KEVIN J. CAREY, Bankruptcy Judge.
As detailed in its October 31, 2011 Opinion, this Court denied confirmation of two competing plans of reorganization for the Debtors because both plans failed to meet the requirements of Bankruptcy Code § 1129. In re Tribune Co., 464 B.R. 126 (Bankr.D.Del.2011) (the "Confirmation Opinion" or Tribune I). Three motions for reconsideration of the Confirmation Opinion were filed.
On November 18, 2011, the DCL Plan Proponents filed the Third Amended Joint Plan of Reorganization for Tribune Company and Its Subsidiaries (D.I. 10273)(the "Third Amended Plan").
Therefore, the Court has agreed to resolve the Allocation Disputes prior to plan solicitation and voting; however, all such determinations are subject to, conditioned upon and for the purpose of obtaining confirmation of a chapter 11 plan substantially in the form of the Third Amended Plan (D.I. 10273), hearing on which is scheduled to commence on June 7, 2012 (D.I. 11362).
The parties submitted proposed schedules for resolution of the "Allocation Disputes" and the process for confirmation of the Third Amended Plan. On January 24, 2012, the Court entered the Order Establishing Scheduling for (1) Resolution of the Allocation Disputes and (2) Consideration of the DCL Plan Proponents' Supplemental Disclosure Document, Solicitation Procedures Motion and Plan. (D.I. 10692) (the "Allocation Procedures Order"). The Allocation Procedures Order defined the "Allocation Disputes" as follows:
(Allocation Procedures Order, ¶ 2).
The Confirmation Opinion noted that the DCL Plan included two settlements known as the LBO Settlement and the Step Two Disgorgement Settlement (together the "DCL Plan Settlement").
The DCL Plan created (and the Third Amended Plan includes) a "Creditors' Trust" to pursue certain pre-petition LBO-Related Causes of Action arising under state fraudulent conveyance law (known as the "Disclaimed State Law Avoidance Claims") that may be assigned to the Creditors' Trust by creditors. (See Third Amended Plan, §§ 1.1.61, 1.1.84 and Article XIV). The plans also create a "Litigation Trust" to pursue unsettled LBO-Related Causes of Action and other specific claims (the "Preserved Causes of Action"). (See Third Amended Plan, §§ 1.1.138, 1.1.193 and Article XIII).
WTC argues that the DCL Plan Settlement includes the settlement of causes of action brought under chapter 5 of the Bankruptcy Code (the "Chapter 5 Causes of Action"), which are not assets of Tribune under Off I Comm. Of Unsecured Creditors of Cybergenics Corp. v. Scott Chinery (In re Cybergenics Corp.), 226 F.3d 237, 245 (3d Cir.2000). WTC further argues that the subordination provisions in the PHONES Notes apply only to a distribution of "assets of the Company" and, therefore, a distribution of DCL Plan Settlement proceeds (the "Settlement Proceeds") would not be subject to the subordination provisions in the PHONES Notes.
WTC concedes that the Reconsideration Decision determined that the PHONES Notes' subordination provisions applied to any proceeds distributed by the Litigation Trust, but argues, correctly, that no decision was made about applicability of the subordination provisions to distributions of the Settlement Proceeds or the Creditors' Trust proceeds.
WTC filed an appeal of the Reconsideration Decision.
The "Divestiture Rule" provides that an appeal divests the lower court of any further jurisdiction over the subject of the appeal. In re Washington Mutual, Inc., 461 B.R. 200, 217-18 (Bankr.D.Del. 2011) ("WaMu") citing (among other cases) Griggs v. Provident Consumer Disc. Co., 459 U.S. 56, 58, 103 S.Ct. 400, 74 L.Ed.2d 225 (1982) ("The filing of a notice of appeal is an event of jurisdictional significance — it confers jurisdiction on the court of appeals and divests the district court of its control over those aspects of the case involved in the appeal."); Venen v. Sweet, 758 F.2d 117, 120-21 (3d Cir. 1985) ("`Divest' means what it says — the power to act, in all but a limited number of circumstances, has been taken away and placed elsewhere."); In re Whispering Pines Estates, Inc., 369 B.R. 752, 757 (1st Cir. BAP 2007) ("It is well established that the filing of a notice of appeal is an event of jurisdictional significance in which a lower court loses jurisdiction over the subject matter involved in the appeal. The purpose of the general rule is to avoid the confusion of placing the same matter before two courts at the same time and preserve the integrity of the appeal process.") (citations omitted).
The WaMu Court recognized, however, that in a bankruptcy context the appeal of one ruling does not stay the entire bankruptcy case. WaMu, 461 B.R. at 218. As explained by one Court:
Whispering Pines, 369 B.R. at 758. Bankruptcy Rule 8005 provides that during an appeal "the bankruptcy judge may suspend or order the continuation of other proceedings in the case under the Code or make any other appropriate order during the pendency of an appeal on such terms as will protect the rights of all parties in interest." Fed.R.Bankr.P. 8005. See also In re Hagel, 184 B.R. 793, 798-99 (9th Cir. BAP 1995) (superceded by statute on other grounds) (holding that Rule 8005 "does not provide that the bankruptcy court must stay all proceedings" but that it has discretion to stay any proceedings.).
The WaMu Court determined that "the correct statement of the Divestiture Rule is that so long as the lower court is not altering the appealed order, the lower court retains jurisdiction to enforce it." WaMu, 461 B.R. at 219 citing In re Dardashti, No. CC-07-1311, 2008 WL 8444787, at *6 (9th Cir. BAP Feb. 12, 2008) (stating that "when there is no stay pending appeal, the bankruptcy court retains jurisdiction to enforce an order that is on appeal, on condition that in doing so, the bankruptcy court does not significantly alter or expand upon the terms of that order."); Hagel, 184 B.R. at 798 ("courts
In WaMu, the Court held that it retained jurisdiction to consider confirmation of a modified plan, even though the plan authorized the transfer of certain securities, the ownership of which was the subject of a pending appeal. The modified plan's treatment of the securities was consistent with the Court's prior decision. The WaMu Court decided that confirmation was not a request to modify the appealed order, but to enforce it. WaMu, 461 B.R. at 220. Judge Walrath stated that the appellant had not moved for a stay pending appeal and, therefore, declined to exercise discretion under Rule 8005 not to consider the confirmation just because it might render the appeal moot.
