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In re Tribune Media Co.

United States District Court, D. Delaware

July 30, 2018

IN RE TRIBUNE MEDIA COMPANY, et al, Debtors.
v.
TRIBUNE MEDIA COMPANY, et al, Appellees. LAW DEBENTURE TRUST COMPANY OF NEW YORK & DEUTSCHE BANK TRUST COMPANY AMERICAS, Appellants,

          MEMORANDUM [1]

         I. INTRODUCTION

         On June 18, 2014 the court issued an opinion finding the appeals equitably moot for the above-captioned bankruptcy appeals filed by Wilmington Trust Company ("Wilmington Trust"), Aurelius Capital Management, LP ("Aurelius"), Law Debenture Trust Company of New York and Deutche Bank Trust Company Americas (the "Appellants"), and EGO-TRB, LLC ("EGI"). (D.I. 93.) Although Tribune Media Company and Tribune Media Retirees (Class IF Creditors) raise different arguments in their respective appeals, the court will collectively refer to them as the "Appellees."[2] Subsequently, on July 16, 2014, Aurelius appealed the court's decision. (D.I. 95.) On September 21, 2015 the United States Court of Appeals for the Third Circuit affirmed the court finding that Aurelius's appeal is equitably moot, but reversed the court finding that the Trustees' appeal is not equitably moot. (D.I. 102 at 23.) Presently before the court is the Appellants' appeal asking the court to find that the Bankruptcy Court erred in confirming the DCL Plan. (D.I. 109 at 1.) For the reasons that follow, the court will affirm the Bankruptcy Court.

         II. BACKGROUND [3]

         On December 8, 2008, the Tribune Company ("Tribune") and its affiliates, the owners and operators of the Chicago Tribune, the Los Angeles Times, and other newspapers, television stations and media properties nationwide, filed voluntary petitions for Chapter 11 protection. (D.I. 59 at 3.) The bankruptcy filings occurred approximately one year after Tribune and certain of its subsidiaries (collectively, the "Debtors") completed a leveraged buyout ("LBO") in December 2007. (D.I. 40 at 12-15.)[4] Prior to the LBO, Tribune had a market capitalization of approximately $8 billion and around $5 billion in debt. (D.I. 60-1 at 4.) Tribune's debt included (1) $10.2 billion in LBO debt; (2) $1.2 billion in "Senior Notes," for which the Trustees served as indenture trustee; (3) around $1 billion in subordinated debt-the PHONES Notes and the EGI Notes; and (4) $265 million in "Other Parent Claims" consisting of $105 million of claims by Tribune Media Retirees ("TM Retirees"), $9 million of trade and miscellaneous debt, and the $151 million "Swap Claim" arising from termination of an interest rate swap agreement tied to the LBO debt. In re Tribune Co., 464 B.R. 126, 137-41, 194-95 (Bankr. D. Del. 2011) ("Tribune 7"); (D.I. 110 at 4.)

         The Trustees represent the interests of certain pre-LBO debt treated as "Class IE Creditors"-Tribune's Senior Noteholders-in the Plan. (D.I. 109 at 3.) Two other series of Tribune Notes-the PHONES notes and the EGI Notes-are contractually subordinate to the Senior Notes. (D.I. 109 at 3.) The Senior Notes are referred to as "Senior Indebtedness" in the contract governing the PHONES Notes and as "Senior Obligations" in the contract governing the EGI Notes. (D.I. 109 at 3.) According to the subordination agreements, if Tribune went bankrupt, any recovery by the PHONES and EGI Notes would be payable to the Class IE Creditors. The Plan, however, provides that any recovery from those Notes are distributed pro rata between Class IE and Class IF. The latter has about 700 creditors in it, the majority of whom "are individuals and small-business trade creditors." In re Tribune Co., Nos. 12-cv-1072 et al, 2014 WL 2797042, at *6 (D. Del. June 18, 2014); (D.I. 93.)

         Before trial, the parties stipulated to the monetary impact of the PHONES and EGI subordination on distributions to the Trustees and holders of Other Parent Claims. (D.I. 109-1 at A95-98.) Among other things, the parties agreed that the Trustees' initial recoveries under the plan would increase from 33.6% (31 million) to 35.9% ($461 million) if they were the only creditors entitled to benefit from the relevant subordination agreements. (D.I. 109-2 at A95-98.) The difference between the Trustees' recovery under the Plan (33.6%) and the Trustees' desired recovery had they been able to enforce all of their alleged subordination rights (35.9%) was 2.9% by recovery percentage. (D.I. 110 at 1.)

