Delaware Bankruptcy Judge Kevin Carey rejected competing plans of reorganization in the Tribune Co. cases in a 125-page opinion in which he recited the fable of the scorpion and the fox and threatened to sua sponte appoint a Chapter 11 trustee.
In an opinion issued Oct. 31, Carey found that neither the debtors' plan (backed by the official committee of unsecured creditors and senior lenders) nor the plan of junior noteholders (led by hedge fund Aurelius Capital Management LP) met Bankruptcy Code confirmation requirements. Among other technical defects, Carey held that neither plan had adequate support from impaired classes. In addition, each plan sought impermissible third-party releases. Carey cautioned that the debtors and other constituencies must quickly find a way to emerge from Chapter 11 or he would consider appointing a Chapter 11 trustee on his own motion.
The centerpiece of the debtors' plan is a $488 million settlement of claims related to the 2007 leveraged buyout (LBO) of Tribune engineered by billionaire Sam Zell. In resolution of claims against senior lenders and LBO bridge lenders and related parties, the senior lenders would forego $401.5 million in recoveries on their claims; LBO bridge and other lenders cashed out in the LBO would contribute $120 million in cash; and the bridge lenders would forego $13.3 million in recoveries. LBO-related claims against others (including against Zell), shareholders that cashed out in the LBO, and professionals, would be preserved in a trust for the benefit of creditors.
Noteholders oppose the debtors' plan arguing that the settlement amounts are too low, making it a "sweetheart deal" for senior and bridge lenders. The noteholders' competing plan proposes to transfer all LBO-related claims into a trust to be pursued for the benefit of creditors.
Both plans were held unconfirmable because, among other reasons, they lacked the requisite support from impaired accepting classes under Section 1129(a)(10)of the Bankruptcy Code. That provision requires that if a plan impairs the rights of one or more class of claims that at least one class of claims support the plan. Significantly, the court determined that the requirement of an impaired accepting class applied on a per-debtor basis where debtors party to a joint plan are not substantively consolidated. Thus, the debtors' plan lacked an impaired accepting class for 39 of the 111 debtors. The noteholders garnered an impaired accepting class for only two of the 111 debtors.
Carey further found that both plans had technical defects in exculpation and third-party release provisions. Notably, Carey endorsed a provision in the debtors' plan (over the objection of Zell) that provided director and officer indemnification claims were prepetition claims and not entitled to administrative priority.
Carey further stated that if both plans were corrected so as to be confirmable under Sections 1129(a) and (b) of the Bankruptcy Code, that under 1129(c), which allows him to take into consideration the preference of creditors, he would be inclined to favor the debtors' plan over the noteholders' plan. He noted that creditors overwhelmingly preferred the debtors' plan. Of 128 classes in which creditors voted, 125 voted to accept the debtors' plan.
In stark contrast, only 3 of 243 classes that voted on the noteholders' plan voted in favor of the noteholders' plan. Carey further stated that the debtors' plan better supports the goal of reorganization "by resolving significant claims and providing the Debtors with more certainty regarding preservation of estate value and a better foundation for revitalizing business operations." He said that it is "highly speculative" that creditors would receive a superior benefit via "extensive and costly litigation" as contemplated by the noteholders' plan.
Under the debtors' plan, equity would be canceled and the senior lenders would be the new owners of the company. Under the noteholders plan, up to 65 percent of the equity ownership of a reorganized Tribune would be held in a distribution trust pending resolution of complex litigation that could last years.
The court provided significant guidance to the debtors, lenders, noteholders and other constituencies on how to correct plan defects, and at the same time sternly warned the debtors to "promptly" find a way to resolve the three-year old cases or risk losing control of the process.
"[T]he Court is of the determined view that, the Debtors must promptly find an exit door to this Chapter 11 proceeding," the ruling held. "The Court is equally resolute that, if a viable exit strategy does not present itself with alacrity, and despite any disruption to management, as well as the added cost and delay this might inevitably occasion, the Court intends to consider, on its own motion, whether a Chapter 11 trustee should be appointed."
Christopher M. Winter, a partner with Duane Morris, is a Delaware business lawyer who focuses his practice on Chapter 11 bankruptcy law and proceedings, commercial and corporate finance and transactions and Delaware corporate and alternative entity law.
Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.
