KEVIN J. CAREY, Bankruptcy Judge.
There is no moral to this story. Its meaning lies in the exposition of an inescapable facet of human character: the willingness to visit harm upon others, even at one's own peril. Our story follows.
On December 8, 2008 (the "Petition Date"), Tribune Company and certain of its subsidiaries (collectively, the "Debtors") filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code (11 U.S.C. § 101 et seq.). Before the Court are two competing plans of reorganization for the Debtors: one proposed jointly by the Debtors, the Official Committee of Unsecured Creditors and certain senior lenders (referred to herein as the "Debtor/Committee/Lender Plan" or the "DCL Plan"),
Voting on competing plans of reorganization was accomplished as directed by Court Order dated December 9, 2010, as amended, which, among other things, approved a general disclosure statement about the Debtors, approved specific disclosure statements for each plan, and established procedures for solicitation and tabulation of votes for the plans. (Docket No. 7126). A hearing to consider the confirmability of the DCL Plan and the Noteholder Plan was held over a two-week period in March 2011 and continued on April 12, 13, and 14, 2011. After post-hearing briefing, closing arguments were heard on June 27, 2011 (collectively, the "Confirmation Hearing").
Although a number of parties object to the competing plans on various grounds, the main source of contention arises from the DCL Plan's proposed settlement of certain LBO-Related Causes of Action with the Senior Lenders and the Bridge Lenders, who loaned more than $10 billion to Tribune in connection with the 2007
In contrast, the Noteholder Plan preserves all of the LBO-Related Causes of Action and creates two trusts to prosecute "vigorously" those claims postconfirmation. The DCL Plan Proponents argue that the Noteholder Plan has fundamental flaws that prevent confirmation under Bankruptcy Code § 1129(a), but, further, that the Plan is not in the best interests of creditors, since it provides minimal distributions now, with a possibility of increased future distributions to creditors only after protracted and risky litigation. They contend:
(DCL Brief, docket no. 8897, at 5). The DCL Plan Proponents argue that the Noteholder Plan purports to be a plan of reorganization, but is not focused on the successful reorganization and advancement of the ongoing operations of the Reorganized Debtors.
For the reasons discussed below, I conclude that neither the DCL Plan nor the Noteholder Plan meets the § 1129 requirements for confirmation.
Tribune Company is a Delaware corporation with its principal place of business in Chicago, Illinois. (Examiner's Report, Vol. I, at 43).
The Tribune Entities' operations are divided into two primary industry segments: the "Publishing Segment" and the "Broadcasting Segment." (Id. at 44). The Publishing Segment accounted for seventy percent (70%) of the Tribune Entities' consolidated revenues in 2009. (DCL Ex. 376, General Disclosure Statement, at 8 (docket no. 7232)(the "GDS")). The Publishing Segment includes operation of eight major-market daily newspapers: The Los Angeles Times, Chicago Tribune, South Florida Sun-Sentinel, Orlando Sentinel, The Sun, Hartford Courant, The Morning Call, and The Daily Press. (Id.).
The Broadcasting Segment accounted for thirty percent (30%) of the Tribune Entities' consolidated operating revenues in 2009 and includes 23 television stations in 19 markets. (GDS at 13). Various Tribune entities also have investments (typically minority equity interests) in a number of private corporations, limited liability companies, and partnerships, including CareerBuilder, Classified Ventures, TV Food Network, Homefinder, Topix, quadrantONE and Metromix. (GDS at 15).
Senior Notes: Between March 1992 and August 2005, Tribune and certain of its predecessors entered into a series of indentures and supplements thereto, pursuant to which the "Senior Notes" were issued.
PHONES Notes: In April 1999, Tribune issued eight million Exchangeable Subordinated Debentures due 2029 (the "PHONES Notes") in an aggregate principal of $1.256 billion.
2006 Credit Agreement. On June 19, 2006, Tribune entered into a credit agreement with various lenders for (i) a $1.5 billion unsecured term loan facility, of which $250 million was used to refinance certain medium-term notes that matured November 1, 2006, and other term loan proceeds were used to finance a portion of Tribune's repurchase of Tribune Common Stock pursuant to the 2006 Tender Offer, and (ii) a $750 million unsecured revolving facility (the "2006 Credit Agreement").
2006 Bridge. At the same time as the 2006 Credit Agreement, Tribune entered into a bridge credit agreement with various lenders for a $2.15 billion unsecured bridge facility (the "2006 Bridge Credit Agreement"). (Id. at 71). Tribune was the sole borrower under the 2006 Bridge Credit Agreement, which was neither guaranteed nor secured. (Id. at 69). The proceeds of the 2006 Bridge Credit Agreement were used to finance a portion of Tribune's repurchase of Tribune Common Stock under the 2006 Tender Offer and to refinance existing indebtedness. (Id. at 72).
As of April 1, 2007, Tribune had outstanding borrowings of $1.5 billion under the 2006 Credit Agreement's term facility, no borrowings under the revolving facility, and $1.325 billion under the 2006 Bridge Credit Agreement facility. (DCL Ex. 1389, Tribune Company Form 10-Q filed May 9, 2007, TRB0430837). Prior to the LBO, Tribune's indebtedness approximated the following:
-------------------------------------------------------------------------Debt Instrument Approximate Outstanding Debt in April 2007 ------------------------------------------------------------------------- Senior Notes $1.456 billion ------------------------------------------------------------------------- PHONES Notes (2% interest) $ 612 million ------------------------------------------------------------------------- 2006 Credit Agreement $1.500 billion ------------------------------------------------------------------------- 2006 Bridge Agreement $1.325 billion ------------------------------------------------------------------------- Property financing obligation $ 51 million ------------------------------------------------------------------------- Interest rate swap $ 23 million ------------------------------------------------------------------------- Other notes and obligations $ 16 million -------------------------------------------------------------------------Total $4.983 billion -------------------------------------------------------------------------
(Examiner's Report, Vol. I, at 63, NPP Ex. 343 at 24 (10-Q 4/1/2007)).
In September 2006, the Tribune board of directors (the "Board") created a Special Committee to oversee a formal process of exploring strategic alternatives for Tribune, including a sale of all Tribune Entities, a leveraged recapitalization of Tribune, the sale of the Broadcasting Segment, a spin-off of the Broadcasting Segment, and a split-off of the Publishing Segment. (Examiner's Report, Vol. I, at 102, 105). As a result of that process, on April 1, 2007, based on the recommendation of the Special Committee, the Board approved a series of transactions with a newly formed Tribune Employee Stock Ownership Plan (the "ESOP"), EGI-TRB, LLC, a Delaware limited liability company wholly owned by Sam Investment Trust, a trust established for the benefit of Samuel Zell and his family ("EGI" or the "Zell Entity") and Samuel Zell ("Zell"). (DCL Ex. 1389, at TRB0430839). This Leveraged ESOP Transaction (also referred to as the "2007 Leveraged Buy-out" or the "LBO") was consummated in two principal steps, commonly referred to as "Step One" and "Step Two".
In Step One, the newly formed ESOP purchased 8,928,571 shares of Tribune common stock at $28 per share. (Id.). The Zell Entity also made an initial investment of $250 million in Tribune in exchange for 1,470,588 shares of Tribune's common stock at a price of $34 per share and an unsecured subordinated exchangeable promissory note of Tribune in the principal amount of $200 million. (GDS at 19).
In Step Two, consummated in December 2007, Tribune merged with a Delaware corporation wholly owned by the ESOP, with Tribune surviving the merger. (Examiner's Report, Vol. I, at 138, 458). Upon completion of the merger, all issued and outstanding shares of Tribune's common stock (other than shares held by Tribune or the ESOP) were cancelled and Tribune became wholly owned by the ESOP. (Id.). The merger was financed through additional borrowings of $2.1 billion under the Senior Loan Agreement (known as the "Incremental Facility") and $1.6 billion under the Bridge Loan Agreement.
As of the Petition Date, Tribune's pre-LBO indebtedness and LBO indebtedness,
---------------------------------------------------------------------------------
Approximate Principal Amount Outstanding as of the
Debt Instrument Petition Date
---------------------------------------------------------------------------------
Senior Loan Facility $8.622 billion16
---------------------------------------------------------------------------------
Bridge Facility $1.600 billion
---------------------------------------------------------------------------------
Senior Notes $1.263 billion
---------------------------------------------------------------------------------
EGI-TRB LLC Notes17 $0.225 billion
---------------------------------------------------------------------------------
PHONES Notes $0.759 billion18
---------------------------------------------------------------------------------
Receivables Facility19 $0.225 billion
---------------------------------------------------------------------------------
Total $12.706 billion
---------------------------------------------------------------------------------
(GDS at 21-25).
On December 8, 2008, Tribune and certain of its subsidiaries filed voluntary petitions under chapter 11 of the United States Bankruptcy Code. On December 18, 2008, the United States Trustee for the District of Delaware appointed an official committee of unsecured creditors (the "Creditors' Committee") (GDS at 44). As of the filing of the GDS, the Creditors' Committee consisted of the following parties: (i) JP Morgan Chase Bank, N.A., (ii) Deutsche Bank, (iii) Warner Bros. Television, (iv) Buena Vista Television, (v) William Niese, (vi) Pension Benefit Guaranty Corporation, (vii) WTC, and (viii) Washington-Baltimore
On February 1, 2010, the Creditors' Committee filed a motion seeking authority to prosecute certain estate causes of action against the Debtors' pre-petition lenders arising out of the LBO (the "Original Standing Motion," docket no. 3281).
From the outset of the bankruptcy cases, the major constituents understood that the investigation and resolution of the LBO-Related Causes of Action would be a central issue in the formulation of a plan of reorganization. (See, e.g., Tr. 3/1/2011 at 23:10-15 (Kurtz)). On April 12, 2010, the Debtors filed a proposed plan (the "April 2010 Plan") that sought to implement the terms of a settlement agreement regarding certain LBO-Related Causes of Action. A confirmation hearing for the April 2010 Plan was scheduled for August 16, 2010.
However, shortly after filing of the April 2010 Plan, the Bankruptcy Court entered an Agreed Order Directing the Appointment of an Examiner (the "Examiner Order," docket no. 4120). On May 10, 2010, the Court approved the U.S. Trustee's application appointing Kenneth N. Klee as examiner (the "Examiner").
The Examiner invited the parties to provide written submissions on these issues and conducted in-person meetings with them. The Examiner was assisted by counsel and by a financial advisor who developed a financial analysis of issues presented, including issues concerning solvency, unreasonably small capital, the flow of funds, and matters pertaining to intercompany claims.
On July 26, 2010, the Examiner filed a report containing the results of his investigation. His report identified the following transfers and obligations that may be subject to avoidance and recovery:
---------------------------------------------------------------------------------Obligations --------------------------------------------------------------------------------- Credit Agreement Debt incurred as Step One $ 7,015,000,000 --------------------------------------------------------------------------------- Incremental Credit Agreement Debt at Step Two $ 2,105,000,000 --------------------------------------------------------------------------------- Bridge Debt at Step Two $ 1,600,000,000 ---------------------------------------------------------------------------------Total Obligations $10,720,000,000 --------------------------------------------------------------------------------- ---------------------------------------------------------------------------------Payments ---------------------------------------------------------------------------------Step One --------------------------------------------------------------------------------- Payments to Selling Stockholders — Step One $ 4,283,999,988
Since 1975, Mr. Klee has participated in several hundred programs for the continuing education of the bar in the area of bankruptcy and business reorganization. He is serving for a second time as a Lawyer Representative to the 9th Circuit Judicial Conference. Mr. Klee also serves as a member of The American Law Institute and was an Advisor on its Transnational Insolvency Project. In addition, he is a founding member of the International Insolvency Project.
Mr. Klee is a founding member of the firm. See http://www.ktbslaw.com/attorneys-29.html.
--------------------------------------------------------------------------------- Step One Financing Fees, Costs, and Expenses --------------------------------------------------------------------------------- JPM Entities $ 35,042,750 --------------------------------------------------------------------------------- Merrill Entities $ 34,992,750 --------------------------------------------------------------------------------- Citigroup Entities $ 32,529,375 --------------------------------------------------------------------------------- BofA Entities $ 18,002,625 --------------------------------------------------------------------------------- Barclays $ 3,375,000 --------------------------------------------------------------------------------- LaSalle Bank National Association $ 2,187,500 --------------------------------------------------------------------------------- Lehman Brothers $ 2,187,500 --------------------------------------------------------------------------------- Sumitomo Mitsui Banking Corporation $ 2,187,500 ---------------------------------------------------------------------------------Other Step One Financing Costs and Expenses $ 3,585,523 ---------------------------------------------------------------------------------Total Step One Financing Fees, Costs, and Expenses $ 134,090,523 ---------------------------------------------------------------------------------Step One Tender Offer/Dealer Manager Fees --------------------------------------------------------------------------------- Merrill Entities $ 460,000 --------------------------------------------------------------------------------- Citigroup Entities $ 450,000 --------------------------------------------------------------------------------- BofA Entities $ 225,000 --------------------------------------------------------------------------------- JPM Entities $ 374,976 --------------------------------------------------------------------------------- All Other Tender Offer Fees $ 3,444,274 ---------------------------------------------------------------------------------Total Step One Tender Offer/Dealer Manager Fees $ 4,954,250 ---------------------------------------------------------------------------------Step one Related Advisor Fees, Costs, and Expenses --------------------------------------------------------------------------------- Morgan Stanley $ 7,667,704 ---------------------------------------------------------------------------------Total Step One Related Advisor Fees, Costs, and Expenses $ 7,667,704 ---------------------------------------------------------------------------------All Other Step One Related Fees, Costs, and Expenses $ 14,473,727 ---------------------------------------------------------------------------------Post-Step One/Pre-Step Two ---------------------------------------------------------------------------------Interest and Principal Payments --------------------------------------------------------------------------------- Interest Payments on Credit Agreement Debt $ 197,610,456 --------------------------------------------------------------------------------- Principal Payments on Credit Agreement Debt $ 113,787,500 ---------------------------------------------------------------------------------Total Interest and Principal Payments $ 311,397,956 ---------------------------------------------------------------------------------Step Two ---------------------------------------------------------------------------------Merger Consideration to Selling Stockholders $ 3,982,119,576 ---------------------------------------------------------------------------------Interest and Principal Payments --------------------------------------------------------------------------------- Interest Payments on Credit Agreement Debt $ 95,740,199 ---------------------------------------------------------------------------------Transactions with EGI-TRB, LLC --------------------------------------------------------------------------------- Repayment of Exchangeable EGI-TRB Note $ 206,418,859 --------------------------------------------------------------------------------- Reimbursement of Expenses incurred by EGI-TRB $ 2,500,000 --------------------------------------------------------------------------------- Payment of Merger Consideration to EGI-TRB $ 49,999,992 --------------------------------------------------------------------------------- Issuance of EGI-TRB Note $ (225,000,000) --------------------------------------------------------------------------------- Purchase by EGI-TRB of the Warrant (90,000,000) ---------------------------------------------------------------------------------Net Received from EGI-TRB $ (56,081,149) ---------------------------------------------------------------------------------
--------------------------------------------------------------------------------- Step Two Financing Fees, Costs, and Expenses --------------------------------------------------------------------------------- JPM Entities $ 13,767,054 --------------------------------------------------------------------------------- Merrill Entities $ 37,883,125 --------------------------------------------------------------------------------- BofA Entities $ 6,883,527 --------------------------------------------------------------------------------- Citigroup Entities $ 11,472,545 ---------------------------------------------------------------------------------Other Step Two Financing Fees, Costs, and Expenses $ 3,436,240 ---------------------------------------------------------------------------------Total Step Two Financing Fees, Costs, and Expenses $ 73,442,490 ---------------------------------------------------------------------------------Step Two Related Advisor Fees, Costs, and Expenses --------------------------------------------------------------------------------- CGMI $ 12,837,360 --------------------------------------------------------------------------------- MLPFS $ 12,768,422 ---------------------------------------------------------------------------------Total Step Two Advisor Fees, Costs, and Expenses $ 25,605,782 ---------------------------------------------------------------------------------Other Step Two Related Fees, Costs, and Expenses $ 21,577,816 ---------------------------------------------------------------------------------Post-Step Two ---------------------------------------------------------------------------------Post-Step Two Interest and Principal Payments --------------------------------------------------------------------------------- Interest Payments on Credit Agreement Debt $ 499,621,384 --------------------------------------------------------------------------------- Principal Payments on Credit Agreement Debt $ 964,387,500 --------------------------------------------------------------------------------- Interest Payments on Bridge Debt $ 114,529,555 ---------------------------------------------------------------------------------Total Post-Step Two Interest and Principal Payments $ 1,578,538,439 ---------------------------------------------------------------------------------
(Examiner's Report, Vol. II, at 6-10, footnotes omitted).
By Order dated August 3, 2010, the Court ordered the unsealing of the Examiner's Report, with exhibits and transcripts.
The Debtors' exclusive period within which to file a chapter 11 plan and solicit acceptances, as extended by court order, expired on August 8, 2010. After the Examiner's Report was filed and the settlement in the April 2010 Plan was abandoned, interested parties continued to negotiate, but failed to reach any consensus. Thereafter, the Debtors asked the Court to appoint a mediator.