         During the bankruptcy case, Tribune and its primary creditor constituents negotiated a compromise of various avoidance claims related to the LBO. The holders of the LBO debt agreed to contribute nearly $535 million in guaranteed settlement payments plus litigation trust interest. This produced another $225 million in settlement value. Tribune I, 464 B.R. at 153-54. Tribune then proposed its Plan, which provided for the Trustees and holders of Other Parent Claims to share the settlement consideration. (D.I. 109-2 at A118.) The Trustees objected, arguing they alone were entitled to recoveries otherwise allocable to the subordinated PHONES and EGI Notes and that, as a consequence, the Plan unfairly discriminated against them by sharing those recoveries with the class of Other Parent Claims. To address this issue, the Bankruptcy Court established a procedure for resolving this and other "Allocation Disputes." (D.I. 109-2 at A1100-03.)

         The Bankruptcy Court's 2012 confirmation order came after it had held more than ten days of evidentiary hearings and multiple days of subsequent legal argument; issued a 2011 confirmation opinion on competing plans for reorganization; issued a reconsideration decision after extensive briefing; and held a separate two-day evidentiary hearing and issued an Allocation Ruling that directly addressed the exact inter-creditor disputes raised in the Appellants' appeals. On April 9, 2012, the Bankruptcy Court concluded that even if the Trustees were correct in asserting that no other creditor could benefit from the PHONES and EGI Subordination Agreements, any discrimination resulting from a sharing of the subordination recoveries was immaterial and permitted by § 1129(b)(1). (D.I. 109-2 at A1124-28.) In making this finding, the Bankruptcy Court rejected the Trustees' argument that § 510 of the Bankruptcy Code (the "Code") overrides § 1129(b)(1) and requires "full implementation[, ]" or enforcement, of subordination agreements. (D.I. 109-2 at A1122-23.) At the same time, the Bankruptcy Court determined that it was not necessary to decide whether any of the Other Parent claims were entitled to seniority over the PHONES and EGI Notes because the alleged discrimination was not material. The Bankruptcy Court nevertheless held that the Swap Claim comprising 57% by amount of all the Other Parent Claims was a senior debt just like the LBO itself. (D.I. 109-2 at A119-20 n.19.) This reduced the alleged discrimination against the Trustees to 0.9% of their initial recovery percentage from 34.5% to 33.6% and made the Plan "even less vulnerable to a charge of 'unfair discrimination.'" (D.I. 109-2 at A119-20 n.19, n.2l.) On December 31, 2012, the Fourth Amended Plan was "substantially consummated" and distributions were made, including the payment of approximately $91 million to over 700 Class IF Creditors. (D.I. 111 at 4.)

         Subsequently, on June 18, 2014, the court determined that the parties' appeals were equitably moot. (D.I. 93.) Aurelius appealed arguing that the case was not equitably moot and sought a Settlement that was not unreasonably low. The Trustees appealed, representing certain pre-LBO debt treated as "Class IE Creditors" in the Plan, arguing that they had subordination agreements with the holders of two series of pre-LBO notes Tribune issued called the PHONES Notes and the EGI Notes which were worth a total of around $30 million. (D.I. 60-1 at 8-9.) On September 21, 2015, the Court of Appeals for the Third Circuit affirmed the District Court in part concluding that, while Aurelius' appeal is equitably moot, "the Trustees' appeal is not[.]" (D.I. 102 at 23.) The Third Circuit remanded the matter for a determination on the merits concluding that, in the event the court reverses the Bankruptcy Court, some relief might be fashioned without unraveling the Plan or harming third parties who relied on its confirmation. (D.I. 102 at 4, 23.)

         III. STANDARD OF REVIEW

         A. Appellate Review of a Bankruptcy Court Decision [5]

         Appeals from the bankruptcy court to this court are governed by 28 U.S.C. § 158. District courts have mandatory jurisdiction to hear appeals "from final judgments, orders, and decrees." 28 U.S.C. § 158(a)(1); In re DNIB Unwind, No. 16-11084 (BLS), 2017 WL 3396468, at *3 (D. Del. Aug. 8, 20l7)(Sleet, J.)

         The court reviews for clear error the Bankruptcy Court's finding that the discrimination alleged by the Trustees was immaterial, while reviewing de novo the Bankruptcy Court's construction of Section 1129 and relevant provisions of the Bankruptcy Code. In re Exide Techs., 607 F.3d 957, 962 (3d Cir. 20l0)("For mixed questions of law and fact, we will engage in a mixed standard of review, affording a clearly erroneous standard to integral facts, but exercising plenary review of the lower court's interpretation and application of those facts to legal precepts."); Anes v. Dehart, 195 F.3d 177, 180 (3d Cir. 1999). "In reviewing a case on appeal, the Bankruptcy Court's factual determinations will not be set aside unless they are clearly erroneous." See Mellon Bank, N.A. v. Metro Comm., Inc., 945 F.2d 635, 641 (3d Cir. 1991), cert, denied, 503 U.S. 937 (1992). Under this "mixed standard of review," the appellate court accepts findings of "historical or narrative facts unless clearly erroneous, but exercise[s] plenary review of the trial court's choice and interpretation of legal precepts and its application of those precepts to historical facts." Id. at 642 (citation and internal quotation marks omitted).

