees incurred by other parties in the dispute.
Carey took pains in his decision to let it be known that he has lost patience with the endless squabbling among the creditors. He led his decision with a recitation of the fable of the fox and the scorpion, a tale of mutually assured destruction.
"There is no moral to this story," Carey wrote. "Its meaning lies in the exposition of an inescapable facet of human character: the willingness to visit harm upon others, even at one's own peril."
When Tribune Co. filed for Chapter 11 protection on Dec. 8, 2008, it wasn't supposed to be this way. Zell, the billionaire real estate mogul who had become the company's chairman, billed the bankruptcy as a relatively simple balance-sheet restructuring that would allow the company to recover from what he called a "perfect storm" of economic and industry events that had made the court petition unavoidable.
Within months of the initial filing, however, the Chapter 11 proceeding devolved into a heated referendum over the probity of Zell's highly complex two-step deal to take the company private in 2007. And as the fraudulent conveyance charges took hold, warfare broke out among creditors on all sides of the issue.
Douglas Baird, a bankruptcy scholar at the University of Chicago Law School, said it appears Carey still hopes that a full settlement will emerge.
"You get a sense from reading the opinion that the judge really hopes everyone will come together and cooler heads will prevail," Baird said. "The possibility of a trustee will put the fear of God into everyone."