by Chris Nolter | Published June 1, 2012 at 2:49 PM
On June 7, U.S. Bankruptcy Judge Kevin Carey will consider the fourth revision of Tribune Co.'s reorganization plan in Delaware, and unlikely as it may have seemed over the past 3-1/2 years of legal warfare, the company may soon leave Chapter 11.
Since Tribune last presented a plan in 2011, Carey has given the company detailed guidance about how its proposal fell short. The company has spent recent months adjusting its plan and resoliciting votes from some creditors.
While Tribune has the support of its senior lenders, its unsecured creditors' committee and other claimholders that voted in favor of the plan, a number of creditors oppose the plan and the settlement that underpins it.
Noteholder Aurelius Capital Management LP, which has been the most prominent opponent throughout Tribune's case, reiterated opposition to a settlement with the lenders that financed Sam Zell's ill-fated 2007 leveraged buyout.
Carey ruled in October that the settlement is sound. Aurelius reiterated in its objection that the pact with the lenders brings the estate "inferior and unreasonable consideration" and "does not satisfy the lowest rung of reasonableness and was neither negotiated nor proposed in good faith."
Among its more detailed arguments, Aurelius complained that Tribune's senior lenders and bridge fee lenders will get "carte blanche payment" of fees and expenses. They will have to run their invoices by Tribune, the U.S. trustee and the unsecured creditors, the firm said, but would not face a hearing unless there is a dispute. Other groups would have to file a "full-blown fee application." The payout for lender and unsecured creditors' committee fees was placed at $72 million in an April plan supplement, though Aurelius argued that the final sum could increase by "tens of millions of dollars."
A number of objections arise from the subordination of Tribune's so-called Phones notes and of claims held by Zell's EGI-TRB LLC.
Deutsche Bank Trust Co. Americas, the indenture trustee for senior notes, argued that the benefits of subordinating the Phones should flow to the senior noteholders. The trustee said that the plan would allocate the recoveries among noteholders and other creditors.
Likewise, the Law Debenture Trust Co. of New York, which is the successor indenture trustee to two series of notes, contended that dividing the proceeds among other groups "ignores the fact that the other parent claims are not entitled to the economic benefits that result from the subordination of the Phones notes and the EGI-TRB note." In line with Aurelius' objection, Law Debenture Trust argued in pleadings that the plan settles "the valuable LBO-related causes of action against the senior lenders for less than a reasonable amount."
EGI-TRB argued that the plan improperly subordinates its claims. The entity claimed that a subordination agreement between it and Tribune does not apply to avoidance action recoveries, settlement proceeds or litigation trust distributions.
Moreover, the Zell vehicle argued that the plan would permit "a litigation trust to expend estate assets pursuing meritless litigation against EGI-TRB, provides for broad indemnification of the trustee of the litigation trust and provides no court oversight of the professionals retained by the litigation trust or the fees incurred by those professionals."
Citadel Equity Fund Ltd. and Camden Asset Management LP hold $222 million in face value of Phones, according to their pleadings. They argued that the plan mistreats creditors who tried to cash out their notes before the bankruptcy but could not because Tribune refused the exchanges. They maintained that the Phones holders whose exchanges Tribune did not honor should be treated as holders of cash claims, not as holders of Phones notes.
Phones trustee Wilmington Trust Co. has appealed Carey's decision regarding subordination of the securities.
In its objections to the plan, Wilmington Trust argued that Tribune should not have "undue influence" over the litigation trust that will pursue claims that fall outside the settlement. The firm cited a "yet-to-be-disclosed cap" on the litigation trust's expenses, among other matters.
Deutsche Bank noted that the litigation trust will initially be funded by a $20 million term loan from reorganized Tribune. The bank suggested that funding by a loan is "wholly inappropriate and inconsistent with applicable precedent in the third circuit, as well as other jurisdictions." If Tribune had pursued litigation during the case, the bank observed that the estate would have borne the costs outright. Deutsche Bank argued that the debtor should disclose the terms of the loan, if not fund the trust through a grant, and provide for payment of counsel fees, costs and expenses of the individual members of the litigation trust advisory board.
Tribune sought bankruptcy protection in December 2008, about a year after Zell's LBO. Through the end of April, there were $242 million in advisory fees and expenses billed to the bankruptcy estate.
"The good news is that it has survived, so maybe there is strength to the business," said Brian Stewart, a director at Chicago firm Keystone Group who consults on restructuring, M&A and other matters.
Carey is presumably ready to move on. Though some creditors still question his prior decision that the settlement with senior lenders stands under the law, most of the current objections are fairly narrow.
When Carey rejected Tribune's previous plan and a proposal from Aurelius and other noteholders on the evening of Oct. 31, 2011, he opened his 129-page ruling by retelling the parable of the fox and the scorpion. Criticizing "the willingness to visit harm upon others" in the bankruptcy, he left some uncertainty about whether he viewed the case as a tale of mutual destruction or identified one side as the fox, a good, if perhaps naïve, character, that is unfairly maligned by the ruthless scorpion.
Despite the apparent frustration, Carey's grievances with Tribune's last plan were largely technical and surmountable. As one person involved in the case observed, "When a judge thinks your plan sucks, he doesn't write a 100-page ruling."