Friday, October 29, 2010

Tribune Braces For Competing Bankruptcy Plans - Unhappy Creditors To Offer Alternatives

By Michael Oneal, Tribune reporter

Still recovering from a management scandal that claimed its chief executive a week ago, Tribune Co. is bracing for its next disruption: How to cope with legal challenges from Aurelius Capital Management and other unhappy creditors seeking to upend its bankruptcy case.

Creditors face a midnight Friday deadline for submitting restructuring plans that would contest a settlement filed Oct. 22 by Tribune Co., its biggest senior creditors and the committee charged with representing the company's junior creditors.

Aurelius intends to file a competing plan, said Mark Brodsky, chairman of the litigious New York hedge fund. So does a group of senior creditors known as the SoCal lenders, one of its lawyers confirmed. Another group of bridge loan lenders represented by Wells Fargo Bank also is considering a filing, although the group's lawyer, Thomas Lauria, of White & Case, said it may end up joining another opposition camp.

Tribune Co. Co-President and Chief Restructuring Officer Don Liebentritt last week hailed the company-endorsed plan as the best way "to conclude its bankruptcy proceedings as soon as possible." But many creditors vow to fight a plan they insist continues to shortchange their interests.

"They settled amongst themselves … again," Lauria said, noting key junior creditors were absent from the negotiations.

Tribune Co., which owns the Chicago Tribune, Los Angeles Times, WGN, WPIX, KTLA, and other media properties, has been struggling in bankruptcy court for almost two years. The case has foundered on disagreements over how to settle claims raised by junior bondholders that a 2007 leveraged buyout led by Tribune Co. Chairman Sam Zell was a case of fraudulent conveyance, meaning it left the company insolvent from the start.

Nobody disputes that the senior creditors allied with Tribune Co. — a group led by Oaktree Capital Management, Angelo, Gordon & Co. and JPMorgan Chase — will end up owning the company, since their more than $8 billion in claims dwarf Tribune's estimated $6.6 billion in total value.

But because a court-appointed examiner in the case found that the second part of the two-part transaction may have been a fraudulent conveyance, junior creditors like Aurelius have gained leverage for their demands that the senior group pay them for releases from the threat of litigation related to those claims.

The Tribune-Oaktree plan has critical mass, given that the biggest constituencies in the case have signed on. It also has the seal of approval of the court-appointed mediator who helped negotiate it.

But Brodsky argues that because the Tribune plan was essentially an agreement among the potential defendants of the buyout claims, "without ever including the bondholders in the negotiation," the presiding judge would have a hard time confirming it.

Brodsky said Aurelius on Friday will submit its plan, which will conclude that there is no chance of a negotiated settlement in the case. Instead, Aurelius will propose that all of the buyout-related claims be put into a litigation trust, preserving them for future court battles. The company could then exit bankruptcy without having to wait for the results of the litigation, which could stretch out for years.

No releases would be granted, but a large portion of the company's value would be distributed to the various parties, most of it going to the senior creditors. A similarly large portion, however, would be reserved to compensate the victors of the court battles. Defendants would include the lenders and advisers to the Zell deal, directors and officers at the time, including Zell, and shareholders who profited.

Bankruptcy experts say Aurelius is likely using the threat of such massive litigation to extract a better settlement from the senior creditors. But if the plan fails, documents suggest Aurelius would switch to another strategy: trying to discredit the Tribune Co. plan by raising questions about the suitability of several key parties who approved it: the creditors committee, Liebentritt and the special committee of the company's board.

Aurelius recently asked the court to replace Tribune Co. officials with a bankruptcy trustee, arguing that executives and board members were conflicted in brokering a settlement in the case. It has since backed off that request.

Transcripts of depositions related to the motion show that Aurelius lawyers grilled Mark Shapiro and Maggie Wilderotter, two members of the special board committee, with questions about the settlement they had approved two days earlier. The apparent goal was to show that they had not lived up to their fiduciary duty by analyzing whether the settlement was fair to creditors like Aurelius. Questioning focused on whether they understood the deal themselves or whether they relied on the counsel of Tribune Co. advisers who may have been conflicted.

In one exchange, an attorney pressed Shapiro, chairman of the special committee, about the logic behind a $120 million payment that is central to the Tribune-Oaktree plan.

"So, in other words," the lawyer said, "if I were to ask you how the $120 million number was arrived at, you would not be able to tell me?"

"Relied on my financial advisers for that," Shapiro replied.

Similarly, a different Aurelius attorney asked Wilderotter about the size of the claim that was being settled for $120 million. After looking at her notes, she gave the wrong answer.

Neither Shapiro nor Wilderotter returned calls for comment.

Aurelius lawyers also asked Wilderotter if the board had considered whether Liebentritt, who has long worked for Zell, one of the key targets of litigation, should be viewed as having conflicts that would be disruptive to brokering a settlement. They further asked the board members about evidence Liebentritt may have lost their confidence or that of various constituents in the case.

Tribune Co. declined to comment.

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