On September 1, 2010, I appointed my colleague, the Honorable Kevin Gross, as a mediator (the "Mediator") to conduct non-binding mediation concerning the terms of a plan of reorganization, including appropriate resolution of the LBO-Related Causes of Action (the "Mediation"). The September 1, 2010 Order included the following parties in the Mediation: (i) the Debtors, (ii) the Creditors' Committee, (iii) Angelo Gordon, (iv) the Credit Agreement Lenders, (v) the Step One Credit Agreement Lenders, (vi) Wells Fargo Bank, N.A., (vii) Law Debenture Trust Company of New York ("Law Debenture"), (viii) Deutsche Bank Trust Company Americas, (ix) Centerbridge Credit Advisors, LLC,
The Mediation began on September 26, 2010, and the Mediation Parties continued settlement discussions on September 27, 2010. On September 28, 2010, the Mediator filed a report which, among other things, reported a settlement agreement between the Debtors, on the one hand, and Angelo Gordon and Oaktree, on the other. The Mediator continued settlement discussions with certain parties. On October 12, 2010, the Mediator filed the Mediator's Second Report, which included the terms of an expanded settlement among the Debtors, the Committee, Oaktree, Angelo Gordon, and JP Morgan (the "October Term Sheet").
After status conferences on October 4 and 13, 2010, the Court entered an Order dated October 18, 2010 (docket no. 6022), setting deadlines for filing competing plans and disclosure statements. As a result, four competing plans of reorganization were filed: (i) the Debtor/Committee/Lender Plan, (ii) the Noteholder Plan, (iii) the Bridge Lender Plan,
Additional mediation sessions involving the DCL Plan Proponents and the Noteholder Plan Proponents were unsuccessful, and on March 7, 2011, the Confirmation Hearing commenced.
The consequence of the Court's valuation determination permeates more than one aspect of the confirmation disputes between respective plan proponents, including, for example, fairness of the settlement proposed in the DCL Plan, which the Court must resolve in the context of confirmation, the reasonableness of proposed releases, and certain subordination disputes in connection with the PHONES Notes.
The DCL Plan Proponents, through their experts, contend that the Debtors' Total Distributable Value is between $6.3 billion and $7.1 billion, with a mid-point of $6.75 billion. The Noteholder Plan Proponents, through their expert, contend that the Debtors' Total Enterprise Value is between $7.912 billion and $8.669 billion, with a mid-point of $8.291 billion. This leaves a staggering chasm—measured by the distance between the competing valuation mid-points—of $1.589 billion. For the reasons
When considering valuation issues in the Spansion
7-1129 Collier on Bankruptcy ¶ 1129.05[3][c] (quoting Consolidated Rock Prods. Co. v. DuBois, 312 U.S. 510, 526, 61 S.Ct. 675, 684-85, 85 L.Ed. 982, 991 (1941)).
The DCL Plan Proponents assert that the Total Distributable Value of the Debtors' consolidated estates is between $6.3 billion and $7.1 billion, with a mid-point of $6.75 billion, based upon the analysis prepared by their investment banker, Lazard Freres & Co, LLC ("Lazard"), and described in Lazard's expert report dated February 2011 (the "Lazard Expert Report"). (DCL Ex. 1135). The Lazard Expert Report contains a valuation prepared in October 2010, which updated a previous $6.1 billion mid-point estimate of Tribune's Total Distributable Value prepared by Lazard in March 2010 for the Debtors' Disclosure Statement dated June 4, 2010. (Id. at 3). The October 2010 valuation relied upon revised financial projections prepared by the Debtors' management in October 2010 to incorporate the year-to-date results and revised outlook over the projection period. (Id.). Lazard also updated its analysis of comparable companies, discount rates, and precedent transactions to reflect current market conditions. (Id.). As a result, Lazard estimated the Total Enterprise Value of Tribune's core business to be between $2.9 billion to $3.4 billion, with a midpoint of $3.194 billion. (Id.). After adding the value of Tribune's non-controlled interests and the estimated cash balance as of December 27, 2010 to the Total Enterprise Value, Lazard arrived at the estimated Total Distributable Value with a mid-point of $6.75 billion.
The Noteholders argue that the DCL Plan Proponents have undervalued the Debtors, which provides a further basis for finding that the Settlements are unreasonable.
First, the Noteholders argue that the $6.75 billion value was "stale" and outdated as of the Confirmation Hearing as evidenced by a report prepared by Lazard in January 2011, which sets the Debtors' Total Distributable Value between $6.6 and $7.4 billion, with a mid-point of $7.019 billion. (DCL Ex. 1092 at 4-5). The January 2011 Report increased the mid-point for the Debtors' Total Distributable Value by $269 million. (Id.).
The DCL Plan Proponents acknowledge that Lazard properly completed a report in January 2011 to "refresh" the October 2010 valuation, and argue that the January 2011 report validated and confirmed the value range prepared in October 2010. (Tr. 3/11/11 at 20:22-21:12). Their expert, Suneel Mandava, noted that the January 2011 $7.019 billion mid-point fell within the high end of the range set in the October 2010 valuation ($7.1 billion). (Tr. 3/11/11 at 77:5-13). Moreover, he analyzed the composition of the $269 million increase in value and noted that the increase did not occur in Tribune's core business, including the publishing and broadcasting segments. (DCL Ex. 1092 at 5). Instead, the January 2011 report shows that the value of the publishing and broadcasting segments decreased by $42 million and $128 million, respectively, between October 2010 and January 2011 (Id., Tr. 3/11/11 at 75:2-76:14). The increase in the Total Distributable Value was due, in large part, to an increase in the value of Tribune's "non-controlled investments," including TV Food Network, Classified Ventures and CareerBuilder. (Id.). Based on this analysis, Mandava opined that the January 2011 report did not provide sufficient basis for increasing Tribune's Total Distributable Value, especially because the reports had given full valuation to the investments, without applying any discount based on lack-of-marketability. (Id.).
The aim of the Court's exercise is to value Tribune upon emergence from bankruptcy (as of the Confirmation Hearing, the parties were using the date of June 30, 2011). Mandava testified that the mid-point from the October 2010 valuation was a reasonable estimate of the Company's valuation on that date because:
(Tr. 3/11/11 at 78:1-12).
This opinion was shared by the DCL Plan Proponents' second expert, John Chachas,
In addition to arguing that the DCL Plan Proponents erred by not relying on the more up-to-date January 2011 report, the Noteholders' expert, Singh, prepared a rebuttal to the Lazard Expert Report. He used, among other things, (i) updated Tribune financial data available through February 21, 2011, (ii) updated comparable company and market data available through February 18, 2011, (iii) adjusted weighting of the discounted cash flow ("DCF") methodology in calculating the value of the publishing and broadcasting segments, and (iv) other corrections to the "deficiencies, errors and inconsistencies" in the Lazard valuation, which resulted in a depressed plan value. (NPP Ex. 2469). As a result of these changes, Singh estimated the Total Distributable Value of Tribune to be in a range of $7.912 to $8.669 billion, with a mid-point of $8.291 billion. (Id. at 18-19). This represents an increase of approximately $1.589 billion from the Lazard Expert Report mid-point. Singh prepared a bridge analysis demonstrating that the $1.589 billion increase consists of (i) an increase in $839 million by using updated financial and market data, (ii) an increase of $223 million by changing the weight assigned to the DCF and comparable company analyses for publishing, broadcasting, and other wholly-owned assets, and (iii) an increase of $527 million from other adjustments, including a determination of distributable cash on June 30, 2011, adding back certain non-cash pension expenses, and revising the comparable company and precedent transaction methodologies used to value Tribune's non-controlled interests. (Id. at 9).
The DCF Plan Proponents defend the Lazard Expert Report, arguing that Lazard used the most current information when preparing the October 2010 and January 2011 Reports. Singh's updated market price analysis caused him to estimate a large increase in the value of the non-controlled interests ($608 million), but the DCL Plan Proponents noted Singh's acknowledgment that most of the market price increase reflected in his February 2011 Report was lost in the weeks between issuing the report and the confirmation hearing. (Tr. 3/15/2011 at 40:1-5, see also DCL Ex. 1502 (Demonstrative)).
The DCL Plan Proponents point out that changes based on updated market data are hard to gauge, considering the fluctuations in the current market. Even market information used for the January 2011 report and Singh's February 2011 rebuttal report may be outdated at this point. The DCL Plan Proponents also argue that using actual (better than expected) 2010 financial results in for the Debtors' publishing business, which is experiencing secular declines year after year,
The DCL Plan Proponents further contend that Singh's adjustments to the weighting of the DCF and comparable company analyses were flawed due to Singh's lack of knowledge and experience in the industry. Singh's change to the weight of the publishing DCF, alone, increased the valuation by approximately $194 million. The DCL Plan Proponents' expert explained that the comparable company analysis assumes that the publishing industry will revitalize itself, while the DCF analysis assumes the industry will continue to struggle with the secular challenges it is facing and will not be able to turn the business around. (Tr. 3/11/11 at 35:4-36:1). When valuing the publishing segment, Mandava applied a weighting of 30% for the DCF and 70% for the comparable company methodologies, recognizing that both viewpoints are valid and possible, but favoring the optimistic view of the future found in the comparable company analysis. Singh, on the other hand, applied a weighting of 90% for comparable company analysis and 10% for the DCF. (NPP Ex. 2469 at 40). Singh commented that Lazard ascribed too much weight to the publishing DCF value, which was based upon projections predicting steep declines in the publishing business. He claims the projections are too dire, considering that the Company outperformed its forecasts for 2010, and are inconsistent with peer newspaper and publishing companies' forecasts. (Id. at 37-38). Mandava argued that a 10% DCF weighting is akin to giving no consideration to management's projections. (Tr. 3/11/11 at 36:2-37:1).
Additionally, the DCL Plan Proponents dispute Singh's revisions to the valuation of certain non-controlled interests, by selecting different comparable companies, adding precedent transactions, and applying different weighting of the methodologies. The DCL Plan Proponents argue that Singh's judgment in such matters should be given considerably less weight than that of their experts, particularly Chachas, who has over 20 years of valuation experience in the industry. Moreover, when comparing the proffered valuations, the DCL Plan Proponents point out that Singh did not perform his own valuation analysis, but simply critiqued Lazard's valuation, by cherry-picking adjustments, substituting his uninformed judgment for Mandava and Chachas, and by guessing (incorrectly) about Lazard's computations.
The valuation record before me consists, predictably, on competing expert opinions. As noted by Judge Peck in the Iridium decision, in a contested matter such as this, the hired experts often approach their valuation task from an advocate's point of view. Statutory Comm. Of Unsecured Creditors v. Motorola, Inc. (In re Iridium Operating LLC), 373 B.R. 283, 291 (Bankr.S.D.N.Y.2007); see also In re Mirant Corp., 334 B.R. 800, 814-15 (Bankr. N.D.Tex.2005) ("That experts may be anxious to serve the interests of the parties retaining them is neither startling nor enough reason to disregard their testimony.. . . It simply means the court must be cautious itself, avoiding undue optimism while at the same time ensuring that assumptions and data used for valuing [the debtor] give full value to the business as rehabilitated through chapter 11.")
The DCL Plan Proponents' experts are convincing in their view that the Lazard Expert Report was reasonable and credible when completed, but I agree with the Noteholders that the October information
Still, I conclude that the DCL Plan Proponents' experts' provided rational explanations for their weighting of the comparable company and DCF methodologies in the Lazard Expert Report and, considering their experience and knowledge of the applicable industries, I find their analysis on these issues to be convincing. Throughout the confirmation hearing, all of the parties agreed that the publishing industry is in a serious decline. The Debtors' actual 2010 results in the publishing business (and broadcast business), however, were better than forecast, indicating that management's projections may have been too bleak. Yet, overall, I conclude that the DCL's experts' weighting was sound. Also, Messrs. Mandava and Chachas proved to be experienced, knowledgeable and credible in their defense of the choices made with respect to comparable company analysis and rejection of certain precedent transactions in evaluating the non-controlled interests.
On the other hand, I cannot conclude that the alternative valuation in the Noteholders' Rebuttal Report is reasonable, reliable or complete. The Rebuttal Report sets forth proposed revisions, but does not indicate how "cherry-picked" changes would impact the report as a whole.
The DCL Plan can be confirmed only if it complies with the requirements of Bankruptcy Code § 1129. As I noted in Exide Technologies:
In re Exide Tech., 303 B.R. 48, 58 (Bankr. D.Del.2003). The remaining objections to confirmation of the DCL Plan include: (i) whether the proposed settlements of the LBO-Related Causes of Action meet the requirements of Bankruptcy Code § 1129(a) and Fed.R.Bankr.P. 9019, (ii) whether the DCL Plan is feasible, due to applicable FCC regulations, (iii) whether the "Bar Order" set forth in Section 11.3 is an improper third party release, and whether other releases in Section 11.2.1 and 11.5 are fair, (iv) whether the DCL Plan complies with § 1129(a)(10) by receiving acceptance by at least one impaired class of creditors for each debtor, (v) whether the DCL Plan's assignment of certain state law causes of action to a creditors' trust is fair and equitable, (vi) whether the Litigation Trust is fair and equitable, (vii) whether the DCL Plan properly classifies certain claims, and (viii) whether the DCL Plan's treatment of the PHONES Notes' subordination provisions is fair and equitable.
Most of the evidence presented at the confirmation hearing addressed the issue of whether the proposed DCL Plan settlements are fair and equitable. The proposed settlements are the main difference between the DCL Plan and the Noteholder Plan, since the latter plan proposes to pursue "vigorously" litigation of all the LBO-Related Causes of Action.
By way of background, two components of the DCL Plan must be described to understand the Noteholder Plan Proponents' objection: the "Settlements" and the "Trusts." The "Settlements" consist of two settlements: (i) the settlement with current and former Senior Lenders, Bridge Lenders, and other parties
The DCL Plan Proponents contend that the Settlements provide the holders of Senior Noteholder Claims, Other Parent Claims, Convenience Claims, and General Unsecured Claims (the "Non-LBO Creditors") with initial distributions well in excess of the "natural recoveries" those creditors would receive from the estate, assuming the Debtors have a total distributable enterprise value (or "DEV") of $6.75 billion, if the Senior Loan Claims and Bridge Loan Claims are not avoided.
Natural Recovery, assuming DEV of
Non-LBO Creditor 6.75 billion (with no avoidance) 36 DCL Plan Recovery
Senior Noteholders 4.8% 33.6%
Other parent claims 4.8% 32-35%37
Subsidiary general unsecured
claims 2.6% 100%
Subordinated PHONES
& EGI Noteholders 0% 0%
The initial settlement distributions are funded from three sources: (1) Senior Lenders will forgo approximately $401.5 million in recoveries to which they would otherwise be entitled upon allowance of their claims, (2) recipients of pre-petition principal, interest, and fee payments on account of the Incremental Facility and the Bridge Loan Facility, provided at Step Two of the LBO, will contribute $120 million in cash,
An additional source of consideration provided to Non-LBO Creditors under the DCL Plan Settlements is the agreement by the Senior Lenders and the Bridge Lenders to forgo pro rata participation in initial recoveries from the Litigation and Creditors Trusts, so that the Non-LBO Parent Creditors will receive the first $90 million in net recoveries by the Trusts, and, thereafter, 65% of all net recoveries by the Trusts, after repayment of the $20 million loan received from Reorganized Tribune to fund the Trust litigation. (DCL Discl. St. at 19-20).
The Noteholder Plan Proponents argue that the DCL Plan Settlements are not fair and equitable to impaired classes that have not accepted the DCL Plan and, accordingly, the DCL plan cannot be confirmed. First, the Noteholders contend that the Settlements were not made in good faith, resulting in a "sweetheart deal" for the Settling Parties, because negotiating parties either had conflicts or did not have an incentive to demand a more valuable, reasonable settlement. Next, the Noteholders contend that the Debtors' distributable enterprise value is greater than the $6.75 billion amount relied upon by the DCL Plan Proponents and, because the greater value increases the natural recoveries for the creditors, the Settlement amounts should also be increased. Further, the Noteholders urge that the Settlement amounts are far too low, considering the value of the claims being released. The Noteholders argue that, if the claims were pursued vigorously, those claims would generate sufficient funds to pay the Senior Noteholders in full and provide a distribution for subordinated noteholders.
The DCL Plan Proponents deny any lack of good faith and point out that negotiation of the Settlements took place in the Mediation under the guidance of Judge Gross. The DCL Plan Proponents also rely upon their experts' reports and testimony to demonstrate that the reasonable, fair distributable enterprise value of the Debtors is $6.75 billion. Further, they assert that the Settlements with the Senior Lenders are fair because the Settlements reflect the essential determinations of the Examiner, who found substantial barriers to avoidance of Step One claims against Senior Lenders, while guaranteeing recoveries in excess of those that the Senior Noteholders would receive if only Step Two Claims were avoided. They also argue that claims against other entities are preserved. Finally, they emphasize that the DCL Plan has been overwhelmingly accepted by creditors across the capital structure of the Debtors.
