Tribune committee tells court plan is not unfair to senior noteholders

By Jim Witters

Wilmington, Del. March 6 - The Tribune Co.'s official committee of unsecured creditors argued Tuesday that the proposed plan of reorganization supported by the debtors, the committee and the lenders does not unfairly discriminate in its treatment of creditors and can be confirmed by the court.

The argument came during the second day of a two-day hearing in the U.S. Bankruptcy Court for the District of Delaware during which parties involved in the case presented their views on the proposed allocations under the plan.

Other issues considered March 6 included:

• The value at which the Phones holders' claims should be assessed in the plan. The Phones are the Tribune Co.'s exchangeable subordinated debentures due 2029; and

• Whether the Phones claims are subordinate, pari passu (equal to) or senior to the claim of EGI-TRB, LLC.

Judge Kevin J. Carey issued no decisions on the allocation disputes during the hearing.

Unfair discrimination

The Tribune Co. senior noteholders argued that the so-called DCL plan of reorganization cannot be confirmed, because it infringes on the contractual rights and constitutes unfair discrimination.

The plan calls for "abnormal subordination," said David S. Rosner, representing Law Debenture Trust Co. of New York and Deutsche Bank Trust Co. Americas.

Rosner said the plan violates the bankruptcy code by not spinning up all third-party recoveries by the Phones group to the senior creditors.

The allocations under the plan would harm the senior noteholders by increasing the Phones recovery by 53% to 73%, Rosner said.

"And we have to pay for that," he said.

The senior noteholders contend that the recoveries should be calculated on the assets of the estate only and exclude any recoveries from third parties, such as the potential Phones recovery in pending litigation over fraudulent conveyances.

David M. LeMay, representing the creditors committee, said Section 1129(b)(1) of the Bankruptcy Code begins with a word - "notwithstanding" - that negates the section of the code (510(a)) that prohibits impinging upon the contractual rights of the senior noteholders.

In crafting that section, Congress "specifically authorized" the bankruptcy court to approve a cram-down on a dissenting class despite the existence of a subordination agreement, LeMay said.

The only constituency that Section 1129(b)(1) could apply to is an unsubordinated creditor who would otherwise benefit from a subordination agreement, LeMay said.

The maximum harm that could befall the senior noteholders under any scenario in the allocation disputes under court review amounts to about 8.5%, LeMay said. That falls far short of the 20% minimum a Congressional report identified as indicating unfair discrimination and further short of the 50% identified in case law, LeMay said.

Of the $439 million in claims made by the senior noteholders, $37 million remains in dispute, he said.

Rosner said the "notwithstanding" provision means that the subordination agreements should not be considered in determining whether the plan is fair and reasonable. But the section also means the subordination agreements are applied after the plan has been considered by the court.

The subordination agreements spin up money from other creditors, not from the debtor, he said.

Robert J. Stark, representing Wilmington Trust, said the court should decide the matter based on what each party was entitled to at the time the bankruptcy petition was filed. The court should not include any recoveries from third-party actions in its determination, he said.

The court cannot "take a contractual subordination entitlement and give it to someone else," Stark said.

Phones claims

David M. Zensky, representing Aurelius Capital Management, LP, said a group of the Phones claims should be based on a $58 million figure rather than the $481 million face amount of the notes.

He said that just before the bankruptcy petition was filed, some Phones holders exercised their option to exchange the notes for cash. About 2.6 million of the 4.5 million notes were tendered for exchange.

Under the global Phones note, each party was bound by the contract from the moment the notice of intent to exchange, he said.

After the petition was filed, the noteholders were not paid. Their claims should be based on the exchange rate, not on the face value, Zensky said.

Stark said the Phones claims should be calculated at the higher rate. He said Deutsche Bank and Tribune agreed to new procedures for exchanging the notes for cash and most of those seeking exchange were in the process when the bankruptcy petition was filed.

The Phones notes were being held by Deutsche Bank, and the noteholders had not been paid, so the notes should have been returned, Stark said.

In addition, about 237,000 of the notes were tendered, but never got into the process before the petition date, Stark said.

"If the amount is reduced, someone should be responsible for that," Stark said.

Carey said that was a good point and asked whether the person who breached the agreement should be responsible.

Stark responded that since the debtor did not come forward with the cash, the Phones notes still exist and should go back to the noteholders. Deutche Bank is still holding them, he said.

Judge Carey asked if he needed to decide this issue. If the court decides in favor of the Oaktree Capital Management, LP swap interests and in favor of the Times-Mirror Co. retirees in their allocation disputes, no money reaches the Phones.

Zensky said the court must decide, because the amount of the claims affects the amount being spun up to senior noteholders.

EGI-TRB or Phones subordinate

David J. Bradford, representing EGI-TRB, said the Phones are subordinate to EGI-TRB under the Phones indenture.

The indenture states that the Phones notes are subordinate to any note, except those that contain a provision in their indenture stating they are subordinate to the Phones.

The EGI-TRB indenture contains no such provision, Bradford said.

Martin S. Siegel, representing Wilmington Trust Co., said the Phones are a senior obligation as defined in the EGI-TRB indenture.

Carey asked whether he needs to make a decision on this issue if neither the Phones nor EGI-TRB "can grab any of the recoveries."

Bradford said, "Not at this time."

The parties have until noon March 9 to submit a two-page letter of rebuttal. Carey did not say when he planned to rule on the allocation disputes, but he said previously that he intends to "decide in very short order."

Tribune, a Chicago-based media company, filed for bankruptcy on Dec. 8, 2008. Its Chapter 11 case number is 08-13141.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.