In Re: Tribune Company et al

Filing 93

MEMORANDUM AND ORDER - granting 88 MOTION for Leave to File Sur-Reply; granting-in-part and denying-in-part 58 MOTION to Dismiss Based upon Equitable Mootness. CA Nos. 12-cv-128, 12-mc-108, 12-cv-1106, 12-cv-1072, and 12-cv-1073 are dismissed as equitably moot. SEE ORDER FOR MORE DETAILS. Signed by Chief Judge Gregory M. Sleet on 6/18/2014. (mdb)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

In re
TRIBUNE COMPANY, et al.,

Debtors.

WILMINGTON TRUST COMPANY,
eta/.,
Appellants,
v.

TRIBUNE COMPANY, eta/.,
Appellees.

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Chapter 11
Bankruptcy Case No. 08-13141 (KJC)
Jointly Administered
Case No. 12-cv-128 GMS
Case No. 12-mc-108 GMS
Case No. 12-cv-1072 GMS
Case No. 12-cv-1073 GMS
Case No. 12-cv-1100 GMS
Case No. 12-cv-1106 GMS
CONSOLIDATED APPEALS

MEMORANDUM
I.

INTRODUCTION
On December 7, 2012, the court consolidated the above-captioned bankruptcy appeals

filed by Wilmington Trust Company ("Wilmington Trust"), Aurelius Capital Management, LP
("Aurelius"), Law Debenture Trust Company ofNew York and Deutsche Bank Trust Company
Americas (collectively, the "Trustees"), and EGI-TRB, LLC ("EGI").

(D.I. 57.) Although

Wilmington Trust, Aurelius, the Trustees and EGI raise different arguments in their respective
appeals, the court will collectively refer to them as the "Appellants." Presently before the court
is the Reorganized Debtors' Motion to Dismiss [the Appellants'] Appeals as Equitably Moot.

(D.I. 58.) For the reasons that follow, the court grants-in-part and denies-in-part the motion.
II.

BACKGROUND

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.) Prior to the LBO, Tribune had approximately $5 billion in
debt. Roughly $2 billion of that debt consisted of certain notes that are held by Aurelius, the
Trustees, and Wilmington Trust. (Id. at 12.) In the course of the LBO, the Debtors incurred an
additional $8 billion in debt through Senior Loan Agreements. Unlike the pre-LBO debt, the
Senior Loan Agreements were guaranteed by a number of Tribune's subsidiaries. (Id. at 13.)
On July 23, 2012,

th~

Bankruptcy Court confirmed the Fourth Amended Joint Plan of

Reorganization for Tribune and Its Subsidiaries (the "DCL Plan") proposed by the DCL Plan
Proponents. 1 According to the Reorganized Debtors, "the cornerstone of the DCL Plan is the
DCL Settlement," which resolved certain LBO-related causes of action against Senior and
Bridge Lenders in exchange for immediate distributions of settlement funds paid to other
1

The Debtor/Committee/Lender Plan ("DCL Plan") Proponents include the Debtors, the Official
Committee ofUnsecured Creditors, and certain senior lenders-- Oaktree Capital Management, L.P.
("Oaktree"), Angelo, Gordon & Co., L.P. ("Angelo Gordon"), and JPMorgan Chase Bank, N.A.
("JPMorgan"). (See D.I. 60-2 at 2 n.4, 2011 Bankruptcy Court Opinion on Confirmation ("2011
Confirmation Decision").) Also before the bankruptcy court in 2011 was a competing reorganization plan
-- the "Noteholder Plan" -- which was proposed by a majority of the present appellants -- Aurelius, the
Trustees, and Wilmington Trust. (!d. at 3 n.5.) The Noteholder Plan was premised on continued
litigation of the LBO-related claims. "The Bankruptcy Court rejected the Noteholder Plan, among other
reasons, due to its promise of 'extensive and costly litigation' that 'is highly speculative' and because it
received such limited support from creditors." (D.I. 86 at 8 n.16 (citing 2011 Confirmation Decision at
125).)

2

creditors, particularly Senior Noteholders and Other Parent Claims? (D.I. 59 at 4.) The DCL
Plan assigned the remaining non-settled LBO-related causes of action to a Litigation Trust for
the benefit of creditors. (D.I. 75 at 4.)
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 intercreditor disputes raised in many of the
Appellants' appeals. Accordingly, the Bankruptcy Court's confirmation order is supported by
~xtensive

III.

fact-finding and detailed conclusions oflaw.

STANDARD OF REVIEW
A.

Equitable Mootness

"Under the doctrine of equitable mootness, an appeal should be dismissed, even if the
court has jurisdiction and could fashion relief, if the implementation of that relief would be
inequitable." In re PWS Holding Corp., 228 F.3d 224, 235-236 (3d Cir. 2000).