A court cannot confirm a plan unless it determines that the plan is "proposed in good faith and not by any means forbidden by law." 11 U.S.C. § 1129(a)(3). "The good faith standard requires that the plan be `proposed with honesty, good intentions and a basis for expecting that a reorganization can be effected with results consistent with the objectives and purposes of the Bankruptcy Code.'" In re Coram Healthcare Corp., 271 B.R. 228, 234 (Bankr.D.Del.2001) (quoting In re Zenith
Moreover, in assessing the fairness of proposed settlement, a court may consider the extent that the settlement is truly the product of arms-length bargaining, and not fraud or collusion. See In re New Century TRS Holdings, Inc., 390 B.R. 140, 167 n. 33 (Bankr.D.Del.2008) rev'd on other grounds 407 B.R. 576 (D.Del.2009); Exide, 303 B.R. at 67-68.
The Noteholders argue that the DCL Plan Settlements must be rejected because they are not the result of good-faith, arms-length negotiations. The Noteholders contend that the settlement process was tainted by conflicts of interest, one-sided negotiations, and other irregularities. These assertions are unsupported by the evidentiary record.
The plan settlement negotiations were biased, the Noteholders contend, because the Debtors' point person was Don Liebentritt, who indicated that he has worked for Zell since 1982, including time (from 1999 to 2006) as general counsel and president of EGI, and continued to be an officer or director of some EGI-related entities and had investments with them. (NPP Ex. 2088, Liebentritt Dep. 2/22/11 at 14:7-16:4).
Despite Liebentritt's direct participation in the negotiations, the proposed settlement does not include any deal or arrangement regarding the claims of Zell, EGI or the Step Two shareholders. Cf. Coram Healthcare, 271 B.R. at 232 (the Court denied confirmation of the debtor's first proposed plan upon finding that the CEO had an actual conflict of interest arising from a on-going $1 million/year consulting contract with one of the debtor's largest creditors that had tainted the debtor's restructuring and plan negotiations).
Moreover, in August 2010, when the April 2010 Plan was no longer a feasible option and it appeared that the reorganization was heading toward litigation rather than settlement, Liebentritt recommended that a "special committee" of board members be established, with separate counsel, to approve any future proposed
Further, the Creditor Committee's participation in the settlement negotiations is highly relevant when considering whether the DCL Plan Settlements were negotiated in good faith. The Noteholders argue that the Creditors Committee's participation provides no evidence of arms-length negotiation or good faith because the Committee failed to represent all unsecured creditors (in particular, the Noteholders) and committee members had no incentive to maximize the value of the Settlement. This position is not supported by the evidence. The Creditors' Committee rejected initial settlements proposals offered by the Debtors and the Senior Lenders in the fall of 2010. (DCL Ex. 273). Instead, the Committee negotiated what it believed to be a fair settlement for all unsecured creditors.
Finally, the Senior Noteholders argue that they were unfairly excluded from early plan negotiations. See In re Nutritional Sourcing Corp., 398 B.R. 816, 838 (Bankr.D.Del.2008) (deciding that a plan settlement was not fair and equitable when certain trade creditors were not afforded "meaningful participation" in the negotiations). However, Aurelius Capital Management, L.P. was named as a "mediation party" in the September 1, 2010 Order appointing a mediator, giving the Senior Noteholders an opportunity for meaningful participation in the mediation. (DCL Ex. 382). Even though the mediation failed to result in an entirely global consensus, Aurelius' access weighs in favor of concluding that the DCL Plan Settlement was achieved as a result of arms-length, good faith negotiations.
The Court's valuation conclusion affects the Court's analysis of the fairness of the DCL Plan Settlement. The DCL Plan Settlement is based upon an assumed value of $6.75 billion (mid-point). Is the Court's valuation determination, higher by $269 million, enough to nudge the proposed DCL Plan Settlements below the lowest point in the range of reasonableness? The Noteholders argue that a Total Distributable Value of $7.019 provides enough value to pay the Step One Lenders in full under a waterfall plan, if Step Two Debt is avoided and no post-petition interest is allowed to Senior Lenders, leaving enough value to pay Senior Noteholders well in excess of the DCL Plan Settlement amount. (Tr. 3/15/11 at 297:13-299:22). This testimony by the managing director
Bankruptcy Code § 1123(b)(3)(A) provides that a plan may provide for "the settlement or adjustment of any claim or interest belonging to the debtor or to the estate." 11 U.S.C. § 1123(b)(3)(A). It is the "duty of a bankruptcy court to determine that a proposed compromise forming part of a reorganization plan is fair and equitable." Protective Comm. For Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 1163, 20 L.Ed.2d 1 (1968).
Bankruptcy courts are also tasked with approving compromises under Rule 9019 of the Federal Rules of Bankruptcy Procedure. "Settlements are favored, but the unique nature of the bankruptcy process means that judges must carefully examine settlements before approving them." Will v. Northwestern Univ. (In re Nutraquest, Inc.), 434 F.3d 639, 644 (3d Cir.2006). "[T]he decision whether to approve a compromise under Rule 9019 is committed to the sound discretion of the Court, which must determine if the compromise is fair, reasonable, and in the interest of the estate." In re Louise's, Inc., 211 B.R. 798, 801 (D.Del. 1997).
The court should "assess and balance the value of the claim that is being compromised against the value to the estate of the acceptance of the compromise proposal." Myers v. Martin (In re Martin), 91 F.3d 389, 393 (3d Cir.1996). In striking this balance, the court should consider: (1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience, and delay necessarily attending it; and (4) the paramount interest of creditors. Id., (citing TMT Trailer, 390 U.S. at 424-25, 88 S.Ct. at 1163-64). See also Nutraquest, 434 F.3d at 644-45 (reaffirming use of the Martin factors for approving settlement of claims by and against an estate); In re Washington Mutual, Inc., 442 B.R. 314, 328 (Bankr.D.Del.2011); In re Spansion, Inc., 2009 WL 1531788, *4 (Bankr.D.Del. June 2, 2009).
In evaluating the fairness of a settlement, the court does not have to be convinced that the settlement is the best possible compromise, but only that the settlement falls within a reasonable range of litigation possibilities. Washington Mutual, 442 B.R. at 328 (citing Coram Healthcare, 315 B.R. at 330). Therefore, the settlement need only be above the "lowest point in the range of reasonableness." Washington Mut., 442 B.R. at 328. The DCL Plan Proponents bear the burden of persuading the Court that the Settlements falls within the range of reasonableness. Id. (citing In re Key3Media Group, Inc., 336 B.R. 87, 93 (Bankr.D.Del.2005)).
In evaluating this factor, the Court's task is not to "decide the numerous questions of law and fact raised by the [objections] but rather to canvass the issues to see whether the settlement fall[s] below the lowest point in the range of reasonableness." Exide, 303 B.R. at 68 (quoting In re Neshaminy Office Bldg. Assoc., 62 B.R. 798,
The LBO-Related Causes of Action that are being settled include claims against the Settling Parties to avoid, subordinate, or disallow obligations arising from the financing of the LBO through the Senior Loan Agreement and the Bridge Loan Agreement (jointly, the "LBO Lender Debt"), and claims for disgorgement of payments made on the LBO Lender Debt prior to the petition date. These claims include (i) causes of action to avoid fraudulent transfers under Bankruptcy Code §§ 544(b) and 548, (ii) causes of action to equitably subordinate claims under Bankruptcy Code § 510(c), (iii) causes of action to avoid preference payments under Bankruptcy Code § 547, (iv) causes of action to disallow or subordinate claims based on theories of estoppel or unjust enrichment. (See Complaint, Docket no. 1, Adv. No. 10-53963). As described by the Examiner:
(Examiner's Report, Vol. II, at 10).
The DCL Plan Proponents argue that the Examiner's Report supports the reasonableness of the Settlements. The Examiner's duties included evaluating the estates' potential causes of action arising out of the LBO. After a comprehensive investigation, the Examiner prepared a lengthy and detailed report setting forth his conclusions. Generally, the Examiner determined that the Step Two transactions were more susceptible to avoidance than the Step One transactions. Some of his many conclusions are summarized as follows:
Claim Examiner's Evaluation Intentional Fraud at Step One 11 U.S.C. A court is "reasonably unlikely" to find that § 548(a)(1)(A) (Examiner's Report, Vol II, at the Tribune Entities incurred obligations or 22) made transfers in the Step One transactions with actual intent to hinder, delay or defraud any entity to which they were or became, on or after the date that such transfers were made or obligations were incurred, indebted Intentional Fraud at Step Two 11 U.S.C. A court is "somewhat likely " to find that the § 548(a)(1)(A) miner's Report, Vol II, at Tribune Entities incurred obligations or made 32) transfers in the Step Two transactions with actual intent to hinder, delay or defraud any entity to which they were or became, on or after the date that such transfers were made or obligations were incurred, indebted Constructive Fraud—Insolvency of Parent at A court is "highly likely " to find that the Step One 11 U.S.C. § 548(a)(1)(B)(ii)(I) (Examiner's Tribune Parent was solvent as of, and after Report, Vol. II, at 187) giving effect to, the Step One Transactions, if
Step Two Debt is not included for purposes of that determination. If Step Two Debt is included, it is " somewhat likely " (although a very close call) that a court could find Tribune was solvent. Constructive Fraud—Insolvency of Guarantor A court is "highly likely " to find that the Subsidiaries at Step One 11 U.S.C. Guarantor Subsidiaries were solvent as of, § 548(a)(1)(B)(ii)(I) (Examiner's Report, Vol. and after giving effect to, the Step One II, at 207) Transactions if the Step Two Debt is not included for purposes of that determination. If Step Two Debt is included, a court is "somewhat more likely " to conclude that the Guarantor Subsidiaries were solvent. Constructive Fraud—Insolvency of Parent A court is "highly likely " to conclude that at Step Two 11 U.S.C. § 548(a)(1)(B)(ii)(I) (Examiner's the Step Two transactions rendered Tribune Report, Vol. II at 220) Parent insolvent. Constructive Fraud—Insolvency of Guarantor A court is "reasonably likely " to conclude Subsidiaries at Step Two 11 U.S.C. that the Guarantor Subsidiaries were rendered § 548(a)(1)(B)(ii)(I) (Examiner's Report, Vol. insolvent on a collective basis as a II at 226) result of the Step Two transactions. Constructive Fraud—adequate capital at Step A court is "reasonably likely " to conclude One 11 U.S.C. § 548(a)(1)(B)(ii)(II) (Examiner's that the Tribune Parent and the Guarantor Report, Vol. II, at 211) Subsidiaries were left with adequate capital after giving effect to the Step One transactions. Constructive Fraud—adequate capital for A court is "highly likely " to conclude that Tribune Parent at Step Two 11 U.S.C. the Tribune Parent was left without adequate § 548(a)(1)(B)(ii)(II) (Examiner's Report, Vol. capital after giving effect to the Step Two II, at 229) transactions Constructive Fraud—adequate capital for the A court is "reasonably likely " to conclude Guarantor Subsidiaries at Step Two 11 U.S.C. that the Guarantor Subsidiaries were left § 548(a)(1)(B)(ii)(II) (Examiner's Report, Vol. without adequate capital after giving effect to II, at 229) the Step Two transactions. Constructive Fraud—incurring debts beyond A court is "reasonably unlikely " to find an ability to pay at Step One 11 U.S.C. that the Tribune Entities intended to incur or § 548(a)(1)(B)(ii)(III) (Examiner's Report, believed they would incur debts beyond their Vol. II, at 239) ability to pay as such debts matured at Step One Constructive Fraud—incurring debts beyond A court would be "somewhat likely " to find an ability to pay at Step Two 11 U.S.C. that the Tribune Entities intended to incur or § 548(a)(1)(B)(ii)(III) (Examiner's Report, believed they would incur debts beyond their Vol. II, at 240) ability to pay as such debts matured at Step Two
The Examiner also evaluated and quantified potential recoveries to the Debtors' estates based on recovery scenarios arising from the alleged LBO-Related Causes of Action (the "Recovery Scenarios"). (Examiner's Report, Vol. II, Annex B). When viewed in light of six Recovery Scenarios as quantified by the Examiner,
Examiner Scenario Noteholders' Recovery ($million) 1. No Avoidance $58 to $65 2. Step Two avoidance at Parent $95 to $107 3. Step Two avoidance at Parent and Subs $100 to $113 4. Step One and Two avoidance at Parent $240 to $280 5. Step One avoidance at Parent, Step Two avoidance at Parent and Subs $246 to $289DCL Settlement $432 6. Full Avoidance $1,305
(Examiner's Report, Vol. II, Annex B at B-10 to B-33).
The Noteholder Plan Proponents assert that the Court's evaluation of the DCL Plan Settlements should not end with findings in the Examiner's Report, arguing that (i) there is a strong possibility of prevailing on full avoidance, subordination or disallowance of the Senior Lenders' debt at both Step One and Step Two, and (ii) there are numerous other litigation outcomes that would result in far greater recoveries for Non-LBO Creditors. Because the Examiner Report supports the Noteholders' contention that it is highly likely that a court would avoid the Step Two transactions, I will focus my analysis on the Noteholders' arguments that there is strong case for full avoidance, subordination, or disallowance of the Step One transactions.
The Noteholder Plan Proponents argue that there is considerable evidence in the record to show that the Step One transactions should be avoided because they were intentionally fraudulent. To prove intentional fraud, a plaintiff must show that the transaction was perpetrated "with actual intent to hinder, delay or defraud" creditors. 11 U.S.C. § 548(a)(1)(A). Intent is often difficult to prove, and a plaintiff may meet his burden of proof by introducing evidence that supports an inference of intent. Moody v. Sec. Pacific Bus. Credit, Inc., 127 B.R. 958, 990 (W.D.Pa.1991) aff'd 971 F.2d 1056 (3d Cir. 1992). In deciding whether to infer actual intent, Courts traditionally have considered "badges of fraud," including (1) the relationship between the debtor and the transferee, (2) consideration for the conveyance, (3) insolvency or indebtedness of the debtors, (4) how much of the debtor's estate was transferred, (5) reservation of benefits, control or dominion by the debtor, and (6) secrecy or concealment of the transaction. The Liquidation Trust of Hechinger Investment Co. Of Delaware, Inc. v. Fleet Retail Finance Group (In re Hechinger Investment Co. Of Delaware), 327 B.R. 537, 551 (D.Del.2005); In re Fedders North America, Inc., 405 B.R. 527, 545 (Bankr.D.Del.2009). "The presence or absence of any single badge of fraud is not conclusive." Fedders, 405 B.R. at 545 (citing Dobin v. Hill (In re Hill), 342 B.R. 183, 198 (Bankr.D.N.J.2006)). "Although the presence of a single ... badge of fraud may cast suspicion on the transferor's intent, the confluence of several in one transaction generally provides conclusive evidence of an actual intent to defraud." Id.
The Noteholders contend that a number of the badges of fraud are present in the Step One transaction, including a relationship
A court may, of course, consider factors other than the traditional badges of fraud in an analysis of fraudulent intent. Fedders, 405 B.R. at 545 (citing Hill, 342 B.R. at 198-99). If the "natural consequence" of a debtor's actions is that its creditors were hindered, delayed or defrauded, a court is more likely to find that an intentional fraudulent transfer occurred. United States v. Tabor Court Realty Corp., 803 F.2d 1288, 1305 (3d Cir. 1986). However, the fact that the LBO Lenders sought to obtain structural seniority for the debt through the subsidiary guarantees is not, on its own and without further evidence, reflective of intent to hinder, delay or defraud creditors or evidence of misconduct. See In re Owens Corning, 419 F.3d 195, 212-13 (3d Cir.2005) (In a different context, the Third Circuit Court of Appeals noted that a bank's efforts to obtain "structural seniority" are not out of the ordinary, writing: "To begin, the Banks did the `deal world' equivalent of `Lending 101.' They loaned $2 billion to [the parent] and enhanced the credit of that unsecured loan indirectly by subsidiary guarantees covering less than half the initial debt. What the Banks got in lending lingo was `structural seniority'—a direct claim against the guarantors (and thus against their assets levied on once a judgment is obtained) that other creditors... did not have. This kind of lending occurs every business day. To undo this bargain is a demanding task.")
The Noteholders contend that the LBO, as a whole, was founded on misleading and unrealistic financial projections prepared in February 2007, on which the Company continued to rely after management became aware that the Company's actual performance was materially below the projection figures. The Noteholders argue that management should have released revised projections prior to Step One, but did not based upon "potential legal concerns." (NPP Ex. 372, 4/12/07 email). Moreover, the Noteholders argue that internal emails demonstrate that Tribune's management knew that the LBO would leave the Company with no equity cushion.
The Examiner undertook an extensive investigation regarding the viability of the intentionally fraudulent transfer claims at Step One and concluded that a Court was "reasonably unlikely" to find that the Tribune Entities made transfers and incurred the obligations at Step One with actual intent to hinder, delay or defraud creditors. (Examiner's Report, Vol. II, at 22). The lack of the traditional badges of fraud here, particularly in light of a showing that the price for the LBO transaction was determined as part of an open and public process, make it less likely that a plaintiff has a strong likelihood of avoiding the Step One transaction based on intentional fraud claims. It is not unreasonable for the Settling Parties to base a settlement on the notion that there was no intentional fraud in the Step One transaction.