The jurisdictional question currently before me is not as difficult as the one presented in WaMu. The matters before me do not implicate application of the PHONES Notes' subordination provisions as to the Litigation Trust proceeds; instead the issues now before me require consideration of the applicability of the PHONES subordination provisions to other distributions. Therefore, the Allocation Disputes do not seek to modify the Reconsideration Decision and my decision on these disputes will not change the Reconsideration Decision. This Court has jurisdiction to consider the Allocation Disputes.
Although the issue before me applies to different distributions than previously considered in the Reconsideration Decision, WTC's arguments are the same: (i) that the DCL Plan Settlement includes resolution of Chapter 5 Causes of Action, (ii) that Chapter 5 causes of action are not assets of Tribune Company pursuant to the Third Circuit Court of Appeals' decision in Cybergenics, (iii) that the PHONES Notes' subordination provisions only apply to distributions of "assets of the Company" and, (iv) therefore, the subordination provisions do not apply to a distribution of DCL Plan Settlement Proceeds or Creditors' Trust proceeds.
Bankruptcy Code § 510(a) provides that "[a] subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable non-bankruptcy law." Determining the meaning of the phrase "assets of the Company" as it is used in the PHONES Indenture requires consideration of basic rules of contract interpretation. This is precisely the exercise that was undertaken in the Reconsideration Decision. As required by Illinois state law (which is applicable pursuant to Article 1.12 of the PHONES Indenture), I considered the phrase "assets of the Company" in light of the entirety of the PHONES Indenture and determined that the subordination provisions applied to a distribution
In the Confirmation Opinion, this Court was asked to determine the outstanding claim amount of the PHONES Noteholders but, due to an insufficient record, the issue was not resolved. (See Tribune I, 464 B.R. at 195-97). The parties have now presented additional evidence, including a Stipulation by and among the Debtors, Aurelius Capital Management, WTC, Barclays Bank PLC, and Waterstone Capital Management, L.P. on certain facts relevant to the Allocation Disputes and the determination of the Allowed Amount of the PHONES Claim (the "Stipulation"). (ADH Ex. 115).
Prior to the Debtors' bankruptcy filing, and as permitted under the PHONES Indenture and the Global Note, some PHONES Noteholders attempted to exchange their Notes for cash, but, due to the intervening bankruptcy, those Noteholders never received payment from Tribune. The practical effect of a successful exchange entitled a PHONES Noteholder to receive cash in an amount, as it turns out, that is lower than the amount due to those PHONES Noteholders who did not tender their notes for exchange. This dynamic has generated the dispute about whether the claim amount should be reduced by the amount of those PHONES Notes that were presented for exchange.
The terms of the form of global note (the "Global Note") (ADH Ex. 3) provide that the holder of each PHONES (a "Holder") has a right at any time and from time to time, to exchange (the "Exchange Right") each PHONES Note for an amount of cash based on the value of certain reference stock. (Stipulation, ¶ 1). Pursuant to the Global Note, with respect to any PHONES held through the Depository Trust Company ("DTC"), the Holders may exercise their Exchange Right through the DTC ATOP system by "delivering an agent's message and delivering the PHONES of such Holder to the Trustee's DTC participant account." (Stipulation, ¶ 2). Upon delivery of a notice from any Holder (the "Exchange Notice") to the Indenture Trustee, Tribune is obligated to pay "the amount due upon exchange as soon as reasonably practicable" but in no event "later than ten Trading Days after the date of such Exchange Notice." (Stipulation, ¶ 3). Pursuant to the Global Note, Tribune is required to deliver an officer's certificate with respect to any received Exchange Notice specifying the exchange amount to be paid and the date such amount would be paid (the "Exchange Payment Date"). On the Exchange Payment Date, Tribune is required to deposit with the Indenture Trustee the due exchange
In September 2008, Tribune and Duetsche Bank Trust Company Americas ("DBTCA") determined that the "mechanism outlined in the [Global] note is obsolete and will not work" because the DTC ATOP System no longer worked for those types of trades. (Stipulation, ¶ 8). Therefore, Tribune and DBTCA agreed on a revised form of exchange notice (the "Revised Exchange Notice") and revised PHONES exchange instructions for DBTCA. (Stipulation, ¶ 9). Pursuant to the Revised Exchange Notice, to the extent the new "Exchange Procedures" modified the procedures in the Global Note, they "shall supercede and replace the procedures set forth in the [Global Note]." (Stipulation, ¶ 11).
The Exchange Procedures attached to the Revised Exchange Notice included the following:
On the Exchange Payment Date (no later than 10 Trading Days following Exchange Date):
(Stipulation, ¶¶ 14-16; ADH Ex. 94). "DWAC" stands for Deposit/Withdrawal At Custodian, which is the automated system for deposits and withdrawals of securities run by the Depository Trust Company. (Stipulation, ¶ 17). In an email dated September 17, 2008 from DBTCA's Vice President to Tribune's outside counsel, DBTCA stated: "When [DBTCA] accept[s] the DWAC it means that we match with the instructions the holder has put up. Accepting the DWAC will remove the
Beginning November 26, 2008 and continuing through the December 8, 2008 (the "Exchange Period"), holders of 3,093,941 PHONES in 17 different exchanges tendered their PHONES for exchange (the "Tendering Noteholders"), but did not receive payment from Tribune. (Stipulation, ¶ 24; ADH Ex. 91). Notices for the 17 exchanges given during the Exchange Period were delivered by DBTCA to Tribune. (Stipulation, ¶ 25). According to DBTCA's records, 14 exchanges were accepted into DWAC and 3 exchanges were not. (Stipulation, ¶ 26).