         IV. DISCUSSION

         On appeal, Appellants challenge the Bankruptcy Court's determination that the subordination agreements do not have to be enforced. Specifically, Appellants make three arguments: (1) that the bankruptcy court erroneously refused to enforce the subordination agreements, in violation of 11 U.S.C. § 1129(b)(1); (2) even if the subordination agreements were not enforceable, the bankruptcy court erred in holding the plan does not "discriminate unfairly" against the Senior Notes; and (3) that the bankruptcy court erred in holding that a contract claim resulting from Tribune's termination of interest-rate hedges (the "Swap Claim") was senior debt under the two subordination agreements. (D.I. 109 at 3.) The court will address each issue in turn.

         B. Enforcement of the Subordination Agreements is Not Required

         a. Textual Analysis of§ 1129(b) and § 510(a)

         First, Appellants argue that the Bankruptcy Court erred in its reading of § H29(b)(1)'s "notwithstanding" provision because the statutory text and legislative intent of the Bankruptcy Code requires enforcement of the subordination agreement when a plan is being "crammed down" on dissenting creditors. (D.I. 109 at 1, 8.) Specifically, Appellants assert that the text of § 1129(b)(1) singles out the only portion of § 1129(a) that does not apply, paragraph eight, and says that "all" other requirements apply. (D.I. 109 at 11.) In contrast, Appellees point out that the Bankruptcy Court previously determined that the Appellants' position regarding the "notwithstanding" provision "is not supported by relevant decisional law." (D.I. 110 at 13); (D.I. 109-2 at A1122.) The court agrees with the Bankruptcy Court.

         Section 510(a) of the Bankruptcy Code provides that "[a] subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law." 11 U.S.C. § 510(a). Section 1129(b)(1) of the Code, however, provides that the court "shall confirm" a plan over the objection of an impaired dissenting class "[n]otwithstanding section 510(a)." 11 U.S.C. § 1129(b)(1). Applying the plain meaning of the word "notwithstanding," the Bankruptcy Court held that the "notwithstanding" provision meant that Section 1129(b) "is applied without prevention or obstruction of any applicable subordination agreement." (D.I. 109-2 at A1123); (D.I. 110 at 12.) In making its conclusion, the Bankruptcy Court utilized the Third Circuit decision In re Goody's Family Clothing, Inc., which held that "notwithstanding" as used in a different section of the bankruptcy code "means 'in spite of or 'without prevention or obstruction from or by.'" 610 F.3d 812, 817 (3d Cir. 2010), aff'd by In re Federal-Mogul Global, Inc., 684 F.3d 355, 369 (3d Cir. 2012); (D.I. 109-2 at A1123.) The Bankruptcy Court observed that "presumptively, identical words used in different parts of the same act are intended to have the same meaning." Sullivan v. Stroop, 496 U.S. 478, 484-85 (1990); see UnitedSa v. Ass'n v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 371 (1988); (D.I. 109-2 at A1123.) Other courts to consider the issue have reached the same conclusion. In re TCI2 Holdings, 428 B.R. 117, 141 (Bankr. D.N.J. 2010); In re Croatan Surf Club, LLC, No. 11-00194-8-SWH, 2011 WL 5909199 at *2 (Bankr. E.D. N.C. Oct. 25, 2011). In TCI2, the court stated:

The only logical reading of the term "notwithstanding" in section 1129(b)(1) seems to be: "Even though section 510(a) requires the enforceability of subordination agreements in a bankruptcy case to the same extent that the agreement is enforceable under nonbankruptcy law, if a nonconsensual plan meets all of the § 1129(a) and (b) requirements, the court 'shall confirm the plan.'" The phrase "[n]othwithstanding section 510(a) of this title" removes section 510(a) from the scope of section 1129(a)(1), which requires compliance with "the applicable provisions of this title."

TCI2, 428 B.R. at 141. Similarly, the Croatan Surf court held that:

§ 510(a) was not intended to give parties carte blanche to override other provisions of the Bankruptcy Code. This is evident in the language of ยง 1129(b) which allows a court to confirm a plan if it "does not discriminate unfairly, and is fair and equitable," "notwithstanding section 510(a) of this title.". . . Therefore, a court can confirm a plan which disrupts bargained for priority, and thus is inconsistent with the terms of a ...

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