The constructive fraud theory does not require an actual intent to defraud. Instead, a transfer or incurred obligation is presumed to be fraudulent as to creditors once a plaintiff establishes the requisite statutory elements. In re Fruehauf Trailer Corp., 444 F.3d 203, 210 (3d Cir.2006). Section 548(a)(1)(B) provides in pertinent part:
11 U.S.C. § 548(a)(1)(B).
The Examiner found it highly likely that a court would collapse all of the transactions within Step One and Step Two for purposes of evaluating "reasonably equivalent value."
When arguing for and against the reasonableness of the DCL Plan Settlement, the parties do not contest vigorously the Examiner's findings about the lack of reasonably equivalent value received for portions of the obligations incurred by the LBO Lenders. The parties' main dispute under the constructive fraud claims is whether the transfers made, or obligations incurred, rendered the Debtors insolvent, inadequately capitalized, or unable to pay their debts as they became due.
The DCL Plan Proponents argue that the Debtors were not rendered insolvent as a result of the Step One transactions, relying on the Examiner's Report, and testimony of their expert, Daniel Fischel. The Noteholder Plan Proponents disagree, relying on the testimony of their own expert,
The Examiner concluded that a court is highly likely to find that both the Tribune Parent and the Guarantor Subsidiaries were solvent as of, and after giving effect to, the Step One Transactions. (Examiner's Report, Vol. II, at 187, 207). However, the Examiner also concluded that if the effects of Step Two, including Step Two Debt, are considered in a Step One solvency analysis (i.e., if Step One and Step Two are "collapsed"), then the question is a very close call. Nonetheless, even with collapse, the Examiner concluded that a court is likely to find that the Tribune Parent was solvent, and somewhat more likely to find that the Guarantor Subsidiaries were solvent, as of the Step One closing. (Id.). The Noteholders disagree with the Examiner's conclusions and argue that a court would collapse Steps One and Two for the solvency analysis at Step One, making it more likely that the Step One transaction is avoidable under a constructive fraud theory.
Courts in this circuit have recognized that multi-step transactions can be collapsed when those steps are part of one integrated transaction. Tabor Court, 803 F.2d at 1302; Hechinger, 327 B.R. at 546; Mervyn's Holdings, 426 B.R. at 497. Instead of focusing on one of several transactions, a court should consider the overall financial consequences these transactions have on the creditors. Mervyn's Holdings, 426 B.R. at 497. The collapsing of multiple transactions is employed frequently in the context of leveraged buy-outs. HBE Leasing Corp. v. Frank, 48 F.3d 623, 635 (2d Cir.1995) (citing United States v. Gleneagles Investment Co., 565 F.Supp. 556 (M.D.Pa.1983) aff'd sub nom. Tabor Court, 803 F.2d 1288); see also Rosener v. Majestic Management, Inc. (In re OODC, LLC), 321 B.R. 128, 138 (Bankr. D.Del.2005) ("In deciding whether to `collapse' a series of transactions into one integrated transaction, the issue is ... whether there was an overall scheme to defraud the estate and its creditors by depleting all the assets through the use of a leveraged buyout.").
The Mervyn's Holdings Court determined that courts generally consider three factors when deciding whether to collapse a multi-step transaction: (i) whether all of the parties involved had knowledge of the multiple transactions, (ii) whether each transaction would have occurred on its own, and (iii) whether each transaction was dependent or conditioned on other transactions. Mervyn's Holdings, 426 B.R. at 497. In this case, the Examiner easily found that all parties had knowledge of the multiple transactions. (Examiner's Report, Vol. II, at 167). As to the second factor, the Examiner concluded that it was possible that the Step One stock repurchase could have occurred on its own if the Step Two merger and ESOP transactions had not been available, but "by the time the April 1, 2007 agreements were in place, Tribune had crafted a comprehensive transaction that would culminate in the Merger and the replacement of old ownership with new, and that could be fully implemented subject to satisfaction of the conditions precedent to Step Two." (Id. at 172-73). Under the Examiner's analysis, the first two factors fall in favor of collapsing Step One and Step Two.
The Examiner decided, however, that the third factor did not favor collapse because Step One and Step Two were not mutually dependent upon or conditioned upon one another. Although the transaction documents required the parties to use their best efforts to close the Step Two transactions, the parties structured the
(Id. at 174-76). The Examiner further considered whether, despite the outward appearance of the documents, the two transactions actually were reciprocally dependent. Although the Examiner said the question was close, he did not conclude that satisfaction of the conditions was a mere formality and without substance. (Id. at 177-79). The Examiner asserts that relevant case law would persuade a court to focus on whether the steps were actually dependent, not the probability that the steps would be completed. (Id. at 180). He wrote:
(Id. at 182).
The Noteholders argue that the Examiner erred in concluding that Step One and Step Two should not be collapsed for the purpose of determining insolvency at Step One. They claim the facts demonstrate that neither step was intended to occur on its own, but the whole LBO transaction was broken into two steps because Tribune's large shareholders would not agree to vote in favor of the LBO unless it provided an up-front payment that did not have to await regulatory approval. (Id. at 174). The Board also approved the entire LBO (i.e., both steps) on April 1, 2007. (Id. at 168). Moreover, the Noteholders urge the Court to view the steps from the lenders' perspective, and note that the commitment letters for both steps were executed at the same time and obligated the parties to provide the requisite financing to permit Step Two to occur. (Id. at 171).
For the most part, the Noteholders' arguments support the second factor in the Mervyn's test because it is unlikely either step would have occurred on its own. The Noteholders argue that no court has required satisfaction of all three factors to collapse the steps to view the transaction as a whole. However, I am not willing to dispense with the third factor in the particular collapsing question at issue here (i.e., for purposes of determining solvency rather than reasonably equivalent value). Timing is key to this solvency issue. The
I also note that when considering solvency of the debtor's estate, the third factor should be viewed from the debtor's perspective (i.e., whether the debtor was obligated to incur additional borrowings) rather than the lender's perspective (i.e. whether the lender was obligated to provide additional financing). At the close of Step One, the Debtors had no obligation to the Senior Lenders for Step Two Debt. I find the Examiner's analysis on this factor particularly persuasive to the collapsing issue: i.e., focusing on what is required to happen to the debtor's estate, rather than what will probably happen. Because there was uncertainty created by the conditions precedent to Step Two, the parties ensured that the Step One transaction could stand on its own. Therefore, the Examiner concluded that it is not appropriate to collapse Step One and Step Two for determining whether the Debtors were insolvent at Step One, and nothing in the record before me suggests that this conclusion is an unreasonable basis upon which the Settling Parties may rely in reaching the proposed DCL Plan Settlement.
The Noteholders' expert opinion regarding insolvency at Step One was based upon collapsing the two steps together. (Tr. 3/18/11 at 109:20-25, 142:21-143:14). While the Examiner reasoned that Steps One and Two would not be collapsed for an insolvency analysis, he nonetheless considered insolvency in light of a collapse and decided:
(Examiner's Report, Vol. II, at 206). The DCL Plan Proponent's expert also opined that contemporaneous market evidence refutes a finding of insolvency as of June 4, 2007, noting that rating agency actions and bond yields showed that market participants considered Tribune solvent at that time. (See DCL ex. 1106, ¶¶ 24-28, ¶¶ 29-31, Tr. 3/10/11 at 95:14-96:23). He also noted that, although he agreed that the credit default swaps spread "spiked" after the closing of Step One, the increase was not at a level which would indicate that the market determined a significant risk of insolvency or bankruptcy in the near term. (Tr. 3/10/11 at 96:24-97:12). The DCL Plan Proponents provided evidence to demonstrate that the "spike" in credit default swap prices between Step One and Step Two was less significant when viewed in light of the prices over a five year period prior to the Petition Date. (See DCL Plan Proponents' Closing Argument Demonstratives, at 13-14 "Statistical Mischief," comparing DCL Ex. 2002 with NPP Ex. 944, Figure 41)
Upon review of the various arguments and evidence offered by the parties, I conclude that it is reasonable for the Settling Parties to base their settlement on the assumption that a court is unlikely to decide that the Debtors were insolvent as of Step One.
In the absence of insolvency, the constructive fraud test of § 548(a)(1)(B) alternatively provides for avoidance of a suspected transfer or obligation if the debtor (1) was engaged in business ... for which any property remaining with the debtor was an unreasonably small capital, or (2) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured." 11 U.S.C. § 548(a)(1)(B)(ii)(II) and (III). The Third Circuit has explained the term as follows:
Moody v. Security Pacific Bus. Credit, Inc., 971 F.2d 1056, 1070 (3d Cir.1992). The Third Circuit decided that a district court did not err in considering the related concepts of "unreasonably small capital" and "inability to pay debts as they become due" together because these "distinct but related concepts furnish a standard of causation which looks for a link between the challenged conveyance and the debtor's insolvency." Id. at 1073.
In Moody, the Third Circuit held that the test for "unreasonably small capital" is "reasonable foreseeability." Id. at 1073. A court should assess the objective reasonableness of the company's financial projections, as well as "all reasonably anticipated sources of operating funds, which may include new equity infusions, cash from operations, or cash from secured or unsecured loans, over the relevant time period." Id. at 1073, 1072 n. 24 (citing [then professor, now Bankruptcy Judge] Markell, Toward True and Plain Dealing: A Theory of Fraudulent Transfers Involving Unreasonably Small Capital, 21 Ind. L. Rev. 469, 496 (1988)); see also Peltz v. Hatten, 279 B.R. 710, (D.Del.2002) (citing Moody). The Moody Court noted that this analysis attempts to strike the proper balance by holding participants in a leveraged buyout responsible "when it is reasonably foreseeable that an acquisition will fail, but at the same time tak[ing] into account that `businesses fail for all sorts of reasons, and that fraudulent [transfer] laws are not a panacea for all such failures.'" Id. 1073 (quoting Markell, 21 Ind. L. Rev. at 506).
In his report, the Examiner noted that a capital adequacy analysis entails a "forward-looking analysis" since "[s]olvency focuses on the debtor's liabilities at a given moment, whereas capital adequacy focuses on the debtor's ability to meet its obligations over time." (Examiner's Report, Vol. II, at 183-84). Having already determined that, at the time Step One took place, Step Two was highly likely to occur, the Examiner decided that the Step Two Debt must also be considered to properly analyze the Debtors' capital adequacy at Step One. (Id.). I agree that the Third Circuit's discussion in Moody regarding "reasonable foreseeability" requires consideration
The Examiner's financial advisor performed a Step One capital adequacy analysis based upon a cash flow projection model developed by Valuation Research Corporation ("VRC"),
The Examiner's financial advisor also incorporated certain downside financial expectations prepared by advisors for other participants in the Step One transaction (including, Duff & Phelps, Blackstone, Morgan Stanley, and Standard & Poor's), which all assumed that Tribune's 2007 revenues would be lower than that assumed in VRC's base case model. (Id. at 215-16). The Examiner's financial advisor reported that the result of his analysis indicated only two instances in which the stress case assumptions by the financial advisors for participants in the Step One transaction resulted in covenant non-compliance and only one instance demonstrating insufficient capital, as illustrated in the following table:
Negative Capital Adequacy
Stress Case Cushion Covenant Violation
VRC No No
Duff & Phelps No No
Blackstone No No
Morgan Stanley Downside A No No
Morgan Stanley Downside B No Yes
Standard & Poor's Yes Yes
(Id. at 218). The Examiner noted that Standard & Poor's stress case was based on "aggressive downside assumptions." (Id.). The Examiner also noted that the foregoing analysis appropriately relied upon management's February 2007 projections, based upon what was known or ascertainable at the time of the Step One transaction. (Id.).
In sum, the Examiner concluded that it is reasonably likely that a court would conclude that the Step One Transactions left Tribune with adequate capital, even factoring in the contemplated Step Two Debt. (Id. at 220). Moreover, the Examiner similarly concluded that the Guarantor Subsidiaries also were adequately capitalized after the Step One transactions, even if the expected Step Two Debt is included in the analysis. (Id.).
However, the capital adequacy analysis performed by the Noteholders' expert (Tuliano)
The Noteholders argue that the DCL Plan Proponents failed to rebut Tuliano's conclusions regarding inadequate capital, since their own expert's analysis showed that Tribune did not have adequate capital to pay its debts as they came due after the Step One transaction. (DCL Ex. 1106 at Ex. Q). The Step One capital adequacy and ability to pay analysis prepared by the DCL Plan Proponent's expert (Fischel) showed that, using an average of downside case projections prepared before June 4, 2007, and considering the anticipated Step Two Debt, Tribune would have negative $79 million in 2009, negative $45 million in 2010, and only $9 million in 2011. (Id., Tr. 3/10/11 at 122:20-123:19). Fischel explained, however, that the numbers were fairly close and, by correcting the amount he used for the sale of certain assets to the same amount used in Tuliano's report, the amount of available cash would increase by $220 million, which would eliminate the negative numbers. (Tr. 3/10/11 at 123:2-124:21).
The record before me does not lead me to conclude that the Step One capital adequacy issue is resolved easily. To borrow a term used in the Examiner's Report, this issue remains in "equipoise." The purpose of the Court's inquiry at this point, however, is not to resolve the issues, but to canvass them. The record here does not provide sufficient evidence that would lead me to conclude that there is a strong possibility that a court would decide this issue in one way or the other. Valid arguments, supported by complex analyses—on both sides—provide support for approving a settlement, including the proposed DCL Plan Settlement.
The Noteholders argue that full avoidance of LBO transactions is not the only litigation outcome that would result in the Non-LBO Creditors recovering more than the consideration offered by the DCL Plan Settlements. For example, the Noteholders contend that they would recover significantly more than the Settlement amounts if Step Two Debt was avoided (which is
The Examiner considered whether the holders of Step One Debt should be prohibited from sharing in any recovery of payments made in connection with the avoidance of the Step Two transactions until the Non-LBO Creditors are paid in full. The argument against participation posits that it is inequitable for Step One Lenders to benefit from any Step Two recoveries, since the Step One Lenders are the same entities who participated in, funded, and made possible the Step Two Debt. (See Examiner's Report, Vol. II at 301). The Examiner noted that case law permits all unsecured creditors to benefit from avoidance action recoveries. See Buncher Co. v. Off. Comm. Of Unsecured Creditors of GenFarm Ltd. P'ship IV, 229 F.3d 245, 250-51 (3d Cir.2000) (citing 2 Collier Bankruptcy Manual ¶ 544.09[5] (Lawrence P. King, ed., 3d ed. Rev. 1999) ("When recovery is sought under section 544(b) of the Bankruptcy Code, any recovery is for the benefit of all unsecured creditors, including those who individually had no right to avoid the transfer.") (Id. at n. 27)). The Examiner agreed that principles of equitable subordination or equitable estoppel could be utilized in an attempt to bar the Step One Lenders from participating in any Step Two recovery.
The DCL Plan Proponents respond that the Noteholders' arguments fail to demonstrate that, even if successful, the Senior Noteholders' recoveries under the WEAR theory would be substantially in excess of that provided by the DCL Plan Settlements' initial distribution. The Noteholders' recovery model predicts that the Senior Noteholders' recovery under WEAR would be approximately $449 million, not much more than the DCL Plan Settlements. (See NPP Ex. 31 at 121). To counter this, the Noteholders have added another step to the WEAR argument, contending that avoided Step Two Debt at the Guarantor Subsidiaries' level would be "upstreamed" to the Tribune Parent, greatly increasing the Senior Noteholders expected recovery. (See NPP Ex. 31 at 89). This theory asserts that the court should apply equitable principles to distribute the value of the Guarantor Subsidiaries to the Tribune Parent creditors, before paying the Step One Lender claims. I agree with the DCL Plan Proponents that "upstreaming" is an uphill battle for the Noteholders because the notion turns on uncertain theories of equitable subordination or equitable estoppel.
In addition, viability of the WEAR and upstreaming theories might depend upon establishing a basis for substantive consolidation of the Guarantor Subsidiaries and the Tribune Parent. In Owens Corning, the Third Circuit determined that substantive consolidation may be used as an equitable remedy, upon a showing that (i) prepetition the debtors disregarded separateness so significantly that their creditors relied on the breakdown of entity borders and treated them as one legal entity, or (ii) postpetition the debtors' assets and liabilities are so scrambled that separating them is prohibitive and hurts creditors. In re Owens Corning, 419 F.3d 195, 210-11 (3d Cir.2005). Neither prepetition disregard of corporate entity borders nor postpetition scrambling of assets and liabilities has been shown on this record, which does not support a conclusion that the Noteholders' are likely to prevail on a WEAR theory and render the proposed DCL Plan Settlements unreasonable.