The Debtors' chapter 11 cases were commenced on December 8, 2008. By letter dated December 30, 2008, DBTCA advised Tribune that it had "received a number of requests from the PHONES holders seeking to withdraw their election to exercise [of] the Exchange Option ... [and] requests that [Tribune] advise the Trustee and WTC as to whether it will honor the [w]ithdrawal [r]equests." (Stipulation, ¶ 30).
By letter dated January 14, 2009, Tribune advised DBTCA that "the Company considers each election to exercise the Exchange Right pursuant to an Exchange Notice submitted by a holder of PHONES to be irrevocable. Accordingly, the company is not prepared to honor any [w]ithdrawal [r]equest." (Stipulation, ¶ 31).
The claim amount of the PHONES Noteholders depends upon the rights of the Tendering Noteholders at the time the bankruptcy petition was filed on December 8, 2008. See Nantahala Capital Partners, LP v. Washington Mutual, Inc. (In re Washington Mutual, Inc.), 464 B.R. 656, 668 (Bankr.D.Del.2012)(deciding that equity holders' interests remained only equity interests when the right to elect a cash payment did not arise as of the bankruptcy petition date) citing Carrieri v. Jobs.com, Inc., 393 F.3d 508, 522 (5th Cir.2004) (holding that warrants with cash redemption provision are equity interests unless the right to receive a cash payment matured before the petition date). See also The Minority Voting Trust v. Orange County Nursery, Inc. (In re Orange County Nursery, Inc.), 439 B.R. 144, 151 (C.D.Cal.2010) (deciding that the bankruptcy court correctly noted that the nature of the minority shareholders' interest "depends on its position at the time the bankruptcy petition was filed.").
The parties do not dispute that the Tendering Noteholders delivered their PHONES Notes to DBTCA for exchange prior to the Debtors' petition date. Although three of the exchanges were not accepted into the DWAC system, Tribune received notice of all 17 exchanges. The
WTC argues that the Tendering Noteholders' attempted exchange was ineffective because payment was not received from Tribune. WTC argues that DTC wrongfully cancelled the Notes because the Revised Exchange Procedures provided that the Notes would be cancelled on the Exchange Payment Date — after payment by Tribune. WTC further argues that this unauthorized termination of the Notes should be treated like "mutilated, destroyed, lost or stolen" securities under Section 3.06 of the PHONES Indenture, requiring Tribune to issue a new security with the same benefits as other securities under the Indenture, or pay the security. (ADH Ex. 2).
Ultimately, cancellation of the Notes (wrongful or otherwise) is not relevant to this inquiry. The relevant inquiry is: what was the obligation of Tribune with respect to the Notes as of the petition date? As of the petition date, here, Tribune's obligation to make the Exchange Payments was set due to (i) the Tendering Noteholders' delivery of the Exchange Notices and the Notes, and (ii) Tribune's acknowledgment of receipt of all of the Exchange Notices (including the Exchange Notices for those three exchanges that were not accepted in DWAC) by setting the Exchange Payment Date and determining the amount of the payments. Tribune was complying with the Exchange Procedures when the bankruptcy filing interrupted that process and prevented payment. There is no need to treat the notes as destroyed, lost or stolen. Cancellation of the Notes, wrongfully or not, is not the event that triggers the parties' rights and obligations.
Aurelius contends that the language of the Indenture supports this conclusion because the Indenture's definition of the term "Outstanding" specifically excludes "Securities theretofore cancelled by the Trustee .... or delivered to the Trustee or any Authenticating Agent for cancellation." (ADH Ex. 2, p. 4 (emphasis added)). Aurelius notes that, regardless of whether the Notes should have been cancelled before payment, the parties should agree that the Notes were delivered for cancellation. But WTC does not agree, and argues that the Notes should not have been delivered for cancellation before the
Next, WTC argues that the Tendering Noteholders are entitled to rescind the Exchange Notices since Tribune failed to make the required payment. By letter dated December 30, 2008, DBTCA advised Tribune that it had received a number of withdrawal requests, but Tribune refused to honor them. The parties agreed that "[n]either the PHONES Indenture, the Global Note nor the Revised Exchange Notices address whether or not an election to tender is revocable or contain any provisions as whether or not a tender is revocable." (Stipulation, ¶ 22). The parties do not cite to any provision in the Bankruptcy Code that would allow rescission post-petition.
"Rescission is an extraordinary remedy that involves the judicial termination of a party's contractual obligation." Bucciarelli-Tieger v. Victory Records, Inc., 488 F.Supp.2d 702, 712 (N.D.Ill.2007). Under Illinois law, rescission is generally granted only for fraud, mutual mistake or breaches of contract so material that they go to the very root of the contract. Id. See also Scott & Fetzer Co. v. Montgomery Ward & Co., Inc., 129 Ill.App.3d 1011, 1021, 85 Ill.Dec. 53, 473 N.E.2d 421, 429 (Ill.App.Ct.1984) (deciding that rescission is equitable in nature and the trial court did not err by denying equitable relief when an adequate remedy at law exists). The Noteholders ask for rescission because Tribune failed to pay the exchange amounts. Rescission is not appropriate here when the Tendering Noteholders' have an adequate remedy in law for Tribune's breach of contract: a claim for the amount the Tendering Noteholders were entitled to receive if Tribune had complied with the Exchange Notices.
