The judge in Tribune Co.'s bankruptcy case on Monday rejected two competing plans for reorganizing the company, leaving the Chapter 11 proceeding unresolved after nearly three contentious years in court.
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."
Judge rejects both competing plans in Tribune Co. bankruptcy case
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