Sunday, October 31, 2010

Tribune's Bankruptcy Plan Likely To Face Legal Challenges

By Michael Oneal - Los Angeles Times

Creditors had until midnight Friday to submit alternatives to a plan backed by the media conglomerate and its largest creditors. At least two groups filed restructuring proposals.

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 faced a midnight Friday deadline for submitting restructuring plans that would contest a settlement filed Oct. 22 by Tribune, 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 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-President and Chief Restructuring Officer Don Liebentritt hailed the company-endorsed plan last week as the best way "to conclude its bankruptcy proceedings as soon as possible." But many creditors vow to fight the plan, saying it shortchanges their interests.

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

Tribune, which owns the Los Angeles Times, KTLA, WPIX, WGN, the Chicago Tribune 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 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 — a group led by Oaktree Capital Management, Angelo, Gordon & Co. and JPMorgan Chase & Co. — will end up owning the company, as their more than $8 billion in claims dwarf Tribune's estimated $6.6 billion in total value.

But because a court-appointed examiner found that the second part of the two-part transaction may have been a fraudulent conveyance, junior creditors such as Aurelius have 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 the support of the biggest constituencies in the case. 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 judge would have a hard time confirming it.

Brodsky said that Friday, Aurelius would submit its plan, which would conclude that there is no chance of a negotiated settlement in the case. Instead, Aurelius would 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 advisors to the Zell deal, directors and officers at the time (including Zell), and shareholders who profited.

Bankruptcy experts say Aurelius is probably using the threat of such massive litigation to extract a better settlement from the senior creditors. But if the plan fails, documents suggest Aurelius will switch to another strategy: trying to discredit the Tribune 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 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 only 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 such as Aurelius. Questioning focused on whether they understood the deal themselves or whether they relied on the advice of Tribune advisors 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 advisors 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 questioned Wilderotter about whether Liebentritt, who has long worked for Zell, one of the key targets of litigation, should be viewed as conflicted and unable to represent the interests of creditors who might be looking to sue his former boss. And they asked the board members about evidence Liebentritt may have lost the confidence of various constituents in the case.

Tribune declined to comment.

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