Failed negotiations may prompt free-for-all in Tribune Co. bankruptcy reorganization plan - Protracted legal battle possible as creditors free to subm

Failed negotiations may prompt free-for-all in Tribune Co. bankruptcy reorganization plan - Protracted legal battle possible as creditors free to submit their own plans for media company, but there are signs of hope
By Michael Oneal
Copyright © 2010, Chicago Tribune
9:28 p.m. CDT, August 20, 2010
http://www.chicagotribune.com/business/feed/ct-biz-0821-tribune-20100820,0,2192525.story



The contentious Tribune Co. bankruptcy case lurched into a new state of uncertainty Friday as a settlement at the heart of the company's proposed reorganization plan fell apart and big creditors said they would attempt to negotiate a deal without Tribune's participation.

The developments threaten to push the 20-month-old case past the two-year mark and raise the specter that it could devolve into protracted litigation.

At a hearing in Delaware on Friday, Tribune Co. lead attorney James Conlan said that in the wake of failed negotiations, the Chicago-based company would file an amended reorganization plan next week that reflects management's own best estimate of what is fair for everybody.

Tribune Co., which owns the Chicago Tribune, the Los Angeles Times and other media properties, still hopes to win widespread support for its plan, Conlan said.

But he warned that if enough creditors balk, Tribune Co. would launch litigation over claims central to the case that a 2007 leveraged buyout led by Chicago real estate magnate Sam Zell rendered the company insolvent.

"The debtor has tried mightily to bring the parties together (to settle the LBO claims)," Conlan said. "That hasn't happened."

Until recently Tribune Co. management had been at the center of settlement discussions by virtue of its exclusive right under bankruptcy law to file a reorganization plan. But in early August that right expired and other parties now have the opportunity to propose alternative plans without the approval of U.S. Bankruptcy Judge Kevin Carey.

If that happens, said Douglas Baird, a bankruptcy expert at the University of Chicago Law School, each plan would have to go through its own months-long disclosure, voting and confirmation process.

In the interest of avoiding such delays, management could rejigger its plan to reflect an agreement hammered out among creditors. But several people close to the situation, who asked not to be named because negotiations are ongoing, said Tribune management is no longer a factor in those talks.

"These are discussions that the debtors are not a part of anymore," one source said.

The original management-brokered settlement began to collapse late last month when court-appointed independent examiner Kenneth Klee filed a report evaluating charges originally raised by junior bondholders that the Zell LBO was an example of "fraudulent conveyance," meaning the transaction rendered the company insolvent from the start. If the charges were proven, claims held by senior lenders to the deal could be wiped out, leaving more for the junior creditors.

All sides of the table found things to like in Klee's massive report, causing parties to realign their negotiating positions. The findings also emboldened new parties in the case, like litigious hedge fund Aurelius Capital Management, which has been amassing junior bonds on the open market hoping to profit from a settlement.

By Friday's hearing, senior creditors JPMorgan Chase and Angelo, Gordon & Co., the two most powerful signatories to the original settlement, had backed out of the deal and signaled that they would negotiate without Tribune Co. management. Conlan, meanwhile, told the court several creditor groups were stubbornly overestimating their leverage and that it might ultimately require the LBO litigation to sort it all out.

Shortly after Carey took the bench, the degree of discord became obvious. Lawyers for the unsecured creditors and JPMorgan complained that Tribune Co. would not consent to delay the hearing slightly to allow them extra time for 11th-hour negotiations.

"They said absolutely not!" said a JPMorgan attorney, "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."

Whether the creditors themselves can find common ground where Tribune Co. failed remains to be seen. Despite all the conflict, there were faint signs of hope.

The most powerful holdout to the original settlement, for instance, was a large group of senior creditors led by Oaktree Capital Management. The group has argued that while it has little exposure to the LBO claims, JPMorgan and others who do have exposure are asking it to fund a $450 million payout to junior creditors.

Months before Tribune Co.'s exclusivity ran out, Oaktree asked unsuccessfully for Carey's permission to file a competing plan that would largely ignore junior claims. Now that the group is free to file the plan, it hasn't done so, causing some sources to conclude that it may be willing to keep talking.

mdoneal@tribune.com