The DCL Plan Proponents rely upon the expert testimony and analysis of Professor
Black's analysis then focused on the likelihood or probability of achieving each Scenario, particularly the likelihood of success for Scenario F (full avoidance). ("[I]f you thought Scenario F was a slam-dunk, you wouldn't be settling for the amount in the DCL Plan. If you thought it was a long shot, then the DCL Plan is going to look a lot better." (Tr. 3/9 at 116:4-11)). So Black developed six "Cases" as sets of probabilities that he assigned to each litigation Scenario to reflect the strengths and weaknesses of each of the LBO claims and to establish settlement ranges. For example, the "Low Settlement Case" assigns probabilities in a manner strongly favorable to the LBO Lenders, and the "High Settlement Case" assigns probabilities strongly favorable to the Non-LBO Creditors. (DCL Ex. 1484 at 23-24). In evaluating the likelihood of success in each Case, Black had to identify and assess key drivers of the litigation outcomes (e.g., whether a court would "collapse" Step One and Step Two and consider both Steps when analyzing solvency at Step One; a finding that Step One and Step Two should be "collapsed" would increase the probability of Scenario F's total avoidance). (Tr. 3/9 at 120:18-125:20). After developing the probabilities associated with each of the litigation Scenarios in each of his Cases, Black derived expected recovery amounts for each Case. (Tr. 3/9 at 147:20-148:1). Black prepared a chart demonstrating that, after including the probabilities of success in the calculations (and assuming recoveries on the unsettled third party litigation), the DCL Plan Settlements exceed any potential settlement recovery amounts the Non-LBO Creditors would receive in each Case. (DCL Ex. 1484 at 29, Table 4).
In determining the probabilities for each "Case," Black acknowledged that he was required to use his best judgment when analyzing a number of sub-issues to make an assessment of how the Examiner might view those sub-issues that the Examiner did not explicitly decide, and then Black would "nudge" the probability percentages up or down based on those judgments, either in his head or by using a calculator. (Tr. 3/9/11 at 228:12-232:25, 242:1-244:9). Subjective judgments about the Examiner's findings and conclusions were central to Black's analysis. (Tr. 3/10/11 at 76:2-17). The Noteholders also argue that many of the judgments made by Black in assessing the probabilities related to the sub-issues are opinions regarding legal issues.
In contrast, the Noteholders' expert, Dr. Bruce Beron, performed a "decision tree risk analysis," a somewhat more "mechanical" approach to evaluation of likely litigation outcomes, to determine a reasonable settlement range for the LBO-related Causes of Action. Beron explained that he performs decision tree risk analyses to calculate the expected value on the outcome of a case for clients who were considering litigation or have been sued. (Tr.
To determine the probability of the possible outcomes for the LBO-Related Causes of Action, Beron relied upon the conclusions in the Examiner's Report (Tr. 3/17/11 at 115:20-116:4), but Beron's method assigns a numerical probability to each of the Examiner's seven explanatory phrases, ranging from 15% for outcomes labeled "highly unlikely" to 85% for "highly likely." (NPP Ex. 2476 at 6). Likewise, probability values are also assigned to the Examiner's conclusion relating to defenses and other clams, such as equitable disallowance or equitable subordination. (Id. at 12-13). Based upon the Examiner's Report, Beron constructed a decision tree which contained 48 possible litigation outcomes for the LBO-Related Causes of Action at Step One and Step Two, which led to 19 possible recovery scenarios. (Tr. 3/17/11 143:14-23). The Noteholders then determined the recovery amounts for the 19 possible scenarios. (Id.). Using this decision tree, Beron calculated that the expected recovery value for the Noteholders on the LBO-Related Causes of Action is $1.57 billion. (Id. at 144:3-17). The Noteholders rely upon Beron's testimony and methodology to support their claim that the DCL Plan Settlement is unreasonable.
Both experts possess highly impressive credentials and both were genuine in their efforts to assist their respective clients and the Court. Ultimately, however, neither expert's analysis is particularly helpful to the Court. The methods employed by each expert here involve deeply subjective judgments. Black's conclusions, as he admits, are based, in large measure, upon highly subjective assessments. Beron's conclusions, on the other hand, follow from the use of information supplied by his client in contemplation of this litigation. Neither supply a reliable basis upon which the Court could adopt either viewpoint.
Consideration of the parties' arguments regarding the strengths and weaknesses of the various elements of the LBO-Related Causes of Action leads me to conclude that the outcome of such claims is uncertain.
Difficulty in the collection of any judgment against the settling parties does not seem to be a concern that either supports or undermines approval of the DCL Plan Settlements.
The Nutraquest Court observed that "[i]t is axiomatic that settlement will almost always reduce the complexity and inconvenience of litigation. . . . The balancing of the complexity and delay of litigation with the benefits of settlement is related to the likelihood of success in that litigation." Nutraquest, 434 F.3d at 646. Fraudulent transfer litigation regarding LBOs are notoriously lengthy and complex. See, e.g., 3v Capital Master Fund Ltd. v. Off'l Comm. Of Unsecured Creditors of Tousa, Inc. (In re Tousa, Inc.), 444 B.R. 613 (S.D.Fla.2011). The LBO-Related Causes of Action in this matter are certainly included in the lengthy and complex category and, as the foregoing review of issues demonstrates, there is no outcome that is a "slam dunk." Neither plan is globally consensual; both plans contemplate follow-up litigation. On one level, the court is being asked to choose the lesser evil between two litigation scenarios. The DCL Plan Settlements will certainly reduce, at least partially, complex and costly litigation over the LBO-Related Claims.
The DCL Plan Proponents assert that creditors across the debtors' capital structure voted resoundingly in favor of the DCL Plan. (See Docket no. 7918, 8114, 8882, as supplemented, the "Epiq Voting Declaration."). In total, 2,300 out of the 2,520 conforming ballots received (91.27%) voted to accept the DCL Plan, with $10,309,165,026 out of $12,871,132,865 in claims represented by those ballots (80.10%) accepting. (See Epiq Voting Declaration, docket no. 8882, at Ex. 1).
In particular, the Voting Declaration shows that the DCL Plan was accepted by both LBO creditors and Non-LBO Creditors. The class of Other Parent Claims— unsecured trade and other claims against the Tribune Parent—supported the DCL Plan, with 226 out of 237 voting creditors (95.36%), holding 94.71% by dollar amount of the claims voted, choosing to accept the DCL Plan.
Finally, it is also important to note that the Creditors' Committee, which has standing to pursue the LBO-Related Causes of Action, supports the DCL Plan Settlement. The Creditors' Committee was actively involved in the negotiations and has not merely "rubber-stamped" this settlement. Its support, as well as the votes of creditors in favor of the plan, weigh heavily in favor of approval of the settlement.
For the reasons discussed above, I conclude that the record before me demonstrates that the DCL Plan Settlement: (i) falls above the lowest point in the range of reasonable litigation possibilities, (ii) would certainly reduce cost and delay pursuing the LBO-Related Causes of Action, and, perhaps most importantly, (iii) has been approved by creditors across the Debtors' capital structure. Therefore, I conclude that the DCL Plan Settlement should be approved because it is fair, reasonable and in the best interest of the Debtors' estates and it is properly part of the DCL Plan pursuant to Bankruptcy Code § 1123(b)(3)(A).
The Litigation Trust and the Creditors' Trust will pursue the LBO-Related Causes of Action that are not settled. Some potential defendants in those law suits may attempt to pursue litigation against the settling parties for contribution and indemnification. The DCL Plan includes a bar order provision (Section 11.3) (the "Bar Order") which prevents claims for non-contractual indemnification or contribution against the "Released Parties."
Bankruptcy courts have authority to enter settlement bar orders. Matter of Munford, Inc., 97 F.3d 449, 455 (11th Cir.1996). Bar orders are increasingly used to encourage partial settlement of litigation involving multiple defendants by barring contribution claims litigation against the settling defendants by the non-settling defendants. Eichenholtz v. Brennan, 52 F.3d 478, 486 (3d Cir.1995).
Cullen v. Riley (In re Masters Mates & Pilots Pension Plan and IRAP Litig.), 957 F.2d 1020, 1028 (2d Cir.1992). While a bar order encourages settlement, it must also be fair to the non-settling defendants, who are losing contribution and indemnification claims, by providing an appropriate right of set-off from any judgment imposed against them. WorldCom, 339 F.Supp.2d at 568 (citing In re Ivan F. Boesky Sec. Litig., 948 F.2d 1358, 1368-69 (2d Cir. 1991)); see also Newby v. Enron Corp. (In re Enron Corp. Securities, Derivative & ERISA Litig.), No. MDL-1446, 2008 WL 2566867, *8 (S.D.Tex. June 24, 2008) ("[The bar order] in return would protect non-settling defendants with a judgment credit reduction that is at least equal to the settling defendants' proven share of liability.").
The Bar Order currently set forth in the DCL Plan includes a proportionate judgment reduction provision, providing, in part:
(DCL Plan, § 11.3). In Eichenholtz, the Third Circuit determined that proportionate judgment reduction was the fairest method to ensure that non-settling defendants were not prejudiced by a bar order, writing:
Eichenholtz, 52 F.3d at 487 (citations omitted).
Both the Noteholders and the D & Os argue that the Bar Order is an improper non-consensual release of third-party claims. See Gillman v. Continental Airlines (In re Continental Airlines), 203 F.3d 203, 212 (3d Cir.2000); Matter of Genesis Health Ventures, 266 B.R. at 608 (discussing standards for permitting third-party releases in reorganization plans). The Continental Court determined that "non-consensual releases by a non-debtor of other non-debtor third parties are to be granted only in `extraordinary cases,'" and that the "hallmarks of a permissible non-consensual release" were "fairness, necessity to the reorganization, and specific factual findings to support these conclusions." Continental, 203 F.3d at 212, 214. The Genesis Court evaluated whether a non-consensual release fit the "hallmarks" discussed in Continental by considering whether: (i) the non-consensual release was necessary to the success of the reorganization, (ii) the releasees have provided a critical financial contribution to the debtor's plan, (iii) the releasees' financial contribution is necessary to make the plan feasible, and (iv) the release is fair to the non-consenting creditors, i.e., whether the non-consenting creditors received reasonable compensation in exchange for the release. Genesis, 266 B.R. at 607-08. The Noteholders and D & Os argue that the Bar Order does not meet the final Genesis factor.
The Noteholders claim that the proportionate judgment reduction provision works inequitably to reduce (or potentially eliminate) claim recoveries on remaining LBO Causes of Action, including the state law constructive fraudulent conveyance claims, which will be pursued by the Creditors' Trust (or possibly by individual creditors) in state court. They argue that a state court's enforcement of the Bar Order's proportionate judgment reduction provision amounts to a non-consensual release of part of those claims, since the state court plaintiffs neither negotiated nor consented to the provisions of the Bar Order.
The Bar Order does not prevent claims against the non-settling defendants. It may limit future recoveries against the non-settling defendants, but the amount of the reduction is tied to enforcement of the DCL Plan Settlement. Even though the Noteholders (or other state court plaintiffs) did not negotiate or consent to the DCL Plan Settlement, the Bar Order is fair because I have determined that the DCL Plan Settlement falls within the range of reasonableness. The Noteholders also object to the Court's approval of the Bar Order without making any findings on the apportionment of fault. They argue that the Bar Order unfairly relieves Senior Lenders from the burden of proving damage allocation. However, parties in future litigation know that any judgment will be subject to the proportionate judgment reduction provision and can plan their trial strategies accordingly. The Senior Lenders are relieved from participation in the apportionment litigation because they settled their claims. The Second Circuit Court decided that it was not error for a trial court to leave the determination of the actual amount of the judgment credit for calculation at trial. Gerber v. MTC Electronic Tech. Co., Ltd., 329 F.3d 297, 305 (2d Cir.2003). I conclude that the Bar Order is fair with respect to the Noteholders.
The Bar Order is fair to the D & Os because, as non-settling defendants, they are protected by the proportionate judgment reduction, which is the equivalent of a contribution claim. Eichenholtz, 52 F.3d at 487; see also McDermott, Inc. v. AmClyde, 511 U.S. 202, 209, 114 S.Ct. 1461, 1466, 128 L.Ed.2d 148 (1994) ("Under this [proportionate share] approach, no suits for contribution from the settling defendants are permitted, nor are they necessary, because the nonsettling defendants pay no more than their share of the judgment.").
The D & Os' concern about another court's unwillingness to enforce the Bar Order is speculative. State courts are apt to enforce a Bar Order as readily as they enforce other bankruptcy court orders. In Bethesda Boys Ranch v. Atlantic Richfield Co., 208 B.R. 980 (N.D.Okla.1997) the District Court for the Northern District of Oklahoma remanded an action against a previous debtor to state court, deciding that a state court could enforce a discharge injunction in a confirmation order, writing:
Bethesda Boys Ranch, 208 B.R. at 983-84.
However, the D & Os contend that the Bar Order unjustly places the burden of enforcement of the Bar Order on the Barred Persons, rather than the plaintiffs who have no incentive to seek application of the Bar Order. The D & Os argue that the Bar Order should include a direct injunction against the future plaintiffs, enjoining them from circumventing the proportionate judgment reduction provision of the Bar Order. I agree. The Bar Order should direct the actions of the Litigation Trustee, Creditors' Trustee and other creditors who may pursue a Preserved Cause of Action or a SLCFC (the "Potential Plaintiffs"). To protect adequately the D & Os, the Bar Order would have to be revised to include language that directly enjoins the Potential Plaintiffs from seeking relief or collecting judgments against non-settling defendants in such a manner that such efforts fail to conform to the terms of Bar Order, including the proportionate judgment reduction provision.
Section § 1129(a)(10) provides the following requirement for confirmation of a plan:
11 U.S.C. § 1129(a)(10). Neither the DCL Plan nor the Noteholder Plan received the affirmative vote of an impaired class for each debtor entity included in the respective joint plans. The DCL Plan Proponents assert that § 1129(a)(10) requires acceptance by one impaired class for each debtor in a multi-debtor plan. In other words, they contend that § 1129(a)(10) is a per debtor, not per plan requirement. The Noteholders disagree with the DCL Plan Proponents' contention, but argue, in response, that the same objection must be raised with respect to the DCL Plan:
(Noteholder Memo., docket no. 8171, at 79 n.49 (NPP Ex. 2223)). The DCL Plan Proponents apparently do not dispute that, but respond that the "DCL Plan received broad support and was accepted by an impaired class at every Debtor for which votes were cast." (DCL Brief, docket 8897, at 106) (emphasis in original). The DCL Plan Proponents argue that their Plan is distinguishable from the Noteholder Plan because "there is a substantial difference between affirmative rejection of a plan and simple creditor inaction . . . Apathy of creditors . . . holding de minimus claims is not cause to derail the DCL Plan." (Id. at 106-07)
The DCL Plan Proponents, citing to the Epiq Voting Declaration (docket no. 7918, Ex. B-1), point out:
(DCL Brief, at 103, docket no. 8897) (emphasis in original). The effect of the Noteholder Plan, say the DCL Plan Proponents, is "to treat all impaired classes as though they were creditors of a single entity for purposes of § 1129(a)(10)," (id.) contrary to the "plain language" of the statute.
The Noteholder Plan Proponents, in turn, respond—after all—that the "plain language" of § 1129(a)(10) dictates that "when all debtor entities are the subject of the same joint plan of reorganization, it is a per plan, not a per debtor, requirement." (Noteholder Memo., docket no. 8171, at 79).
There exists little decisional authority on whether § 1129(a)(10) is to be applied "per debtor" or "per plan." The earliest case cited in support of the "per plan" interpretation of § 1129(a)(10) is In re SGPA, Inc., 2001 Bankr.LEXIS 2291 (Bankr.M.D.Pa. September 28, 2001), in which the Court overruled the objection of complaining creditors and confirmed a joint plan, holding that it was unnecessary "to have an impaired class of creditors of each Debtor to vote to accept the Plan." Id. at *19. However, the Court found explicitly that the objecting creditors suffered no adverse effect and that the result would not have changed if the debtors had been substantively consolidated.
The Court in In re Enron, 2004 Bankr.LEXIS 2549 (Bankr.S.D.N.Y. July 15, 2004), in an opinion marked "Not For Publication," also considered the § 1129(a)(10) issue and decided that both the plain statutory meaning and "the substantive consolidation component of the global compromise" allowed confirmation of a 177-debtor joint plan when at least one class of impaired claims voted to accept the plan. Id. at *234-35. The Enron Court relied, in part, on SGPA.
Other authorities cited by the parties included decisions in which § 1129(a)(10) was not directly at issue or were simply stock confirmation orders (perhaps unopposed). The leading treatise on bankruptcy law, Collier in Bankruptcy, ¶ 1129.02[10][a] (16th ed. 2011), Resnick & Sommer, contains no discussion of the "per plan/per debtor" issue.
First, to consider the plain meaning of § 1129(a)(10), one must start at the beginning: the Bankruptcy Code's rules of construction provide that "the singular includes the plural." § 102(7). Therefore, the fact that § 1129(a)(10) refers to "plan" in the singular is not a basis, alone, upon which to conclude that, in a multiple debtor case, only one debtor—or any number fewer than all debtors—must satisfy this standard. As is not uncommon, each of the proposed plans contains a provision (DCL Plan, § 5.1; Noteholder Plan, § 5.1) expressly stating, in primary part, that the respective Debtors' estates are not being substantively consolidated, that a claim against multiple Debtors will be treated as a separate claim against each, that claims are to be satisfied only from assets of the particular Debtor against which a claim is made, that obligations of any particular Debtor shall remain with that particular Debtor and no Debtor is to become liable for the obligations of another. The practical effect of these "non-substantive consolidation" provisions, while not articulated this way in either plan, is that each joint plan actually consists of a separate plan for each Debtor. Therefore, ascribing the plural to the meaning of "plan" in § 1129(a)(10) is entirely logical and consistent with such a scheme.