Therefore, the Tendering Noteholders' claims should be allowed in the amount that Tribune was obligated to pay in exchange for the tendered Notes. According to the Stipulation, the PHONES Claim Amount should be $759,252,932, calculated as follows:
PHONES Claim
Amount
Number of (calculated at $155.4944
PHONES per PHONES)
Original PHONES 8,000,000 $1,243,955,537
Less Exchanges not subject to challenge (prior to (386,649) ($60,121,771)
the Exchange Period)
subtotal 7,613,351 $1,183,833,767
Less Exchanges subject to determination (tendered (3,093,941) ($481,090,630)
during the Exchange Period, including the rejected
DWAC tenders)
subtotal 4,519,410 $ 702,743,137
Add Exchange Value of Accepted DWAC Tenders $ 56,509,795
(including Rejected DWAC tenders)
Total 4,519,410 $ 759,252,932
In their objection to the DCL Plan, the Senior Noteholders argued that the DCL Plan contravened the requirements of Bankruptcy Code § 1129(b)(1) that a plan "not discriminate unfairly" and Bankruptcy Code § 510(a), providing that subordination agreements are enforceable in a bankruptcy case, because, they argue, the DCL Plan allowed other unsecured creditors of Tribune to reap the benefits of the PHONES and EGI subordination provisions undeservedly. This issue of "unfair discrimination" was discussed, but not resolved, in the Confirmation Opinion because the record was unclear (Tribune I, 464 B.R. at 198-199), and the issue remains unresolved with respect to the Third Amended Plan.
The Third Amended Plan provides the Senior Noteholders and the Other Parent Claims
Underlying the Senior Noteholders' argument is the position that the Other Parent Claims do not fall within the PHONES Indenture's definition of "Senior Indebtedness" or the EGI Subordination Agreement's definition of "Senior Obligations." These issues comprise separate Allocation Disputes argued by the parties at the hearing. However, based upon my decision on the issue of unfair discrimination, I need not decide each of those separate disputes. For this purpose, I could assume (without deciding) that the none of the Other Parent Claims are Senior Indebtedness or Senior Obligations and are not entitled to the benefit of either subordination agreement.
Vol. C COLLIER ON BANKRUPTCY App. Pt. 4(d)(i) at 416-418 (15th ed. rev.). The Senior Noteholders argue that this legislative history compels the conclusion that the Third Amended Plan unfairly discriminates against the Senior Noteholders by treating the Senior Noteholders class and the Other Parent Claims class equally.
The legislative history is not determinative for analyzing this issue, especially in light of the numerous developments in case law, discussed below, on this particular issue since the Code's enactment. Further, the examples of unfair discrimination in the legislative history have been described as "roundabout, almost otiose." Bruce A. Markell, A New Perspective on Unfair Discrimination in Chapter 11, 72 Am.Bankr.L.J. 227, 237-38 (1998) (hereinafter, Markell at 237). See also Armstrong, 348 B.R. at 121 ("Unfair discrimination is not defined in the Bankruptcy Code, nor does the statute's legislative history provide guidance as to its interpretation."). I agree. The legislative history is useful for confirming that the concept of unfair discrimination may be applied to examine facts such as those before me, but further analysis must be viewed in light of the plain language of the statute and applicable decisional law.
In re TCI 2 Holdings, LLC, 428 B.R. 117, 141 (Bankr.D.N.J.2010). The Third Circuit reviewed the meaning of "notwithstanding" in the context of a different Code section, writing:
In re Goody's Family Clothing, Inc., 610 F.3d 812, 817 (3d Cir.2010). Therefore, the meaning of "notwithstanding section 510(a) of this title" means that § 1129(b) is applied without prevention or obstruction of any applicable subordination agreements.
When considering whether a plan complies with the unfair discrimination test, the Armstrong Court recognized that several courts have adopted a rebuttable presumption test, first proposed by then professor, now Bankruptcy Judge, Bruce A. Markell. Armstrong, 348 B.R. at 121. Professor Markell wrote:
Markell at 249-250. This rebuttable presumption test has been adopted or applied by a number of courts. See Armstrong, 348 B.R. at 122, In re Unbreakable Nation Co., 437 B.R. 189, 202 (Bankr.E.D.Pa. 2010), In re Quay Corp. Inc., 372 B.R. 378, 386 (Bankr.N.D.Ill.2007), In re Greate Bay Hotel & Casino, Inc., 251 B.R. 213, 231 (Bankr.D.N.J.2000), In re Dow Corning Corp., 244 B.R. 696, 701-03 (Bankr. E.D.Mich.1999). I join the courts adopting the rebuttable presumption test for analyzing the unfair discrimination issue of Bankruptcy Code § 1129(b).
The presumption of unfair discrimination does not arise unless the plan's treatment of two classes results in "a materially lower percentage recovery for the dissenting class" or an allocation of "materially greater risk to the dissenting class." Materiality is important because "[t]he pertinent inquiry is not whether the plan discriminates, but whether the proposed discrimination is `unfair.'" Armstrong, 348 B.R. at 121. Minor or immaterial differences in plan treatment do not rise to the level of unfair discrimination. See Unbreakable Nation, 437 B.R. at 203 (Relying, in part, on the rebuttable presumption test, the court determined that the difference between 1.5% and 1.25% in a proposed distribution to two classes was not unfair discrimination); Greate Bay Hotel, 251 B.R. at 231 (deciding that the difference between an 80% and 76% distribution was not a "materially lower percentage recovery" that would constitute unfair discrimination). Disparity of risk has not been raised as an issue in this present dispute. At issue is whether the plan's equal treatment of the Senior Noteholders and the Other Parent Claims results in a materially lower recovery for the Senior Noteholders.
The Recovery Scenarios admitted into evidence show the change in the Senior Noteholders' recovery due to allowing the Other Parent Claims to benefit from the subordination provisions:
percentage recovery if only percentage recovery to senior noteholders benefit senior noteholders percentage from subord. provisions under the Plan difference Initial Distributions 35.9% 33.6% 2.3% Initial Distributions plus $250mm 49.4% 46.6% 2.8% net Litigation Trust proceeds Initial Distributions plus $500mm 61.4% 58.2% 3.2% net Litigation Trust proceeds Initial Distributions plus $750mm 73.5% 69.8% 3.7% net Litigation Trust proceeds
(See ADH Ex. 89).
