Judge rejects both Tribune bankruptcy exit plans

The judge in Tribune Co.’s bankruptcy case rejected two competing plans for reorganizing the company, leaving the Chapter 11 proceeding unresolved after nearly three contentious years in court.

In a 126-page opinion, U.S. Bankruptcy Judge Kevin J. Carey said neither plan was confirmable under the Bankruptcy Code and threatened to appoint a bankruptcy trustee to resolve the case if the company and its warring creditors can’t come up with a viable solution soon.

Even as he rejected both plans, however, Carey said Monday that the one proposed by Tribune and a group of senior creditors, including Oaktree Capital Management, JPMorgan Chase & Co. and Angelo, Gordon & Co., had a better chance of confirmation if it was altered to meet his objections.

DOCUMENT: Tribune bankruptcy opinion

Carey said the competing plan proposed by Aurelius Capital Management and a group of junior bondholders was not as feasible as the senior creditors’ proposal because it depended on a “highly speculative” litigation trust to resolve the many legal issues swirling around the case.

He also said voters overwhelmingly favored the plan proposed by the senior creditors.

Both Aurelius and Tribune said they needed more time to study the decision before commenting.

Although he failed to provide a specific roadmap, Carey made clear his resolve to wrap up the case soon.

Carey said that “the court is … resolute that if a viable exit strategy does not present itself with alacrity,” he will consider whether to appoint a trustee to resolve the case, even if it creates more delay.

“The debtors must promptly find an exit door to this Chapter 11 proceeding,” Carey wrote.

The judge’s decision is a milestone for Tribune, one of the nation’s largest media companies, with 25 television stations, eight newspapers and Internet and other media properties. Besides the Los Angeles Times and KTLA-TV Channel 5, Tribune owns national cable station WGN-TV and a 31% stake in Television Food Network.

Tribune is approaching 1,100 days in Bankruptcy Court, putting it in the upper 10% of longest-running bankruptcies for large public companies, according to a bankruptcy database at UCLA.

“Generally speaking, a company that comes out of a long bankruptcy is more likely to do well than a company that comes out of a short bankruptcy,” said Lynn M. LoPucki, a UCLA law school bankruptcy expert.

Just getting through a long reorganization shows that a company has staying power, LoPucki said. Besides, mistakes can be made in shorter bankruptcies, which could end up hurting a company’s chances of survival.

Carey’s decision pushes the bankruptcy case toward a conclusion nearly three years after Tribune filed for protection.

The company has been held in a state of limbo during the process as aggressive banks and hedge funds haggled over its future.

Cost cutting in publishing and a slight recovery in TV advertising have kept cash flow from collapsing amid a relentless falloff in revenue from print advertising, which is gravitating toward the Internet, as are readers.

But Tribune Chief Executive Eddy Hartenstein has argued in court that the company has been 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 complex case has become an especially high-profile example of how the bankruptcy process has been taken over by distressed debt investors, who 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 some experts say the hyper-litigiousness 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 has so far been billed for more than $305 million in legal and professional fees, 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.

When Tribune filed for Chapter 11 protection Dec. 8, 2008, it wasn’t supposed to be this way. Billionaire real estate mogul Sam Zell, 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 Tribune private in 2007.

Those who held around $2 billion in corporate bonds before the buyout argued that the more than $10 billion in senior debt taken on to finance the Zell deal improperly wiped out their claims because the deal was a fraudulent conveyance, meaning that it left the company insolvent from Day One.

If that argument was true, the senior claims held by the banks that funded the deal could be invalidated, leaving more money to pay off the junior debt. The pre-buyout bondholders also teed up a host of other claims against Zell, Tribune management, board members and shareholders who sold into the deal.

Senior creditors led by Oaktree Capital Management, Angelo Gordon & Co. and JPMorgan Chase & Co., meanwhile, dismissed the charges as posturing.

They argued that Tribune was the victim of an unforeseen economic collapse — the recession — that accelerated an industrywide decline in advertising spending and rapidly made repayment of the debt to fund Zell’s takeover untenable. Zell too has vehemently denied that he has any liability.

Some of the senior creditors were willing to pay the junior bondholders a small amount to make the claims go away. But ultimately, they believed, their own claims overwhelmed all others and should give the banks and funds that owned the senior debt unquestioned ownership of the reorganized company after it emerged from bankruptcy.

The various sides almost resolved their differences in April 2010 with a wide-ranging settlement that would have paid $450 million to the junior creditors.

But Oaktree, which owned the largest chunk of senior debt, staunchly opposed the settlement and began to maneuver to defeat it almost as soon as it was filed.

In the end, Oaktree needn’t have bothered. The settlement fell apart of its own accord in August 2010 after a court-appointed independent examiner issued a massive report on the Zell takeover deal.

The examiner, Los Angeles bankruptcy lawyer and scholar Kenneth Klee, found that the first step of the two-step deal probably wasn’t a fraudulent conveyance.

But Klee determined that the second step, which closed six months later, probably was a fraudulent conveyance because the company’s financial health had deteriorated dramatically and, he said, certain members of management may have misled lenders.

Tribune has denied that its managers did anything wrong.

Oaktree eventually formed an alliance with Angelo Gordon and JPMorgan to present a reorganization plan supported by Tribune and the official committee of unsecured creditors.

But they were opposed by Aurelius Capital Management, which in September last year became the largest junior bondholder when it bought out another large hedge fund that had agreed to the April settlement.

The bankruptcy was filed eight years after Tribune reached an agreement to acquire Times Mirror Co. in a $6.8-billion transaction that created what was then the nation’s third-largest newspaper company and ended more than 100 years of local ownership of The Times by the Otis and Chandler families.

The merger was accomplished only after a dramatic board-level battle pitting the Chandler family against non-family directors of Times Mirror. The battle was waged over the non-family directors’ belief that the Chandlers had made a deal with Tribune that benefited themselves at the expense of other shareholders.

In the end, the family was forced to accept a deal that was marginally less advantageous to its interests, although Tribune sweetened its offer by $5 a share, to $95.

DOCUMENT: Tribune bankruptcy opinion

mdoneal@tribune.com

jerry.hirsch@latimes.com

walter.hamilton@latimes.com