In the absence of substantive consolidation, entity separateness is fundamental. See In re Owens Corning, 419 F.3d 195, 211 (3d Cir.2007) (Absent compelling circumstances, courts respect "the general expectation of state law and of the Bankruptcy Code, and thus of commercial markets"). Neither the DCL Plan nor the Noteholder Plan proposes substantive consolidation of the Debtors.
Second, § 1129(a)(10) must be read in conjunction with the other subsections of § 1129(a), particularly (a)(8), when considering rights of impaired unsecured creditors. King v. St. Vincent's Hospital, 502 U.S. 215, 221, 112 S.Ct. 570, 116 L.Ed.2d 578 (1991) (a "cardinal rule" of statutory construction is that "a statute is to be read as a whole, since the meaning of statutory language, plain or not, depends on context") (citations omitted); Credit Agricole Corporate and Inv. Bank v. American Home Mortg. Holdings, Inc., 637 F.3d 246, 255 (3d Cir.2011) ("The Supreme Court
Section 1129(a)(1) provides that the "plan" (stated in the singular) must comply with the applicable provisions of the Bankruptcy Code. Section 1129(a)(3) requires that the "plan" (stated in the singular) be proposed in good faith and not by any means forbidden by law. Could either of these requirements be met if only one or more—but fewer than all—debtors proposing a joint plan satisfies them? The answer is no. By way of further example, § 1129(a)(7), embodying the "best interest of creditors" test, speaks of the treatment required for "each impaired class." This requirement cannot be read fairly other than as an entitlement to the prescribed treatment for every impaired class of creditors for each debtor which is part of a joint plan. By way of further comparison, § 1129(a)(8) mandates one of two outcomes—satisfaction by consent ((a)(8)(A)) or nonimpairment ((a)(8)(B)). This applies to each class of claims or interests. Granted, § 1129(b), which permits confirmation by "cram down," relieves a plan proponent from the § 1129(a)(8) requirement if all other § 1129(a) requirements are met when the proposed plan "does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan." Section 1129(b) does not relieve a plan proponent of the § 1129(a)(10) requirement.
Third, large, complex, multiple-debtor chapter 11 proceedings are often jointly administered for the convenience of the parties and the court. Such debtors, as a matter of convenience, may file joint plans. It may be that in many cases, and as is the case here (see DCL Plan, § 5.1, Noteholders Plan, § 5.1), a single distribution scheme is proposed, in which sources of plan funding and distribution are designed without regard to where assets are found or where liabilities lie. In my experience, in most such cases, the constituents in the chapter 11 proceeding either reach this result by consensus, or, no objection is made by any creditor or party in interest. However, convenience alone is not sufficient reason to disturb the rights of impaired classes of creditors of a debtor not meeting confirmation standards.
I find nothing ambiguous in the language of § 1129(a)(10), which, absent substantive consolidation or consent, must be satisfied by each debtor in a joint plan. Neither plan here satisfies § 1129(a)(10).
Would "deemed acceptance" by a non-voting impaired class, in the absence of objection, constitute the necessary "consent" to a proposed "per plan" scheme?
The Noteholder Plan Proponents question the feasibility of the DCL Plan because the Plan provides some Senior Lenders (JP Morgan, Angelo Gordon and Oaktree, together the "Lender Proponents") with certain ownership interests and director-designation rights in Reorganized Tribune that the Noteholders say will "violate" Federal Communications Commission ("FCC") rules and regulations or, in the alternative, will require the Debtors to obtain waivers of those FCC rules and regulations which would seriously delay implementation of the DCL Plan. The Debtors disagree with the Noteholder Plan Proponents' FCC analysis and argue (i) the Plan does not result in any FCC issues, and (ii) if there are obstacles to obtaining approval, the DCL Plan includes provisions to address them.
The Noteholders contend that the FCC violations arise because the Lender Proponents already have what the FCC calls "attributable interests" in various media companies operating in the same markets as Reorganized Tribune.
The DCL Plan Proponents dispute whether certain media interests held by the Lender Proponents constitute "attributable interests" under the FCC regulations.
"Feasibility does not require that success be guaranteed but rather only a `reasonable assurance of compliance with plan terms.'" In re Washington Mutual, Inc., 2011 WL 4090757, *41 (Bankr.D.Del. Sept. 13, 2011) (quoting In re Orlando Investors LP, 103 B.R. 593, 600 (Bankr. E.D.Pa.1989); see also In re Briscoe Enters., Ltd., II, 994 F.2d 1160, 1166 (5th Cir.1993) ("[I]t is clear that there is a relatively low threshold of proof necessary to satisfy the feasibility requirement.")) To demonstrate feasibility in the regulatory context, a debtor must show that the reorganized debtor will not face material hurdles to achieve the necessary regulatory approvals. In re TCI 2 Holdings, LLC, 428 B.R. 117, 154 (Bankr.D.N.J.2010).
The record presented by the DCL Plan Proponents on this issue satisfies me that they are not likely to encounter significant obstacles to obtaining the required FCC approvals, especially because, if any obstacles arise, the Plan includes provisions, ordinarily used in this industry, that will enable the Debtors' to take corrective action. The Noteholder Plan Proponents' claim that the Lender Proponents' other media ownership interests will cause unreasonable delays to the FCC approval process is nothing more than speculation. The Noteholders' objection to the DCL Plan based on feasibility is overruled.
The Noteholders have objected to the Debtors' release of claims set forth in Section 11.2.1 of the DCL Plan (the "Debtors' Release") and the Exculpation provision in Section 11.5 of the Plan. The Debtors' Release, as well as the DCL Plan's definition of "Released Parties," "Released Stockholder Parties," and "Related Parties" have been modified numerous times and contain so many exceptions, attorneys are assured future employment litigating the scope of Debtors' Release. While some of the Noteholders' objections have
"Determining the fairness of a plan which includes the release of non-debtors requires the consideration of numerous factors and the conclusion is often dictated by the specific facts of the case." Washington Mut., 442 B.R. at 345. When deciding whether a plan may include a debtor's release of non-debtor third parties, notwithstanding section 524(e), bankruptcy courts in this district have considered the following factors:
Id. at 346 (citing In re Zenith Elecs. Corp., 241 B.R. 92, 110 (Bankr.D.Del.1999)).
The language of Section 11.2.1 provides that the parties who are releasing claims are:
(DCL Plan, § 11.2.1, docket no. 8769). Although this Plan section, as titled, purports to describe the releases by the Debtors and the Estates, it includes non-debtor entities as releasing parties, specifically the Litigation Trustee, the Creditors' Trustee, and the Subsidiary Non-Debtors.
Judge Walrath decided in Washington Mutual that the debtors' release must be limited to the debtors, and that the plan should be modified to separately identify all third-party releasors, which are reviewed under a different standard. Washington Mut., 442 B.R. at 346, n. 33. See also Exide, 303 B.R. at 71-74. I agree. The "releasing parties" in the Debtors' Release must be limited to the Debtors.
The Noteholders' object to including Senior Lenders, Bridge Lenders, and Senior Loan Agents (that is, the "Settling Parties") as "Released Parties," arguing that none of the Zenith factors are satisfied. I disagree. The record is unclear as to the extent of any identity of interest between the Debtors and the Settling Parties based upon indemnification claims. However, the Debtors and the Settling Parties share the common goal of confirming the DCL Plan and implementing the DCL Plan Settlement. The Noteholders' argument that the Settling Parties have failed to provide adequate consideration for the Debtors' Release is a reiteration of their previous claims that the DCL Plan Settlement is unfair. Because I have already decided that the Settlement meets the standard for approval, I likewise conclude that the Settling Parties' consideration for the Debtors' Release is sufficient. Moreover, because the Debtors' Release is connected to the DCL Plan Settlement, which is integral to the DCL Plan, I conclude that the release of the Settling Parties is necessary to the Debtors' reorganization. A majority of creditors have voted in favor of the DCL Plan. (See Epiq Voting Declaration, docket no. 8882 at Ex. 1) (showing that 125 of 128 voting classes accepted the DCL Plan, and that even members of the Senior Noteholder Class (70% in number, which represented, however, only 12% in claim amount) voted to accept the DCL Plan).
The definition of "Released Parties," set forth in Section 1.1.200 of the DCL Plan, includes "Related Persons" of the Debtors, Senior Lenders, Bridge Lenders, Settling Step Two Payees, the Bridge Loan Agent, and Creditor Proponents.
(DCL Plan, § 1.1.196, docket no. 8769). The Noteholders argue that the inclusion of the various "Related Persons" in the
The DCL Plan Proponents reply that the release of "Related Persons" is specifically limited in the definition of "Released Parties." First, the release of the Debtors' "Related Persons" is limited "to the extent a claim arises from the Related Person's relationship to [the Debtors, non-Debtor Affiliates, including Subsidiary Non-Debtors, and the Reorganized Debtors] and is not a LBO-Related Cause of Action." There is no basis in the record to support any finding that a "substantial contribution" has been made by the Debtors' Related Persons or that a release is necessary to the reorganization.
Second, the release of the Settling Parties' "Related Persons" is limited "to the extent a claim arises from actions taken by such Related Person in its capacity as a Related Person ... and is released against the party as to which they are a Related Person." This part of the Debtors' Release is a component of the of the DCL Plan Settlement, which made a substantial contribution to the estate, is a necessary piece of the reorganization, and has been accepted by creditors. I conclude that the Debtors' release of the Settling Parties' Related Persons meets the standard for fairness and is allowed.
The Debtors' Release also includes a release of the "Released Stockholder Parties," as well as their Related Persons. There are three groups of "Released Stockholder Parties" found in its definition, which can be roughly described and summarized as follows:
(DCL Plan, § 1.1.201, docket no. 8769).
The DCL Plan Proponents argue that the Debtors' release of the 401(k) Stockholders and the Current Employees is a proper exercise of the Debtors' business judgment, relying on testimony that lawsuits against current employees would seriously damage employee morale. (Tr. 3/14/11 at 118:21-119:10).
The Retiree Claims, however, are different. The Retiree Claimants filed proofs of claim in the aggregate amount of approximately $113 million. The Debtors' disputed the amount and treatment of the Retiree Claims. After lengthy negotiations, the Retiree Claimants and the Debtors entered into a settlement agreement (attached as Exhibit 5.15.4 of the DCL Plan) which, among other things, reduced the aggregate amount of the Retiree Claims by $10 million. The Retiree Settlement is an important piece of the reorganization. In light of the settlement, I am satisfied that the release of the Retiree Claims is proper.
The Exculpation clause in the DCL Plan (Section 11.5) provides a release to Proponents and their Related Persons of any liability arising from acts or omissions taken during the chapter 11 cases, except for liability that results from willful misconduct or gross negligence. The Noteholders object to the inclusion of Creditor Proponents (i.e., Oaktree, Angelo Gordon and JPMorgan) in the Exculpation. As recognized in Washington Mutual, "the Third Circuit has held that a creditors' committee, its members, and estate professionals may be exculpated under a plan for their actions in the bankruptcy case except for willful misconduct or gross negligence." Washington Mut., 442 B.R. at 350 (citing In re PWS Holding Corp., 228 F.3d 224, 246 (3d Cir.2000)). Because an exculpation provision merely states that standard to which estate fiduciaries should be held, the Washington Mutual Court determined that exculpation clauses should be limited to fiduciaries who have served during the chapter 11 proceedings: estate professionals, committees and their members, and the debtors' directors and officers. Id. at 350-51. I agree and, therefore, Section 11.5 must exclude non-fiduciaries.
Section 11.6.1 of the DCL Plan provides, in part, that the Debtors' obligations to indemnify or reimburse directors, officers and employees will survive confirmation and not be discharged, except for any indemnification or reimbursement obligations related to the LBO-Related Causes of Action arising prior to the Petition Date. Zell objects to the Debtors' exclusion of indemnification and reimbursement claims related to the LBO-Related Causes of Action from the Reorganized Debtors' continuing obligations. Zell argues that these obligations arise under the Debtors' certificates of incorporation, which are executory contracts and, therefore, the Debtors may not partially assume the indemnification and reimbursement obligations. See Sharon Steel Corp. v. Nat'l Fuel Gas Distrib. Corp., 872 F.2d 36, 41 (3d Cir.1989) (citing In re Heafitz, 85 B.R. 274, 283 (Bankr.S.D.N.Y.1988) (a trustee must either reject a contract in full or assume a contract in full, which includes both benefits and burdens)).
The DCL Plan Proponents argue that articles of incorporation are not executory contracts. See In re Baldwin-United Corp., 43 B.R. 443, 459 (S.D.Ohio 1984) (rejecting debtor's argument that by-laws constituted an executory contract to indemnify directors, finding a lack of mutual obligations when the directors could resign at any time). Zell argues that because he continues to serve as Tribune's Chairman, the obligations under the certificates of incorporation are ongoing. Zell, however, has provided no support for his contention that articles of incorporation are an executory contract between the Debtors and the directors and officers. On this record, I cannot conclude that the Debtors must assume (or reject) the entirety of the indemnification or reimbursement requirements.
Moreover, I do not find that the limitations contained in Section 11.6.1 are inequitable. They do not eliminate any indemnification or reimbursement obligations with respect to the LBO-Related Causes of Action, but merely restrict such obligations to pre-petition claims. Zell argues that he should not be prevented from pursuing administrative claim status for any indemnification claims based upon LBO-Related Causes of Action. However, it is unlikely that claims for contractual or common law indemnity are entitled to administrative status, since a claimant would have to prove that expense as substantially benefitted the estate. In re Pinnacle Brands, Inc., 259 B.R. 46, 51-52 (Bankr.D.Del. 2001) ("Determining whether a creditor has an administrative claim is a two-prong test: the expense must have arisen from a post-petition transaction between the creditor and the trustee (or debtor-in-possession), and the transaction must have substantially benefitted the estate."). The limitation in the indemnification and reimbursement provision is appropriate.
A number of creditors have objected to the DCL Plan provision establishing the Creditors' Trust to administer the Creditor' Trust Assets and to make distributions to the Creditors' Trust Beneficiaries.
(DCL Plan, § 1.1.80). The Creditors' Trust will litigate the claims through a Creditors' Trustee, appointed by the Creditors' Trust Advisory Board, which consists of members of the Creditors' Committee, including Deutsche Bank and Wilmington Trust Company (DCL Plan, § 14.4).
The Creditors' Trust objections raise basically the same issues: (i) that establishment of the Creditors' Trust violates the confirmation requirements of "complying with the applicable provisions of this title" (§ 1129(a)(1)) and "good faith" (§ 1129(a)(3)) because the Creditors' Trust seeks to circumvent § 546(e), the Bankruptcy Code's "safe harbor" provision, which limits avoidance actions on certain transfers involving securities contracts, and (ii) that the Creditors' Trust does not have standing to assert direct claims of creditors.
By way of background, this Court has already considered similar arguments in connection with the motion filed by Aurelius, Deutsche Bank, and Law Debenture (docket no. 8201) for entry of an order (I) determining that creditors have regained their state law constructive fraudulent conveyance claims to recover stock redemption payments made to Step One Shareholders and Step Two Shareholders due to the expiration of the statute of limitations under 11 U.S.C. § 546(a); (II) determining that the automatic stay does not bar the commencement of litigation by or on behalf of creditors with respect to such claims or, in the alternative, granting relief from the automatic stay to permit the commencement of such litigation; and (III) granting leave from this Court's Order Appointing a Mediator to permit the commencement of such litigation (the "SLCFC Motion").
I reserved this issue for further consideration in connection with confirmation, but, consistent with my decision in connection with the SLCFC Motion, I conclude that issues regarding standing, preemption, and applicability of § 546(e) are best left for determination by the courts hearing these claims. Because the Creditors' Trust allows the Trustee to pursue creditors' rights, if any, arising under state law, I will not conclude that the Creditors' Trust is merely a sham to circumvent the applicability of § 546(e) or that Article 14 prevents the Plan from meeting the confirmation requirements of § 1129(a)(1) or (3).
Further, the objecting parties argue that a plan can not assign creditor's claims to a litigation trust, such as the Creditors' Trust. See Kipperman v. Onex Corp., 411 B.R. 805, 831 n. 21 (N.D.Ga.2009) (stating, in dicta, that "[l]itigation trustees do not have standing to directly pursue claims on behalf of creditors and creditors may not assign their claims to a litigation trust."); Mukamal v. Bakes, 383 B.R. 798, 811-14 (S.D.Fla.2007) (holding that a litigation trust lacked standing to bring creditor claims that were expressly assigned to the trust); Trenwick Am.Litig.Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 189-91 (Del.Ch.2006) (stating that "even if the Litigation Trust Agreement or plan of reorganization did expressly assign the direct claims of [debtor's] creditors to the Litigation Trust, federal bankruptcy law is clear that litigation trusts do not have standing to pursue the direct claims of creditors.") These cases, for the most part, rely upon the reasoning of Caplin v. Marine Midland Grace Tr. Co. Of N.Y., 406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972). In Caplin, the Supreme Court decided that a trustee in a Chapter X reorganization proceeding could not sue an indenture trustee on behalf of debenture holders because: (i) the statutory duties given to the reorganization trustee did not include authority to sue on behalf of third parties, but only to pursue claims on behalf of the estate, (ii) the defendant had a possible claim of subrogation against the debtor, and (iii) the debenture holders could assert their own claims against the defendant, resulting in inconsistent judgments. Caplin, 406 U.S. at 428-432, 92 S.Ct. 1678.