Courts considering 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. A chart prepared by the Creditors's Committee summarized those cases as follows:
Dissenting Class Preferred Class
Case % Recovery % Recovery Conclusion
In re Greate Bay Hotel & 76% 80% no unfair discrimination
Casino, Inc., 251 B.R. 213
(Bankr.D.N.J.2000)
In re Unbreakable Nation 1.25% 1.78%22 no unfair discrimination
Co., 437 B.R. 189 (Bankr.
E.D.Pa.2010)
In re Crosscreek Apartments, 50% 100% unfair discrimination
Ltd., 213 B.R. 521,
537-38 (Bankr.E.D.Tenn.
1997)
In re Cranberry Hill Assocs., 50% 100% unfair discrimination
L.P., 150 B.R. 289, 290-91
(Bankr.D.Mass.1993)
In re Barney & Carey Co., 15% 100% unfair discrimination 170 B.R. 17, 25-26 (Bankr. D.Mass.1994) In re Tucson Self-Storage, 10% 100% unfair discrimination Inc., 166 B.R. 892, 898 (9th Cir. BAP 1994) In re Aztec Co., 107 B.R. 585, 3% 100% unfair discrimination 589-91 (Bankr.M.D.Tenn. 1989)
(Creditors Comm. Brief, D.I. 1000, at 8).
The Senior Noteholders argue that the discriminatory treatment in this case is grossly disproportionate when viewed in terms of the percentage increase to the Other Parent Creditors receiving the benefit of the subordination provisions. If viewed by looking at the increase in payment of the proposed Initial Distribution to the Other Parent Claims, the SWAP claimant's payment increases from $36,818 to $54,403 (47.8% increase) and the Retirees claimants' payment increases from $23,043 to $35,275 (53% increase). When viewed in terms of percentage of recovery, the SWAP claimants' recovery increases from 24.4% (if only the Senior Noteholders benefit) to 36% under the Plan — an 11.6% increase; likewise the Retirees recovery increases from 21.9% (if only the Senior Noteholders benefit) to 33.6% under the Plan — an 11.7% increase.
However, the analysis for determining whether the discriminatory treatment is unfair should be viewed by its effect on the dissenting class. See Greate Bay Hotel, 251 B.R. at 231-32 ("confirmation would be denied only if there was a `materially lower' percentage recovery for the dissenting class" citing the Markell rebuttable presumption test), see also Legislative History, supra, ("[the unfair discrimination test] preserves just treatment of a dissenting class from the class's own perspective."). As shown above, the proposed distributions in the Third Amended Plan will result in a decrease to the Senior Noteholders' percentage of recovery of less than four percent.
The parties dispute whether the PHONES Notes or the EGI Notes are senior to each other in right of payment. For the following reasons, I conclude that the EGI Notes are subordinate to the PHONES Notes.
On the same date the EGI Notes were executed, EGI-TRB, LLC entered into a Subordination Agreement (the "EGI Subordination Agreement") (ADH Ex. 8) that was "in favor of the holders of Senior
(ADH Ex. 8 at 1). WTC argues that because the PHONES Indenture does not does not expressly state that it is subordinate to the EGI Notes, the PHONES Notes are Senior Obligations. Moreover, WTC points out that the PHONES Indenture could not expressly reference the EGI Notes since the PHONES Indenture was entered into in 1999, while the EGI Notes were issued in December 2007. WTC further argues that the EGI Subordination Agreement was written with full knowledge that the PHONES Notes had been in existence for eight years and that the PHONES Indenture had no express language stating that the PHONES Notes were pari passu or 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.
On the other hand, EGI argues that PHONES Notes were drafted in a way that contemplated that the PHONES Notes would be subordinated to Tribune's future debt, since the definition of "Senior Indebtedness" includes subordination to the Company's indebtedness "whether outstanding on the date of this Indenture or hereafter incurred, assumed or guaranteed." EGI also points out that the exception to "Senior Indebtedness" in the PHONES Indenture states:
(PHONES Indenture, § 14.01(2)(A) (emphasis added)). And, similar to WTC's argument, EGI argues that the EGI Notes and the EGI Subordination Agreement do not expressly provide that the EGI Notes are subordinated or pari passu to the PHONES Notes.
Thus I am faced with similar, but not identical, language in the subordination provisions relating to both the PHONES Notes and the EGI Notes. Clearly, the EGI Subordination Agreement was drafted with full knowledge of the existence of the PHONES Notes, so I begin my analysis with that agreement. Each party argues that the failure to specifically reference the PHONES Notes in the EGI Subordination Agreement — either as a Senior Obligation or as an exception to the Senior Obligations — falls in its favor.
The EGI Subordination Agreement provides that it should be interpreted according to the laws of the State of Delaware. (ADH Ex. 8 at ¶ 13). "A court applying Delaware law to interpret a contract is to effectuate the intent of the parties." JFE Steel Corp. v. ICI Americas, Inc., 797 F.Supp.2d 452, 469 (D.Del. 2011). The JFE Steel Court further wrote:
JFE Steel, 797 F.Supp.2d at 469.
The EGI Subordination Agreement provides that "Senior Obligations" includes all indebtedness of Tribune, with certain exceptions. I do not infer anything from the EGI subordination agreement's "failure" to list the PHONES Notes as a Senior Obligation — the document is written so that the term is broad. However, the exceptions to the Senior Obligations are ambiguous. On the one hand, it is reasonable to argue that the first exception to the definition of "Senior Obligations" refers to the PHONES Notes, since the PHONES Indenture expressly provides that PHONES Notes will be subordinated to future indebtedness. Parties must have intended that the phrase "express terms" in the exception language refers to the intent to be subordinated to future indebtedness generally — not specific future obligations, which are unknown.
