Tribune judge rules allocation issues, sets $759 million Phones claim

By Jim Witters

Wilmington, Del., April 10 - The Tribune Co. bankruptcy judge decided seven key allocation issues in an opinion issued on Monday that could clear the way for confirmation of a plan of reorganization at a June 7 hearing.

In a 50-page opinion based on two days of courtroom testimony and written arguments from all parties, Kevin J. Carey ruled the following:

• The subordination provisions in the Phones indenture are applicable to distributions of the settlement proceeds and the creditors' trust proceeds. The Phones notes are subordinated debentures due in 2029, issued April 1, 1999, between Tribune and Wilmington Trust Co., as successor indenture trustee;

• The claim amount for the Phones noteholders should be more than $759 million;

• The third amended plan of reorganization's equal treatment of the senior noteholders and the other parent claims does not constitute unfair discrimination under the bankruptcy code;

• The EGI-TRB LLC notes are junior in priority to the Phones notes. The EGI-TRB notes are promissory notes with an aggregate principal of $225 million issued by Tribune;

• The beneficiaries of the Phones indenture subordination provisions are not entitled to receive post-petition interest prior to the Phones noteholders receiving payment of their claims;

• The subordination provisions of the EGI-TRB agreement are applicable to a distribution of settlement proceeds under the third amended plan, to a distribution of litigation trust proceeds and to a distribution of creditors' trust proceeds; and

• The issue of whether beneficiaries of the subordination provisions of the EGI agreement are entitled to post-petition interest prior to payment of the EGI note is not ripe for determination.

Allocation issues

In October, Carey denied confirmation of two competing plans of reorganization because neither met the requirements of the bankruptcy code.

In the subordination determination section of that ruling, Carey concluded that fraudulent transfer claims pursued by the litigation trust are not assets belonging to the debtors and could not be assets of the company that are subject to the subordination provisions of the Phones notes.

In Carey's Dec. 29 memorandum of reconsideration, he stated that the phrase "assets of the company" must be read broadly, and he amended the confirmation opinion to strike his subordination decision.

In November, the DCL plan proponents - the debtors; the official committee of unsecured creditors; Oaktree Capital Management, LP; Angelo, Gordon & Co., LP; and JPMorgan Chase Bank, NA - filed a third amended joint plan of reorganization that includes an allocation dispute protocol.

The protocol calls for a reserve for distributions to holders of allowed claims in certain classes that would be affected by unresolved disputes regarding inter-creditor priorities, particularly with respect to the Phones notes and the EGI-TRB LLC notes.

Carey heard testimony for two days in early March. He identified five questions about the Phones notes and two questions about the EGI-TRB notes.

Carey said resolution of the allocations disputes should occur before creditors are asked to vote on the proposed plan of reorganization.

Phones disputes

• Question 1: Are the Phones notes subordination provisions applicable to a distribution of settlement proceeds under the third amended plan or a distribution of creditors' trust proceeds?

Ruling: The Phones indenture subordination provisions apply to any distribution of settlement proceeds or creditors' trust proceeds.

Reasoning: Wilmington Trust argued that the proceeds of the litigation trust are not proceeds of the company and the subordination provisions of the Phones notes do not apply.

Carey wrote that the matters before the court "do not implicate application of the Phones notes' subordination provisions as to the litigation trust proceeds."

Instead, the court considered the application of the provisions to other distributions.

Carey considered the meaning of the term "assets of the company" under Illinois state law - which governs the Phones notes - and determined that the subordination provisions applied to a distribution of the litigation trust because of the "unqualified subordination language," the application of subordination provisions to all sources of payment and "the catch-all language of the pay-over obligation."

Wilmington Trust provided no "basis to differentiate between the litigation trust proceeds and the settlement proceeds or creditor's trust proceeds," Carey wrote.

• Question 2: What is the allowed amount of the Phones notes claim?

Ruling: The tendering noteholders' claims should be allowed in the amount that the Tribune was obligated to pay in exchange for the tendered notes.

According to the stipulation, the Phones claim amount should be about $759 million.

• Question 3: Is the third amended plan's treatment of the other parent claims class unfair discrimination?

Ruling: The proposed distributions in the third amended plan will result in a decrease to senior noteholders of less than 4% as a percentage of recover or 6.5% of the dollar amounts.

"Courts consider the issue of unfair discrimination have roundly rejected plans proposing grossly disparate treatment (50% or more) to similarly situated creditors, while at least two courts decided that unfair discrimination did not exist when the difference in recoveries was 4% or less," Carey wrote.

"The discriminatory effect on the dissenting class is immaterial and, therefore, no rebuttable presumption of unfair discrimination arises here," he wrote.

• Question 4: Are the Phones senior to the EGI-TRB notes in right of payment?

Ruling: The EGI-TRB notes are subordinate to the Phones notes.

Reasoning: The EGI agreement was written with the full knowledge that the Phones notes had been in existence for eight years and that the Phones indenture contained no express language stating that the Phones were junior to the EGI notes.

"If EGI intended to exclude the Phones notes from the senior obligations, the drafters would have included the Phones as one of the specific exceptions to senior obligations," Carey wrote.

• Question 5: Are the beneficiaries of the subordination provisions of the Phones indenture entitled to receive post-petition interest before the Phones noteholders receive payment of their claims?

Ruling: "The general rule in bankruptcy is that unsecured creditors are not entitled to recover post-petition interest unless the debtor is solvent."

"The record does not support a finding that the debtor is solvent."

EGI-TRB notes disputes

• Question 1: Are the subordination provisions of the EGI-TRB subordination agreement applicable to a distribution of settlement proceeds under the third amended plan, to a distribution of litigation proceeds or to a distribution of creditor's trust proceeds?

Ruling: The provisions are applicable.

Reasoning: EGI-TRB argued that fraudulent transfer claims are not "assets of the company," so its claims to those proceeds are not subordinated to the senior obligations in the distribution of the DCL plan settlement proceeds, recoveries by the litigation trust or recoveries by the creditors' trust.

EGI-TRB also claimed its subordination provisions do not contain the same broad language of the Phones indenture.

"The flaw in EGI's argument is the focus upon whether the fraudulent transfer claims belong to the debtors," Carey wrote.

That focus "fails to consider properly the interplay between claims under state law fraudulent transfer laws and the bankruptcy code," Carey wrote.

Under the laws of the state of Delaware, the terms "assets of the company" and "by or on behalf of the company" must be considered in the context of the subordination agreement as a whole and "considered in light of how that phrase would be understood by an objective reasonable third party," Carey wrote.

• Question 2: Are the beneficiaries of the subordination agreement governing the EGI-TRB notes entitled to received post-petition interest before the holders of the EGI-TRB notes claims receive payment on their claims?

Ruling: "I have determined that the EGI notes are junior subordinated debt, at the bottom of the Tribune's capital structure. At this point in the case, it is far from certain whether senior noteholders, including the Phones noteholders, will be paid in full. The issue of post-petition interest is an intercreditor issue, rather than a bankruptcy issue. I decline the invitation to parse through the unsettled law on this issue, especially since the issue is not ripe for adjudication on this set of facts," Carey wrote.

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

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