The DCL Plan Proponents rely on decisions that distinguished Caplin and held that creditors may assign claims to a litigation trust created in a plan of reorganization and that the litigation trustee had authority to pursue those assigned claims. See Grede v. Bank of N.Y. Mellon, 598 F.3d 899, 901-02 (7th Cir.2010) (deciding that Caplin does not apply to a plan-created litigation trust, writing "[a]lthough the terms of the Bankruptcy Code govern the permissible duties of a trustee in bankruptcy, the terms of the plan of reorganization (and of the trust instrument) govern the permissible duties of a trustee after bankruptcy.") (emphasis in original);
The DCL Plan Proponents also note that the Creditors' Trustee is not acting as a representative of the estate, is not a successor to the estate, and is wholly independent from the estate. Therefore, they argue, the concerns expressed in Caplin and the related cases case do not apply because the Creditors' Trustee is not acting under authority granted to estate representatives under § 1123(b)(3)(B).
Upon review of the foregoing case law, I agree with Grede's and Semi-Tech's analysis and conclude that the Plan's establishment of the Creditors' Trust and procedure for assignment of creditors' claims is not inconsistent with Caplin.
In his objection, Zell asserts that both the Examiner and the DCL Plan Proponents' expert, Bernard Black, concluded that the claims against Zell had no meaningful chance of success. He argues, therefore, that the DCL Plan (and the Noteholder Plan) should not be confirmed if they contain provisions establishing litigation trusts that would pursue the "wasteful and baseless litigation" against him. He argues that the record demonstrates that pursuit of such claims would not be in the best interests of creditors since the cost of such litigation would waste estate assets and reduce potential distributions to creditors.
The DCL Plan Proponents respond by arguing that Zell's position is nothing more than an attempt to obtain a release of liability for his role in the 2007 LBO. They argue that the Litigation Trust is not proposed in bad faith, but is merely a structure to preserve estate claims and provide a mechanism for pursuit of those claims. The DCL Plan Proponents note that nothing in the Plan impairs any defense that Zell may have with respect to those claims.
I agree that Zell's objection does not impair the confirmability of the DCL Plan. His objection is more appropriately raised as a defense or in a motion to dismiss current or future litigation. The Litigation Trust is an appropriate structure for pursuit of estate claims. The advisory board for the Litigation Trust consists of the trust's beneficiaries. They have no rational incentive to waste trust assets, that would otherwise be distributed to them, by pursuing baseless litigation. The
The Noteholders argue that the DCL Plan improperly classifies the Swap Claim as a Class 1F "Other Parent Claim" rather than a Class 1C "Senior Loan Claim." Bankruptcy Code § 1122 provides, in part, that "a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class." Further, as discussed in Genesis Health Ventures:
Genesis Health Ventures, 266 B.R. at 611. The DCL Plan Proponents assert that there is a reasonable basis for treating the Swap Claim separately from the Senior Loan Claims.
The Swap Claim is described in the General Disclosure Statement as follows:
(GDS, at 22).
The DCL Plan Proponents argue that it is proper to classify separately the Swap Claim from the Senior Loan Claims because the basic nature of the claims are different. As noted by the Ninth Circuit, "[a] fundamental characteristic of an interest rate swap is that the counter-parties never actually loan or advance the notional amount. The swap involves an exchange of periodic payments calculated by reference to interest rates and a hypothetical
Further, the DCL Plan Proponents argue that separate classification is appropriate because the Swap Claim is governed by a different loan agreement than the Senior Loan Claims. They note that the Examiner recognized that "[t]he obligations of Tribune under the Swap Documents do not constitute Credit Agreement Debt." See Examiner Report, Vol. II, at B-5.
Finally, the DCL Plan Proponents also assert that there is no plausible claim for avoidance of the Swap Claim, writing:
(DCL Memo., at 145 (docket no. 8173)). The Noteholders argue that § 546(g) does not apply to intentionally fraudulent avoidance actions. However, there is nothing in this record to support a finding of any intentional fraud in connection with the Swap Claim. Because of the protection afforded to swap claims by § 546(g), there is no basis to include the Swap Claim as part of the settlement with the Senior Lenders. The DCL Plan Proponents have provided reasonable justification for separate classification of the Swap Claim from the Senior Loan Claims. I conclude that classifying the Swap Claim with Class 1F "Other Parent Claims" is appropriate.
Tribune lists the amount of the PHONES Notes on its Amended Schedules of Assets and Liabilities, dated April 13, 2009, as $758,871,303. (Docket no. 938, Sch. F). On June 5, 2009, Wilmington Trust Company, Successor Indenture Trustee for the PHONES notes ("WTC"), filed a proof of claim on behalf of the holders of the PHONES Notes, asserting that the amount of the PHONES Notes is approximately $1.197 billion. (PHONES Motion (described below) at ¶ 20). On December 30, 2010, WTC filed a Motion for (i) Estimation of the PHONES Claims and (ii) Classification of PHONES Claims Pursuant to Bankruptcy Rule 3013 (the "PHONES Motion") (Docket no. 7352). By Order dated February 3, 2011, the PHONES claims were allowed solely for voting purposes in the amount of $1,196,823,429.80. (Docket no. 7777). The dispute regarding the amount of the PHONES Notes was reserved for further consideration at confirmation.
As alleged in the PHONES Motion, the PHONES dispute arises from an attempt by some Noteholders to exchange their Notes prior to the bankruptcy filing. Pursuant to the terms of the PHONES Notes, each holder has the right, at any time and from time to time, to exchange each of its PHONES Notes for an amount of cash equal to 95% (or 100% under certain circumstances) of the market value of two shares of common stock of Time Warner, Inc., as successor by merger to AOL (the
Shortly before the Petition Date, holders of 2,659,467 units of PHONES Notes (the "Tendering Holders")—in the aggregate principal amount of $417,536,319, calculated at $157 per PHONES Note—properly sought to exercise the Exchange Right by delivering an Exchange Notice and surrendering their PHONES Notes to then-Indenture Trustee Deutsche Bank Trust Company Americas ("DBTCA"). (Id. at ¶ 14). Tribune did not honor the Exchange Right exercised by the Tendering Holders, i.e., it did not make the exchange payments to the Tendering Holders by the Petition Date. (Id.).
By letter dated December 30, 2008, DBTCA informed Tribune that it had received a number of requests from PHONES Noteholders seeking to withdraw their election to exercise the Exchange Right (the "Withdrawal Requests"). (Id. at ¶ 16). In response, by letter dated January 14, 2009, Tribune advised DBTCA that it considered each election to exercise the Exchange Right to be irrevocable and was not prepared to honor the Withdrawal Requests. (Id. at ¶ 17). The Debtors' disclosure statement provides that the "approximate carrying value of PHONES Notes on the Petition Date was $759 million comprised of $703 million for PHONES Notes not submitted for exchange and $56 million for PHONES Notes exchanged that were not settled in cash." (GDS, at 24).
The responses to the PHONES Motion raise two issues. First, the Debtors argue that the election to exercise the Exchange Right is irrevocable, thereby limiting the Tendering Holders' claim amount to the cash payment amount due from the Debtors as a result of the Exchange. Second, some PHONES Noteholders who did not exercise the Exchange Rights argue that the Tendering Holders' claims should be subordinated to the other PHONES Note claims pursuant to § 510(b).
The record before me is not developed enough to resolve the issue about the PHONES' claim amount. Although certain facts are not in dispute, other details (for example, the dates of the Exchange Notices and whether the Indenture Trustee cancelled Notes provided for exchange) are not provided. Establishing the amount of the PHONES claims is not essential to determination of the matters now before me. When and if confirmation is achieved, the PHONES claim amount can be determined in connection in a claims objection process.
The second issue regarding subordination, which could impact claim classification issues, however, should be addressed. Section 510(b) of the Bankruptcy Code provides, in pertinent part, that a claim "for damages arising from the purchase or sale of such a security ... shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security." 11 U.S.C. § 510(b). Some PHONES Noteholders who did not exercise Exchange Rights pre-petition argue that, under the plain language of Section 510(b), the Tendering Holders' claims for payment are subordinated to remaining PHONES Noteholder claims. The Tendering Holders
The Bankruptcy Code defines the term "security" to include notes, stock, bonds, and debentures (11 U.S.C. § 101(49)), and, thus, the PHONES Notes would fall within that definition. The Third Circuit Court of Appeals has recognized that the phrase "arising from the purchase or sale of such security" in § 510(b) can be ambiguous. Baroda Hill Inv., Ltd. v. Telegroup, Inc. (In re Telegroup, Inc.), 281 F.3d 133, 138 (3d Cir.2002). The Telegroup Court then looked to legislative history of § 510(b) and determined that
Telegroup, 281 F.3d at 142. The Telegroup Court decided that a claim for the debtor's breach of a stock purchase agreement was subordinated. Id. at 144. See also In re Touch America Holdings, Inc., 381 B.R. 95, (Bankr.D.Del.2008) (deciding that ERISA litigation claims seeking damages for breach of fiduciary duties due to the decision to continue a plan's investment in company stock fell within § 510(b)).
The Tendering Holders argue that their claims are not for damages arising out of the purchase or sale of PHONES Notes, but are claims to collect the amount due under the terms of the Notes. In Blondheim Real Estate, Inc., 91 B.R. 639 (Bankr.D.N.H.1988), the Court determined that a noteholders' claims for the amounts owing on the debtor's notes were not claims for damages subject to § 510(b), noting that "the concept of `damages' has the connotation of some recovery other than the simple recovery of an unpaid debt due upon an instrument." Id. at 640 (emphasis in original). Upon review of § 510(b)'s legislative history, the Blondheim Court wrote that the history is
Id. at 641 (emphasis in original). Like Blondheim, the issue here addresses priorities between subordinated creditors on the "same level," rather than a noteholder's attempt to bootstrap its claim into a more senior class expected to receive a better recovery. I conclude that § 510(b) is not applicable to the Tendering Noteholders. Their claim is not for "damages" and does not fall within the plain language of § 510(b). Moreover, the Tendering Noteholders are not seeking to promote their claim status from a subordinated level. The purpose of Section 510(b) is to prevent creditors or equity holders from upgrading their claim position, but, in this case, it is not appropriate to use § 510(b) to sub-subordinate the Tendering Holders' claims to other PHONES Noteholder Claims. Whether the amount of the Tendering Holders' claim is fixed as of the date the Exchange Notices were given, or whether the Exchange Notices were revoked or never took effect for failure of the Debtors to complete the process, the PHONES Noteholder claims should be treated alike.
The Noteholders and WTC, argue that the DCL Plan allows other claimants to benefit unfairly from the PHONES subordination by (1) treating "Other Parent Claims" (Class 1F) as Senior Indebtedness, and (2) applying the PHONES subordination provision to distributions of non-Debtor assets made from the Litigation Trust and the Creditors' Trust. The objectors contend that the plan construction violates § 1129(b)'s requirement that a plan should not discriminate unfairly with respect to impaired classes, and § 510(a)'s requirement that "a subordination agreement is enforceable in a case under [title 11] to the same extent that such agreement is enforceable under applicable nonbankruptcy law." 11 U.S.C. § 510(a).
By way of background, section 14.01 of the PHONES indenture states that the PHONES shall be subordinated to "Senior Indebtedness," which is defined in that same section to be "the principal of (and premium, if any) and interest on ... and other amounts due on or in connection with any Indebtedness of the Company." (DCL Ex. 668 at § 14.01(2)). Section 14.01 defines "Indebtedness" to be:
(Id. at § 14.01(1)). Further, the definitions specifically except "any Indebtedness constituting trade accounts payable arising in the ordinary course of business" from "Senior Indebtedness." (Id. at § 14.01(2)).
The DCL Plan provides that holders of Other Parent Claims receive the same distribution percentage as the holders of Senior Noteholder Claims. The Noteholders and WTC argue that the holders of "Other Parent Claims" do not fall within the PHONES Indenture's definition of Senior Indebtedness. Therefore, Senior Noteholders, who are entitled to benefit from the PHONES subordination, should receive a higher recovery.
The DCL Plan Proponents assert that the class of Other Parent Claims includes the Swap Claim (approximately 57%), Retiree Claims (approximately 40%), and Trade Claims, and that the SWAP Claim, and possibly the Retiree Claims, fall within the definition of the Senior Indebtedness. However, even if the entire class of Other Parent Claims is deemed not to be Senior Indebtedness, the DCL Plan Proponents argue that the impact on Senior Noteholders' recoveries would be $100,000, or roughly .024% of the Senior Noteholders' potential initial distributions under the DCL Plan.
In Armstrong World Ind., Inc., 348 B.R. 111 (D.Del.2006), the Court noted that a rebuttable presumption of unfair discrimination arises when there is:
Armstrong, 348 B.R. at 121 (citing In re Dow Corning, Corp., 244 B.R. 696, 702 (Bankr.E.D.Mich.1999)).
In this case, the objecting parties argue that the DCL Plan Proponents failed to discriminate properly and should have proposed a lower recovery to the Other Parent Claims. They argue that the DCL Plan Proponents' evaluation of the discrepancy is wrong because the DCL Plan Proponents only analyzed a reallocation of the natural recoveries flowing to creditors. There is no analysis of the impact a reallocation would have on the distribution of settlement consideration or Litigation Trust proceeds. According to the Noteholders' analysis, giving the Other Parent Claims the unwarranted benefit of the PHONES subordination could strip as much as $50 million from the Senior Noteholders' settlement consideration. (See Noteholders' Reply Brief, at 35-36, Ex. A, docket no. 9022).
The record here is unclear, so I cannot conclude that the effect of providing subordination rights to Other Parent Claims— even excluding the Swap Claim—is "immaterial." Therefore, I cannot conclude that the DLC Plan's treatment is fair or appropriately enforces the terms of the subordination agreement in accordance with Bankruptcy Code § 510(a).
In Cybergenics, the Third Circuit Court of Appeals decided that fraudulent transfer claims, which state law provides to creditors, are not assets of the debtor, even though the Bankruptcy Code empowers a debtor to pursue those claims for the benefit of all creditors. Off'l Comm. Of Unsecured Creditors of Cybergenics Corp. v. Scott Chinery (In re Cybergenics Corp.), 226 F.3d 237, 245 (3d Cir.2000). See also In re Gentek, Inc., 328 B.R. 423, (Bankr. D.Del.2005) (A debtor has the power to pursue and settle fraudulent transfer claims post-petition). The Cybergenics Court wrote:
Cybergenics, 226 F.3d at 245. Therefore, the Third Circuit held that the fraudulent transfer claims (which arose from obligations incurred and transfers made in connection with a leveraged buy-out) were not included in an earlier sale of "all of the rights, title, and interest of Cybergenics in and to all of the assets and business as a going concern of Cybergenics." Id. at 239, 245.
The Litigation Trust will pursue the Preserved Causes of Action as defined in § 1.1.188 of the DCL Plan. Pursuant to Cybergenics, causes of action that the Debtors' estate may assert under Chapter 5 of the Bankruptcy Code are not "assets of the Company" subject to the PHONES Notes' subordination provision.
For the reasons set forth above, the following objections to confirmation are overruled: (i) the objection to the reasonableness of the DCL Plan Settlement, (ii) the objection to feasibility of the DCL Plan based on FCC regulations, (iii) the objection to the Bar Order in Section 11.3 (except to the extent that the Bar Order must be revised to enjoin specifically potential plaintiffs from acting contrary to its provisions), (iv) the objection to the DCL Plan provision regarding treatment of prepetition indemnification and reimbursement claims, (v) the objection to the DCL Plan provision providing an option to assign state law constructive fraudulent conveyance claims to the Creditors' Trust (subject to any applicable non-bankruptcy law restricting assignment of such claims), (vi) Zell and EGI's objection to the establishment of the Litigation Trust and the Creditors' Trust, (vii) the objection to equal treatment of the PHONES Noteholders who exercised exchange rights pre-petition, and (viii) the objection to classification of the SWAP claim.
However, for the reasons discussed in more detail above, I conclude that the DCL Plan does not meet the requirements for confirmation under Bankruptcy Code § 1129 because, inter alia:
Accordingly, the request to confirm the DCL Plan in its current form is denied.
The Noteholder Plan Proponents have filed their own chapter 11 plan of reorganization as an alternative to the DCL Plan, claiming that the Noteholder Plan is the only avenue for a just and equitable recovery for the Debtors' Non-LBO creditors (i.e., consisting, for the most part, of the Senior Noteholders and the PHONES Noteholders). The main difference between
(vi) the applicability of the subordination provisions in the Bridge Loan Agreement.
(the "Trust Causes of Action"). Rather than including intercompany claims as one of the Trust Causes of Action, the Noteholder Plan integrates the Intercompany Claims Settlement, as defined in the DCL Plan, and the allocation of the Debtors distributable enterprise value ("DEV"), consistent with the DCL Plan (i.e., 8.4% of the DEV is allocable to Tribune, and 91.6% of the DEV is allocable to the Subsidiaries).