However, because the PHONES Indenture has a similar "exception" to its definition of "Senior Indebtedness" (which would except the EGI Notes from the PHONES Notes' definition of "Senior Indebtedness") the argument becomes circular as the reader continuously refers to each document's "exception," thereby leading to the ambiguity.
Therefore, Court must review parol evidence to resolve the ambiguity presented by the "exceptions" to the Senior Obligations and the Senior Indebtedness. In Falco v. Alpha Affiliates, Inc., 2000 WL 727116 (D.Del.2000), the Court wrote:
Falco, 2000 WL 727116 at *8. WTC argues that there is "significant contemporaneous evidence demonstrating that the EGI-TRB Notes were intended to be the most junior debt in the capital structure, and junior to the PHONES." (D.I. 10999 at 33). EGI argues that parol evidence shows that the parties intended the EGI Notes to be junior only to LBO-related debt.
The parties do not dispute that in March 2007, Tribune made inquiries concerning the ratings impact of Tribune's contemplated LBO-Transaction. (ADH Ex. 151, Examiner's Report, Vol. I at 199). Moody's Investors Service ("Moody's") eventually issued a March 29, 2007 letter summarizing its assumptions and report its conclusions concerning the rating impact of the LBO. (ADH Ex. 125). Included in those conclusions is reference to the EGI Notes as "junior subordinated debt"
One set of correspondence related to the Moody's letter involved a "notching model" or "waterfall analysis" prepared by Moody's, which listed Tribune Company's debt instruments together with a "priority rank" for each. (ADH Ex. 124). Moody's ranked the PHONES Notes as a "6" priority, ahead of the "Zell Investment Subordinate Note" (i.e., the EGI Notes), which was given a "7" priority rank. (Id.). John Puchalla of Moody's sent the "notching model" via email to Chandler Bigelow, Tribune's Treasurer, asking him "to review the inputs." (Id.). Bigelow forwarded the Puchalla email to entities involved in structuring the LBO, including JPMorgan, Citigroup, and Merrill Lynch, and asked "Anyone have a view on the PHONES vs. Zell note — is the PHONES [Note] senior?" (the "Bigelow Email") (ADH Ex. 123). He received the following responses:
In preparing his response to the Bigelow Email, Peter Cohen of JPMorgan contacted another JPMorgan employee, Joachim Sonne, who advised by email:
(ADH Ex. 128). The parties agreed that ADH Exhibits 116-136 are admissible under the business records exception to hearsay (Fed.R.Evid. 803(6)). However, EGI objects to the admissibility of ADH Ex. 128 on the grounds of double hearsay, because the email contains a statement attributed to Hochschild, an analyst at EGI, who was not copied on the email and, in a recent deposition, stated that he has no recollection of making the statement. (See ADH Ex. 157 at 55:5-56:3). WTC argues that ADH Ex. 128 overcomes the double hearsay objections: the first layer of hearsay is overcome by the parties' agreement that the email is admissible under the business records exception, and the second layer of hearsay related to the Hochschild statement is overcome under Fed.R.Evid. 801(d)(2)(D), which provides that a statement is not hearsay if "[t]he statement is offered against an opposing party and ... was made by the party's ... employee on a matter within the scope of that relationship and while it existed."
As further evidence, ADH Ex. 138 demonstrates that another Tribune officer, Gary Weitman, told a reporter from the New York Times on April 4, 2007, that the "Zell Note will be fully subordinated, just above common equity." (ADH Ex. 138 at 3).
In rebuttal, EGI offers deposition testimony of William Pate, who was one of the leaders of EGI's team of professionals who structured and negotiated the 2007 LBO. (ADH Ex. 156 at 10:24-11:5). Pate testified that the documentation presented by WTC, including the terms sheets and information provided to Moody's, were relevant to a combined note and warrant received by EGI at Step One of the LBO, and that the deal changed before the EGI Notes were provided at Step Two. (Id. at 108:4-110:13). He stated that, for Step Two, the parties used a different structure that separated the note and the equity warrant, making the note "hard" and "independent" for tax reasons. (Id. at 17:20-19:15). Pate also assumed the Step Two EGI Notes would be senior to the PHONES Notes, stating: "My view of the PHONES was they were a convertible subordinated security. I wouldn't say I had a specific understanding, but I had seen other convertible subordinated securities and assumed that they were similarly subordinated." (Id. at 15:21-16:2). However, at the deposition, Pate was uncertain whether his understanding of the EGI
Pate's testimony regarding his subjective understanding of the priority between the EGI Notes and the PHONES Notes at Step Two of the LBO is not helpful. "[I]n order to interpret contracts with some consistency, and in order to provide contracting parties with a legal framework which provides a measure of predictability, the courts must eschew the ideal of ascertaining the parties' subjective intent and instead bind parties by the objective manifestations of their intent." Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001, 1009 (3d Cir. 1980).
(ADH Ex. 5 at ¶ 2(e)). The term "Senior Obligations" was changed in the Subordination Agreement executed along with the EGI Notes at Step Two, with the following changes marked in bold text:
(ADH Ex. 8 at 1). The changes in the subordination provisions from Step One to Step Two do not alter the language applicable to the PHONES priority dispute. The changes do not indicate any intent to ensure that, after the deal changed to a "hard" note, the EGI Notes would be senior to the PHONES Notes.
To further rebut WTC's parol evidence, EGI argues that three public filings with the SEC between April and July 2007 expressly described the EGI Note as "subordinated to the senior obligations of the Company." (ADH Ex. 137 at 7, ADH Ex. 139 at 2, ADH Ex. 145 at 114). EGI argues that the PHONES are not senior obligations of the Company. Although not capitalized, this language may refer to the term "Senior Obligations" as defined in the Subordination Agreement. However, this language does not directly refer to the
Finally, EGI also relies upon a letter dated June 2, 2009 from EGI's attorneys to the Debtors' attorneys stating that the PHONES Notes are junior to the EGI Notes. (ADH Ex. 150). This letter, written well after the LBO negotiations and after the chapter 11 filing, merely sets forth EGI's position on the subordination issue. "It is black letter law that lawyers' arguments are not evidence." Perry v. Shinseki, 783 F.Supp.2d 125, 135 (D.D.C. 2011). Thus, I accord no weight to this letter in determining this issue.
