Resolution hearing opens in Tribune Co. bankruptcy

By Michael Oneal
Posted March 7 at 6:31 p.m.

WILMINGTON, Del. – The warring creditors in Tribune Co.’s bankruptcy case provided few surprises Monday as they fired their opening shots in litigation aimed at resolving a case that one lawyer said had come to resemble “water torture.”

Lawyers for the case’s two principal groups of combatants presented U.S. Bankruptcy Judge Kevin Carey with stark choice:

He can confirm a restructuring plan favored by senior creditors, the company and many unsecured creditors based on a decidedly imperfect settlement of the legal claims surrounding the company’s ill-fated 2007 leveraged buyout.

Or he can bless a competing plan offered by junior bondholders that would open the case to massive litigation, where each creditor would have a chance to seek its own recovery in the courts.

Carey himself offered a possible third outcome at the end of a pair of relatively brief opening statements from each side. Lawyers may convince him that both plans are confirmable, he said, in which case he would have to choose between them. But he also hinted that that they might convince him that neither plan is confirmable.

“What then?” he warned obliquely.

Lawyers  suggested Carey’s statement at the opening of what promises to be a highly contentious litigation was an attempt to coax both sides to the negotiating table to hammer out a global settlement that could end the case with a minimum of expensive, time-consuming court time.

Chicago-based Tribune Co., which owns the Chicago Tribune and other media properties, fell into bankruptcy more than two years ago, a year after going private.

Representatives from both sides have said repeatedly in the long-running case that they would welcome a consensual resolution. But on Monday compromise seemed the furthest thing from anybody’s mind.

With a stack of evidence boxes largely obscuring one wall (including the courtroom clock), the hearing opened with Aurelius Capital Management, the litigious leader of the junior creditor group, complaining that Citigroup, one of the large banks that anchor the senior creditor group, had improperly withheld evidence vital to its case. Citigroup lawyers  argued otherwise. Carey ordered that more position papers on the matter be filed overnight.

James Johnston, an attorney for senior creditors Oaktree Capital Management and Angelo, Gordon & Co., used the water torture analogy to describe a similar dispute between Aurelius and Angelo, Gordon.

Carey lit up at the comparison. “Brother, you’re telling me,” he said.

Barring an unexpected settlement, Carey has set aside two weeks for the confirmation hearings. They will focus on demonstrating which of the two plans provides the best chance of resolving claims that the 2007 leveraged buyout, led by Chicago financier Sam Zell, was a case of fraudulent conveyance, meaning it left Tribune Co. insolvent from Day One.

If the fraudulent conveyance claims, which have been pressed by junior creditors such as Aurelius, can be proven, the court could invalidate senior obligations stemming from some $8 billion in debt used to finance the transaction. That would leave much more value to pay off junior creditors.

The confirmation hearings aren’t designed to litigate that issue. Rather, Carey is being asked to decide the fairest approach to resolve the matter.

Tribune Co., the Official Committee of Unsecured Creditors, JPMorgan Chase and hedge funds Oaktree Capital Management and Angelo, Gordon & Co. have proposed settling the case by offering junior bondholders around 35 cents on the dollar. But the junior group, led by Aurelius, hopes to squeeze out more by dragging the senior group into years of ligation — or presenting a credible threat of doing so.

James Sottile of law firm Zuckerman Spaeder, who argued for senior creditor plan, spent much of his opening statement laying out a list of reasons the Aurelius plan was unrealistic. Though recoveries might theoretically be higher through a long litigation, a series of legal hurdles made that highly unlikely, he said. Aurelius “is making a bet not just for themselves but for everybody else in this case (that litigation will prove out),” Sottile said, adding that most creditors don’t want “to bet the farm.”

Aurelius attorney David Zensky of Akin Gump Strauss Hauer & Feld responded that the Tribune Co. buyout was “doomed to fail” from its inception. Evidence would show that fraudulent conveyance litigation has a much better chance of maximizing recoveries than the settlement promoted by senior lenders. He also said Aurelius will argue that the senior lender plan uses a valuation for the company that is months old and doesn’t reflect recent gains. That, in turn, he said, undervalues the fixed recovery assigned to the junior bondholders.

Moreover, Zensky argued, the evidence will show that Aurelius was never seriously invited to participate in those settlement talks, making the pact a one-sided affair improperly negotiated.

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