Judge Gives WorldCom, Creditors Time to Settle

The federal judge overseeing WorldCom Inc.’s bankruptcy set a midnight deadline for the company and dissident creditors to reach a settlement.

U.S. Bankruptcy Judge Arthur Gonzalez in Manhattan halted a hearing that started Monday on the company’s recovery plan, to give the sides time to resolve their differences.

Holders of about $750 million in convertible bonds known as “Quips” issued by WorldCom’s MCI Communications unit are among two creditor groups that object to using assets of MCI, the most profitable WorldCom unit, to help pay debt owed by other divisions. The dissidents oppose combining the parent with MCI and other units in a bankruptcy procedure called substantive consolidation.

At issue “is whether MCI is a solvent corporation,” Daniel Webb, attorney for the Quips, said in an opening statement filed with the court. WorldCom’s “plan of reorganization cannot be confirmed if MCI is shown to be a solvent corporation because if it is so, the dissenting MCI bondholders are legally entitled to be paid in full,” Webb said.

The bankruptcy recovery plan to erase $36 billion in debt also is opposed by some competitors, including AT&T; Corp. and Sprint Corp., which have said WorldCom would gain an unfair advantage if the court lets it reduce debt to about $5 billion.

AT&T; and other rivals have intensified efforts outside the bankruptcy proceedings to disrupt the reorganization, alleging WorldCom fraudulently directed calls to Canada to avoid paying access fees.

Auburn, Va.-based WorldCom and its co-founder, former Chairman Bernard Ebbers, were charged last month in Oklahoma with criminal fraud. Former Chief Financial Officer Scott Sullivan is facing federal criminal charges in New York, where four other former WorldCom executives have pleaded guilty and agreed to help prosecutors. The company said the criminal charges won’t directly affect the reorganization.

The dissident creditors are seeking full payment. Under the current plan, Quips holders would receive nothing, while the other dissident group, which holds about $235 million in MCI trade claims, would get 36 cents on the dollar, the same as WorldCom’s senior bondholders.