Tribune Co. bankruptcy settlement breaks down

By Michael Oneal
Posted Aug. 20, 2010 at 2:34 p.m.

The settlement at the heart of Tribune Co.’s proposed reorganization plan has fallen apart, casting doubt on whether the Chicago-based media conglomerate can continue to control its own fate in bankruptcy court.

At a status hearing in Delaware Friday, Tribune Co. lead attorney James Conlan of Sidley Austin said the company planned to file unilateral amendments to its plan by next Friday and threatened to cast the case into extended litigation if the warring parties can’t come to an agreement.

“The debtor has tried mightily to bring the parties together,” Conlan said. “That hasn’t happened.”

Other testimony at the hearing made it clear that a settlement may be an increasingly faint hope at this point.

JPMorgan and Angelo, Gordon & Co., the two largest and most powerful signatories to the original settlement, have backed out, one attorney said, rendering the original agreement moot. And various creditor attorneys suggested that competing reorganization plans may be in the offing.

Until the last few days, Tribune Co. had been leading settlement discussions by virtue of its exclusive right to file a reorganization plan. But in early August that right expired and other parties now have the opportunity to propose alternative plans if they can’t reach agreement on a consensual settlement.

What that means for the timing of the case’s resolution is hard to know. If the various parties can come to agreement soon, the case could still move along toward a vote and confirmation by the end of the year. But if an entirely new plan is proposed, that would require a new confirmation process, which would delay the case indefinitely.

Tribune Co.’s declaration that it would move forward with its own settlement proposal sends the case down what attorneys said was two tracks.

On the one hand, Tribune Co., which owns the Chicago Tribune, will now put forth its plan based on what Conlan said was “a pretty good sense of who is being unreasonable (based on their negotiating leverage in the case).”

On the other, various creditors will continue to try to negotiate their own settlement and may eventually propose their own plan of reorganization.

What will be looming is Tribune Co.’s threat to cast the case into extended litigation over claims surrounding Tribune Co.’s controversial 2007 leveraged buyout. Claims that the deal, led by Chicago real estate magnate Sam Zell, rendered the company insolvent from Day 1, were originally pressed by junior creditors. But under law, it is the debtor’s right to bring an actual case.

Conlan’s threat of litigation seemed calculated to call the bluff of parties standing in the way of an agreement.

“We think it is critical to change the dynamic that has emerged,” Conlan said.

The degree to which the case has dissolved into discord could be seen at the start of the hearing.

Shortly after U.S. Bankruptcy Judge Kevin Carey took the bench, lawyers for the Official Committee of Unsecured Creditors in the case and JPMorgan, one of Tribune Co.’s largest senior creditors and formerly its biggest ally, complained that the debtor would not allow them an extra hour to try to complete 11th hour negotiations before the hearing began.

“They said absolutely not!” said a lawyer for JPMorgan, “and they told the parties to run over (to the courthouse for the start of the hearing).”

Conlan didn’t dispute the account, noting that “we didn’t have to run over because we weren’t part of those settlement discussions.”

Tribune’s creditors are still trying to negotiate a settlement, sources said, but they remain are far apart on any proposed terms. Moreover, new parties have emerged, including a litigious hedge fund called Aurelius Capital Management, which has recently established a substantial position by buying into a class of junior bonds in the case.

Negotiations were thrown into turmoil late last month when independent examiner Kenneth Klee filed a report evaluating the claims surrounding the Zell LBO. That caused parties to realign their positions based on the findings and emboldened new parties like Aurelius to press for advantage, sources said.

The most powerful holdout to the original settlement was a large group of senior creditors led by Oaktree Capital Management. The Credit Agreement Lenders, as they dubbed themselves, have argued that despite their contention that they have little exposure to the LBO claims, they are being asked by JPMorgan and other parties that do have exposure to help pay for the $450 million it took to appease the junior creditors.

Oaktree has suggested that others with exposure, including Zell, should pay into that settlement.

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One comment:

  1. jack (me) Aug. 20, 2010 at 10:43 a.m.

    Given that the 18 months exclusivity has run out (the law was amended because United managed to drag it out for three years) and it has appeared that for at least the last 6 months, Zell’s interests have had no skin in the game, the strict priority rule indicates that excluding them is the proper way to go. Just leave the keys to the house and let the bankers walk in.

    Hopefully, this is also an indication that management’s plan for golden parachutes is also out of the discussions.