After review of the evidence offered by the parties, including parol evidence, I conclude that the collective, contemporaneous understanding of the parties negotiating the LBO was that the EGI Notes would be the most junior in Tribune's capital structure. Accordingly, I conclude that the PHONES Notes are senior to the EGI Notes.
The background of judicial analyses of the post-petition interest/subordination agreement issue was succinctly summarized by the Bankruptcy Court in 203 North LaSalle Street, as follows:
Bank of America v. North LaSalle Street Ltd. P'ship (In re 203 North LaSalle Street P'ship), 246 B.R. 325, 330 (Bankr. N.D.Ill.2000). Since the enactment of Bankruptcy Code § 510(a), however, some courts have questioned whether the Rule of Explicitness continues to be viable. Id. citing Chemical Bank v. First Trust of New York (In re Southeast Banking Corp.), 156 F.3d 1114, 1120-24 (11th Cir. 1998). Section 510(a) directs courts to enforce subordination agreements to the extent the agreement are enforceable under "applicable nonbankruptcy law." Southeast Banking, 156 F.3d at 1121 quoting 11 U.S.C. § 510(a). Lacking a federal statute or common law to guide in the interpretation
As noted earlier, the PHONES Indenture is governed by the law of the State of Illinois. (ADH Ex. 2 at § 1.12). Illinois law provides that, "in the absence of ambiguity, the terms of subordination agreements are to be construed according to their plain language." 203 North LaSalle, 246 B.R. at 329.
The definition of "Senior Indebtedness" in the PHONES Indenture addresses expressly the inclusion of post-petition interest:
(ADH Ex. 2, § 14.01(2))(emphasis added). This provision permits a senior noteholder to recover postpetition interest only to the extent permitted in the bankruptcy proceeding. The general rule in bankruptcy is that unsecured creditors are not entitled to recover postpetition interest, unless the debtor is solvent. Washington Mutual, 461 B.R. at 241 (citations omitted). See also In re W.R. Grace & Co., 2012 WL 310815 at *74 (D.Del. Jan. 30, 2012) ("[T]he general rule is that payment of any post-petition interest, whether at a default or non-default rate, on pre-petition unsecured claims is prohibited by the Bankruptcy Code." The exceptions to that rule (for oversecured creditors or when the debtor is solvent) were determined to be inapplicable.)
The record does not support a finding that the Debtor is solvent. Some creditors argue that this issue is not ripe for adjudication since there is a possibility of recoveries by the Litigation Trust and the Creditors' Trust to pay creditors in full. I conclude that, at this time, the senior noteholders have not demonstrated any entitlement to recover post-petition interest before the PHONES Noteholders can receive payment. However, this determination is without prejudice to allow the parties to revisit the issue in a court of competent jurisdiction if the Trusts' recoveries reach a level that would cause the solvency exception to become applicable.
EGI argues that the terms of the EGI Subordination Agreement expressly
The Subordination provision in the EGI Subordination Agreement provides:
(ADH Ex. 8 at ¶ 2) (emphasis added). EGI argues that the language emphasized in bold print demonstrates that the EGI Notes are subordinate to senior debt only with respect to claims on "assets of the Company" and payments "from the Company." EGI also argues this interpretation is consistent with the "payover" provision of the Subordination Agreement, which provides:
(ADH Ex. 8, ¶ 6) (emphasis added). EGI again emphasizes that the language in this provision limits its application to payments and distributions made by or on behalf of the Company, thereby excluding distribution of the Avoidance Recoveries.
EGI's argument is based upon its assertion that the Avoidance Recoveries, which include claims for fraudulent transfer, are not property of the Debtor, Tribune. The flaw in EGI's argument is the focus upon whether the fraudulent transfer claims belong to the Debtors.
"Fraudulent conveyance law aims `to make available to creditors those assets of the debtor that are rightfully a part of the bankruptcy estate, even if they have been transferred away.'" Id. at 313 citing Buncher Co. v. Official Comm. Of Unsecured Creditors of GenFarm Ltd. P'ship IV, 229 F.3d 245, 250 (3d Cir.2000). "Section 544(b) places the debtor in possession in the shoes of its creditors, giving it the right to prosecute individual creditors' fraudulent transfer claims for the benefit of the bankruptcy estate. This provision of the Bankruptcy Code is consistent with its objective of equitable distribution." PWS, 303 F.3d at 314.
In PWS, a creditor sought to assert state law fraudulent transfer actions, arguing that the confirmed chapter 11 plan could not extinguish those claims because Cybergenics decided that the debtor did not own those claims. The Third Circuit held that the chapter 11 plan, which had been confirmed over the creditor's objection, could properly extinguish those claims, explaining:
Id., 303 F.3d at 315. In this case, the Debtors have proposed a plan that will exercise their power to resolve, or pursue through the Litigation Trust, potential fraudulent transfer claims on behalf of creditors under Bankruptcy Code § 544(b) and § 548. Any recoveries will be property of the estate pursuant to § 541(a)(3) (Property of the estate includes "any interest in property that the trustee recovers under section ... 550"). Since the DCL Plan Settlement Proceeds and the Litigation Trust recoveries are property of the estate, the distribution of those funds would be a distribution or payment "by or on behalf of the Company" and the subordination provisions of the EGI Subordination Agreement will apply to those distributions.