Despite preservation of the Trust Causes of Action, based on the DCL Plan's DEV of $6.75 billion, the Noteholder Plan provides that between 34.7% and 51.2% of the DEV will be distributed to creditors immediately upon the Debtors' emergence from chapter 11 (the "Initial Distribution").
With some exceptions, the classes entitled to receive Initial Distributions will receive consideration in the form of a "strip," consisting of New Common Stock (or New Warrants) to the extent the applicable Creditor so elects, New Senior Secured Term Loan, and Distributable Cash. In addition to the Initial Distributions, on the Effective Date, holders of claims will also receive (i) Distribution Trust Interests, which may entitle a creditor to distributions from the Litigation Trust or distributions of reserved DEV, and (ii) Creditors' Trust Interests, if the creditor did not opt out. The ultimate recoveries for each impaired class of claims receiving Trust interests will be based on the final resolution of the Trust Causes of Action.
The DCL Plan Proponents, as well as the D & Os, Zell, and EGI, filed objections to confirmation of the Noteholder Plan. As discussed, supra, I concluded that neither plan may be confirmed. (See discussion in section B.2, supra.). The D & Os and Zell
The DCL Plan Proponents argue that the Noteholder Plan improperly and unfairly provides for the Senior Lenders and Bridge Lenders to release their guaranty claims against non-debtor subsidiaries of Tribune (the "Non-Debtor Guarantors"). Section 11.1.1 of the Noteholder Plan provides, in part, that "confirmation of the Noteholder Plan shall, as of the Effective Date, authorize the release of the Senior Loan Guaranty Claims, Swap Guaranty Claims, and the Bridge Loan Guaranty Claims against the Guarantor Non-Debtors." (Noteholder Plan, § 11.1.1, docket no. 8755).
The Noteholders argue, in response, that the Court should approve the release of the Non-Debtor Guarantors due to the "extraordinary" circumstances of this case. See Continental Airlines, 203 F.3d at 212 ("non-consensual releases by a non-debtor of other non-debtor third parties are to be granted only in `extraordinary circumstances.'"). As discussed previously, the Genesis Court evaluated whether a non-consensual release fit the "hallmarks" discussed in Continental by considering whether: (i) the non-consensual release was necessary to the success of the reorganization, (ii) the releasees have provided a critical financial contribution to the debtor's plan, (iii) the releasees' financial contribution is necessary to make the plan feasible, and (iv) the release is fair to the non-consenting creditors, i.e., whether the non-consenting creditors received reasonable compensation in exchange for the release. Genesis, 266 B.R. at 607-08.
The Noteholders argue that the release of the Non-Debtor Guarantors is warranted here because, (i) the Non-Debtor Guarantors would have filed their own bankruptcy cases, absent unusual circumstances, and the LBO Lenders' treatment would not change if those entities had filed, (ii) there is significant identity of interest between the Debtors and the Non-Debtor Guarantors, since the guaranty obligations against both Debtor Guarantors and Non-Debtor Guarantors arise from the same documents, (iii) the Non-Debtor Guarantors generate substantial value for the Debtors and the LBO Lenders are receiving valuable consideration by receiving up to approximately 80% of the Reorganized Debtor's equity, (iv) the LBO Lenders did not intend that the Non-Debtor Guarantors' guaranties would remain in place upon the Debtors' emergence from chapter 11, (the DCL Plan also provides for a release of the Guarantor Non-Debtors), and (v) the Debtors' and Senior Lenders' conduct during the chapter 11 has treated the Debtors and Non-Debtor Guarantors identically (e.g., the DEV conclusions in the General Disclosure Statement contemplate
I cannot agree that the release of the Non-Debtor Guarantors meets the Genesis test. The Noteholders cannot compare the LBO Lenders' consensual release of Non-Debtor Guarantors' claims as part of the overall settlement in the DCL Plan, on the one hand, with the forced release presented in the Noteholders' Plan, which was soundly rejected by the LBO Lenders. Although the Non-Debtor Guarantors may provide value to the Reorganized Debtor, which is necessary for the proposed reorganization, this record does not provide a sufficient basis for concluding that substituting an equity interest in the Reorganized Debtor is reasonable compensation for the Senior Lenders' release of the Non-Debtor Guarantors, especially in light of the LBO Lenders' dissatisfaction with the Noteholder Plan provisions regarding post-bankruptcy control over the Reorganized Debtors. The Noteholder Plan's non-consensual release is not fair and equitable to the LBO Lenders.
The DCL Plan Proponents argue that the Noteholder Plan "destroys value with unnecessary taxation" because the Distribution Trust is highly likely to be considered a "disputed ownership fund" that is taxable at corporate rates after bankruptcy. (See 26 C.F.R. § 1.468B-9). The definition of a "disputed ownership fund" specifically excludes a liquidating trust under 26 C.F.R. § 301.7701-4. (See 26 C.F.R. § 1.468B-9(b)(iv)). The DCL Plan Proponents have not provided a sufficient basis to support a conclusion that the Distribution Trust would not qualify as a liquidating trust under 26 C.F.R. § 301.7701-4. Based upon the record before me, I cannot conclude that this objection to the Noteholder Plan has any merit.
The DCL Plan Proponents also contend that the Noteholder Plan unfairly discriminates against Senior Lenders because the Noteholder Plan proposes to pay equity to the Senior Lenders, while the Senior Noteholders and holders of Other Parent Claims will receive a "strip" of cash, new debt, and equity. The Noteholders claim that this treatment of the Senior Lenders is not unfairly discriminatory because the DCL Plan Proponents agree that a dollar of cash is equal to a dollar of equity.
As discussed previously in connection with the DCL Plan, a rebuttable presumption of unfair discrimination arises when there is:
Armstrong, 348 B.R. at 121 (citing In re Dow Corning, Corp., 244 B.R. 696, 702 (Bankr.E.D.Mich.1999)). In Matter of Greate Bay Hotel & Casino, Inc., 251 B.R. 213 (Bankr.D.N.J.2000), the Court held that the distribution of equity to a deficiency claim and a distribution of cash to trade creditors was not unfair. Id. at 232. After reviewing the expert witness testimony on the value of the equity interest, the Greate Bay Court decided that the difference amounted to a 80% distribution to general unsecured claims, and a 76% distribution to the deficiency claim. Id. at 231. This difference was not "materially lower" and was not unfair discrimination. Id. Further, the Greate Bay Court decided that the allocation of equity to the deficiency claim holders did not impose a materially greater risk on those creditors, writing:
Id. at 232 (citations omitted); see also In re Hawaiian Telecom Commc'ns, Inc., 430 B.R. 564, 605 (Bankr.D.Ha.2009). The Noteholders argue that the same reasoning applies here: the Senior Lenders are long term investors and it is not inequitable for them to receive equity that conforms to their prepetition long-term expectations.
However, the disparity in the Noteholder Plan is not simply between Senior Lenders and trade creditors. The Noteholders provide no justification for discriminatory treatment between Senior Lenders and Senior Noteholders, which similarly had long-term investment expectations
The DCL Plan Proponents argue that the Noteholder Plan purports to "adopt" the Intercompany Claims Settlement for purposes of allocating value among individual Debtors to enable distributions, but the manner in which the Noteholder Plan implements the Intercompany Claims Settlement ultimately removes any benefit of the Intercompany Settlement. The DCL Plan Proponents assert that the Noteholder Plan has three phases of treatment of intercompany claims: (1) adoption of the Intercompany Claims Settlement solely to allocate value among Debtors, and thus enable initial distributions that ignore the intercompany claims themselves; (2) litigation regarding allowance of Senior Loan Claims would be followed by distributions that, it appears, completely ignore intercompany claims, and (3) if at any point the value of the Guarantor Debtors is determined to be sufficient to pay the principal amount of allowed claims against them, intercompany claims against the Guarantor Debtors would be resurrected and enforced, such that the remaining value of the Guarantor Debtors would be distributed to Tribune parent creditors before creditors of the Guarantor Debtors could recover postpetition interest. (See DCL Brief, docket no. 8897, at 108-109). The DCL Plan Proponents argue that the Noteholder Plan's implementation of the Intercompany Settlement Agreement is merely an attempt to siphon value of the Guarantor Debtors to the benefit of creditors of the Tribune parent. However, the DCL Plan Proponents contend that more than 80% of the value of the Guarantor Debtors resides at Debtors that do not have material intercompany liabilities owing to the Tribune parent. Therefore, even if the Noteholders could selectively adopt and ignore portions of the Intercompany Settlement Agreement, the DCL Plan Proponents claim that the proposal fails.
The Noteholders continue to press their argument that the Guarantor Subsidiaries are insolvent and, therefore, the Senior Lenders are not entitled to post-petition interest on their claims.
I conclude that the Noteholder Plan does not meet the requirements for confirmation
Accordingly, the request to confirm the Noteholder Plan is denied.
Neither the DCL Plan nor the Noteholder Plan is confirmable. I am uncertain, at this point, what steps the Debtors or other parties may take as a consequence of this decision. It may be that the parties simply will try to address the issues raised in this Opinion, or that an entirely new plan or plans will be devised. Perhaps parties will realign. Perhaps yet another attempt will be made to reach consensus.
I, therefore, believe it appropriate to address § 1129(c) considerations to avoid wasteful efforts by the parties. Section 1129(c) provides that "[i]f the requirements of subsections (a) and (b) of this section [1129] are met with respect to more than one plan, the court shall consider the preferences of creditors and equity security holders in determining which plan to confirm." 11 U.S.C. § 1129(c). See In re Orchards Village Investments, LLC, No. 09-30893, 2010 WL 143706, *21 (Bankr.D.Or. Jan. 8, 2010) ("Based on the clear terms of § 1129(c), I give primary consideration to the preferences of creditors and equity holders.").
The voting results reveal that creditors overwhelmingly prefer the DCL Plan over the Noteholder Plan. Out of 128 classes of claims in which creditors actually voted, 125 classes (97.66%) voted to accept the DCL Plan. (Epiq Voting Declaration, docket no. 7918 at Ex. A-1; See also Epiq's Third Supp. Decl., docket no. 9298, Ex. 1).
Creditors were also permitted to indicate a preference on their ballot among the plans they voted to accept. However, since approximately 1,340 out of 2,200 creditors that voted on both plans chose to accept only one plan, relatively few creditors expressed a preference on their ballot
While courts are obligated to consider the preferences of the creditors and equity interests, courts also have considered other factors. In re River Village Assocs., 181 B.R. 795, 807 (E.D.Pa.1995). Beyond considering the preferences of creditors and equity holders, a court may consider (1) the type of plan, (2) the treatment of creditors and equity holders; and (3) the feasibility of the plan. TCI 2 Holdings, 428 B.R. at 182.
Although both plans claim to allow the Debtors to reorganize, the DCL Plan better supports this goal by resolving significant claims and providing the Debtors with more certainty regarding preservation of estate value and a better foundation for revitalizing business operations. The DCL Plan is feasible. The settlement of claims in the DCL Plan treats creditors fairly. That other creditors might benefit from extensive and costly litigation, as the Noteholder Plan Proponents assert, is highly speculative. The overwhelming majority of creditors have made their preference for the settlement known through the voting results.
Accordingly, assuming that both sets of plan proponents addressed only the flaws in their respective plans and both returned confirmable plans containing terms otherwise similar to those presently proposed, with similar voting results, the DCL Plan would survive the crucible of § 1129(c).
In any event, the Court is of the determined view that, the Debtors must promptly find an exit door to this chapter 11 proceeding. The Court is equally resolute that, if a viable exit strategy does not present itself with alacrity, and despite any disruption to management, as well as the added cost and delay this might inevitably occasion, the Court intends to consider, on its own motion, whether a chapter 11 trustee should be appointed. Bankruptcy Code § 1104; see also In re Marvel Entertainment Group, Inc., 140 F.3d 463 (3d Cir.1998).
An appropriate order follows.
The "Senior Lenders" are those lenders from time to time party to the Senior Loan Agreement (defined in n. 13, infra.), including the Credit Agreement dated May 17, 2007, which provided Tribune with approximately $8.028 billion in financing at Step One of the LBO, and an additional $2.1 billion in financing, known as the Incremental Facility, at Step Two of the LBO. (DCL Plan, Section 1.1.219, docket no. 8769). The "Bridge Lenders" are "the lenders from time to time party to the Bridge Loan Agreement" dated December 20, 2007, defined in n. 15, infra., which provided Tribune with $1.6 billion in financing at Step Two of the LBO. (DCL Plan, Section 1.1.16, docket no. 8769).
The parties use the terms "Senior Lenders" and "Senior Noteholders" (defined infra) and, although the terms are similar we use them for the convenience of the parties.
Pursuant to the Stipulation Regarding Use of Examiner's Report at the Confirmation Hearing (approved by an Order dated February 4, 2011 (docket no. 7790)), the plan proponents agreed that "[t]he opinions expressed by the Examiner (the "Examiner's Opinions") regarding the law and/or the facts will be admissible by any entity in connection with the Confirmation Hearing for all purposes to the same extent as the opinions testified to by an expert witness under the Federal Rules. The Examiner's Opinions will not be binding on the Court or any entity, nor will there be any presumption of correctness attributed to such opinions. The Court may accord the Examiner's Opinions whatever weight the Court deems is appropriate." (Ex. 1 (Stipulation) at ¶ 1, docket no. 7790).
Kenneth N. Klee is a professor at the UCLA School of Law, where he teaches courses in bankruptcy law and chapter 11 business reorganizations law. He received an A.B. in Economics, with great distinction, at Stanford University in 1971. He earned his J.D. degree from Harvard University, graduating cum laude, in 1974. Mr. Klee is admitted to practice before the bars of California, the District of Columbia and New York.
Mr. Klee was Associate Counsel, Committee on Judiciary, U.S. House of Representatives 1974-77, where he was a principal draftsperson of the Bankruptcy Code. Since then, he has served periodically as a bankruptcy consultant to the House Judiciary Committee, 1977-1982, and to the United States Department of Justice, 1983-1984. From 1992-2000, he served as a member of the Advisory Committee on Bankruptcy Rules of the United State Judicial Conference. In June, 1994, he led a mission to China sponsored by the International Republican Institute to assist in the writing of the Chinese Bankruptcy Laws.
To which the CFO replied:
First, in evaluating whether the Debtors received reasonably equivalent value in exchange for the LBO indebtedness, a court may collapse transactions within Step One. That is, collapsing the transaction in which the Tribune Parent received monies from the Senior Lenders (the first transaction) with the one in which the Tribune Parent purchased stock from the Stockholders (the second transaction). In Tabor Court, the Court noted that the loan proceeds of over $4 million were immediately passed on by the borrowing companies to an affiliated company and ultimately to the selling shareholders. Tabor Court, 803 F.2d at 1302. The Court affirmed the district court's decision to treat the transactions as one integrated transaction, so that the loan proceeds could not be deemed consideration received by the borrowing corporation. Id. In this case, the parties do not dispute that a court is likely to collapse transactions in connection with a reasonable equivalent value analysis.
Second, in evaluating whether the Debtors were insolvent or had adequate capital at Step One, a court may collapse Step One and Step Two together and consider the entire LBO indebtedness. The parties vigorously contest the use of collapse in this context. This issue of "collapse" is discussed, infra.
To establish equitable estoppel, a party must show that (i) he lacked the knowledge of the true facts or he lacked the means to obtain the truth, (ii) he relied on the conduct of the party against whom the estoppel is claimed, and (iii) he suffered a prejudicial change of position as a result of his reliance. In re Comm. Dynamics, Inc., 382 B.R. 219, 239 (Bankr.D.Del.2008). The Examiner wrote that "equitable estoppel is at best an imperfect fit, as that doctrine typically requires some form of representation from the party against whom estoppel is sought in favor of the party seeking estoppel, with some courts requiring a false representation." Examiner's Report, Vol. II, at 303. The Examiner found no representations by Senior Lenders to the Non-LBO Creditors here. (Id.) The record before me reflects none.
The D & Os and other objectors argue that this Court should determine that it will continue to have jurisdiction over the Creditors' Trust. This Court has no intention to surrender any prerogative to enforce its own orders; however, it must be recognized that a confirmation order cannot confer jurisdiction upon a bankruptcy court unless jurisdiction exists pursuant to 28 U.S.C. § 1334 or 28 U.S.C. § 157 at the time a dispute may arise. In re Resorts International, Inc., 372 F.3d 154, 161 (3d Cir.2004). After plan confirmation, the bankruptcy court's "related to" jurisdiction is limited to matters in which "there is a close nexus to the bankruptcy plan or a proceeding, as when a matter affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement . . . ." Resorts, 372 F.3d at 168-69.
DCL Ex. 1456 (Rosenstein Rebuttal Expert Report) at 4-5 citing, inter alia, Review of the Comm's Regulations Governing Attribution of Broadcast Interests, Notice of Proposed Rulemaking, 10 FCC Rcd 3606, 3609 (1995).
(DCL Plan Confirmation Obj., at 22-23 (NPP Ex. 2219) (emphasis in original)).