It is not as clear whether the same result follows for the Creditors' Trust proceeds, since that trust is pursuing the Disclaimed State Law Fraudulent Transfer Claims. Bankruptcy Code § 510(a) directs the court to determine enforceability of the subordination agreement by reviewing "applicable non-bankruptcy law." The EGI Subordination Agreement is governed by the law of the State of Delaware (ADH Ex. 8 at ¶ 13), which requires "[a] court applying Delaware law to interpret a contract... to effectuate the intent of the parties." JFE Steel Corp. v. ICI Americas, Inc., 797 F.Supp.2d 452, 469 (D.Del.2011). Furthermore,
Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (internal quotations omitted). See also JFE Steel, 797 F.Supp.2d at 469 (same).
Paragraph 4 of the Subordination Agreement limits EGI's ability to exercise rights and remedies to collect amount due on the EGI Note, stating:
(ADH Ex. 8, ¶ 4). The exception in this paragraph that allows EGI to file a proof of claim and vote its claim in any bankruptcy proceeding reinforces the broad scope of its prohibitions, since the parties determined the need to specify EGI's ability to exercise even those rights. This paragraph plainly prevents EGI from pursuing fraudulent transfer claims on its own. Under EGI's reading of paragraphs 2 and 4, the phrases "of the Company" or "by or on behalf of the Company" would allow EGI to bypass the overall subordination intent of this agreement and permit EGI to share in those proceeds. Such a result is implausible and not one that a reasonable, objective third party would reach. Osborn, 991 A.2d at 1160 ("An unreasonable interpretation produces an absurd result or one that no reasonable person would have accepted upon entering the contract.").
Similar arguments that rely on a phrase or subsection found within a broad subordination agreement to limit a scope of the subordination agreement have arisen before me on at least three prior occasions. See Tribune II, 464 B.R. at 213-221, In re Spansion, 426 B.R. 114, 148-51 (Bankr. D.Del.2010), Kurak v. Dura Automotive Systems, Inc. (In re Dura Automotive Systems, Inc.), 379 B.R. 257 (Bankr.D.Del. 2007). In Dura, when considering an attempt to limit the reach of the subordination provisions of an indenture, I decided that a clause in the subordination provision:
Dura, 379 B.R. at 270. Similar considerations are present here. The overall purpose of the Subordination Agreement is to ensure that the EGI Notes are at the bottom of Tribune's capital structure. (See previous discussion regarding the priority between the PHONES Notes and the EGI Notes). EGI's argument that the phrases "of the Company" or "by the Company" in paragraphs 2 and 6 should be read as limiting the scope of the Subordination
As discussed above in connection with the PHONES Notes, determining whether senior noteholders are entitled to recover post-petition interest to be "paid in full" requires courts to interpret and enforce subordination agreements according to applicable non-bankruptcy law. Southeast Banking, 156 F.3d at 1121, 11 U.S.C. § 510(a). The EGI Subordination Agreement is governed by the laws of the State of Delaware. (ADH Ex. 8 at ¶ 13). The parties have not cited and independent research has not revealed any Delaware decisions addressing whether a senior noteholder's "full payment" permits recovery of post-petition interest, particularly whether Delaware Courts would continue to apply the Rule of Explicitness.
I have determined that the EGI Notes are junior subordinated debt, at the bottom of 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.
For the reasons set forth herein, I conclude as follows with respect to the PHONES Notes issues (subject to, conditioned upon, and for the purpose of obtaining confirmation of a chapter 11 plan substantially in the form of the Third Amended Plan):
For the reasons set forth herein, I conclude as follows with respect to the EGI Notes issues (subject to, conditioned upon, and for the purpose of obtaining confirmation of a chapter 11 plan substantially in the form of the Third Amended Plan):
An appropriate Order follows.
The PHONES Indenture defines "Senior Indebtedness," in part, as "the principal of (and premium, if any) and interest on ... and other amounts due on or in connection with any Indebtedness of the Company incurred, assumed or guaranteed by the Company, whether outstanding on the date of this Indenture or hereafter incurred, assumed or guaranteed and all renewals, extensions and refundings of any such Indebtedness of the Company; provided, however, that the following will not constitute Senior Indebtedness: [exceptions listed do not apply here]." (PHONES Indenture, § 14.01(2)). The parties do not dispute that the Credit Agreement is Indebtedness and Senior Indebtedness as defined by the PHONES Indenture. The record before me establishes that the indebtedness due under the Swap Agreement is an amount due in connection with the Credit Agreement and, therefore, within the definition of the Senior Indebtedness under the PHONES Indenture.
The definition of "Senior Obligations" in the EGI Subordination Agreement is even broader, and includes "all obligations, indebtedness and other liabilities of the Company." The indebtedness under the Swap Agreement also falls within the definition of Senior Obligations under the EGI Subordination Agreement.
Because the Swap Agreement indebtedness is part of the Senior Indebtedness and Senior Obligations as defined in the relevant documents, the treatment in the Third Amended Plan of the Senior Noteholder Claims and the Other Parent Claims becomes even less vulnerable to a charge of "unfair discrimination." (See n. 21, infra.).
In his deposition, Hochschild testified that he did not have a formal title at EGI, but was essentially an analyst (ADH Ex. 157 at 10:23-11:2) and that he "was involved in the operational due diligence [and] ... also worked on the models and analytics around the investment." (Id. at 14:18-21). The evidence shows that in this position Hochschild had information about the framework of the deal and proposed capital structure for Tribune. (See, e.g., ADH Ex. 144 (email dated June 29, 2007 from Chandler Bigelow to Chris Hochschild with the subject heading "May 31st Debt/Cash (PF for the 1st step)", attaching financial information that includes the amount of the PHONES Notes in an entry titled "Total debt (before Zell note)")). Knowledge of information on the priority of the PHONES Notes relative to the EGI Notes was within the scope of Hochschild's responsibilities during his employment at EGI. ADH Ex. 128 is admissible, but, recognizing Hochschild's junior status, the statement in the email will be weighed accordingly.
Dennis J. Connolly and William Hao, X Marks the Spot: Contractual Interpretation of Indenture Provisions, 17 J. Bankr.L. & Prac. 6 Art. 1 (Sept. 2008).