However,

"[ d]ismissing an appeal as equitably moot should be rare, occurring only where there is sufficient

2

Aurelius provides additional details and a different perspective for the DCL Settlement:
The DCL Settlement releases the lenders and holders of the LBO Debt (collectively, the
"'LBO Lenders") from all of the valuable LBO-related claims ... asserted against them in
their capacities as LBO Lenders, including claims to (a) avoid the Debtors' obligation to
repay the LBO Lenders any of the $8.6 billion of LBO Debt, and (b) recover the more
than $2 billion of principal, interest and fees paid to the LBO Lenders by Tribune prepetition. In consideration for these broad releases, Aurelius and Tribune's other senior
and subordinated noteholders (collectively, the "Noteholders"), who are the would-be
beneficiaries of approximately $2.3 billion in proceeds that could have been derived from
the [LBO-related claims], received only $369 million-a mere 16% of the Noteholders'
aggregate allowed claims against Tribune ....
(D.I. 80 at 3.)

3

justification to override the statutory appellate rights of the party seeking review."

In re

SemCrude, 728 F.3d 314, 326-27 (3d Cir. 2013). Sufficient justification may be found when

"granting relief on appeal [is] almost certain to produce a 'perverse' outcome -- 'chaos in the
bankruptcy court' from a plan in tatters and/or significant 'injury to third parties."' Id. at 320
(quoting In re Phi/a. Newspapers, LLC, 690 F.3d 161, 168 (3d Cir. 2012)). Because dismissal
"should be the rare exception and not the rule," the party seeking dismissal bears the burden to
prove that it is warranted, "based on an evidentiary record, and not speculation." Id. at 321.
Courts assess five prudential factors to determine whether an appeal should be dismissed
as equitably moot:
( 1) whether the reorganization plan has been substantially
consummated, (2) whether a stay has been obtained, (3) whether
the relief requested would affect the rights of parties not before the
court, (4) whether the relief requested would affect the success of
the plan, and (5) the public policy of affording finality to
bankruptcy judgments.
In re Continental Airlines, 91 F.3d 553, 560 (3d Cir. 1996) (en bane) ("Continental r'). The

factors are "interconnected and overlapping," which, in practice, leads the equitable mootness
determination to proceed in two analytical steps:

"(1) whether a confirmed plan has been

substantially consummated; and (2) if so, whether granting the relief requested in the appeal will
(a) fatally scramble the plan and/or (b) significantly harm third parties who have justifiably relied
on plan confirmation." SemCrude, 728 F.3d at 321.
Satisfaction of the Bankruptcy Code "substantially consummated" statutory standard3 is

3

Substantial consummation is defmed in the Bankruptcy Code as: "(A) transfer of all or
substantially all of the property proposed by the plan to be transferred; (B) assumption by the debtor or by
the successor to the debtor under the plan of the business or of the management of all or substantially all
of the property dealt with by the plan; and (C) commencement of distribution under the plan." 11 U.S.C.
§ 1101.

4

sufficient for the first step, and "indicates that implementation of the plan has progressed to the
point that turning back may be imprudent." !d. After the threshold step is satisfied, courts
should then analyze "whether granting relief will require undoing the plan as opposed to
modifying it in a manner that does not cause its collapse." Id. 4 Courts should also "consider the
extent that a successful appeal, by altering the plan or otherwise, will harm third parties who
have acted reasonably in reliance on the finality of plan confirmation."

!d. (citing In re

Continental Airlines, 203 F.3d 203,210 (3d Cir. 2000) ("Continental II').
B.

Appellate Review of a Bankruptcy Court Decision

"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). Conversely, a Bankruptcy
Court's conclusions oflaw are subject to plenary review. See id., at 641. Mixed questions oflaw
and fact are subject to a "mixed standard of review." !d. at 641-42. Under this "mixed

st~dard

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." !d. at 642 (citation and internal
quotation marks omitted).

IV.

DISCUSSION
A.

Equitable Mootness Analysis

The Appellants uniformly argue that the Reorganized Debtors have not satisfied their

4

See In re Zenith Elecs. Corp., 329 F.3d 338, 343-44 (3d Cir. 2003) (appeal not equitably moot
where disgorgement of professional fees would not unravel plan); United Artists Theatre Co. v. Walton,
315 F.3d 217, 228 (3d Cir. 2003) (appeal not equitably moot where striking indemnification provision
would allow the plan to stay otherwise intact).

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burden to moot the respective appeals because the Appellants individually seek only limited
relief that will not unravel the DCL Plan or have a significant impact on third parties. (D.I. 71 at
1-2; D.I. 72 at 3-4; D.I. 75 at 1; D.I. 80 at 15-16.) The court notes, however, that each of the
Appellants original requests for relief sought to either reverse or vacate the Bankruptcy Court's
Confirmation Order.
1.

Substantial Consummation and Obtaining a Stay

The parties do not dispute, and the court has no reason to disagree, that the DCL Plan has
been substantially consummated. Indeed, the Reorganized Debtors argue that pursuant to the
DCL Plan, "more than $8 billion in cash and securities has been distributed to thousands of
creditors; 100 million new shares of stock and warrants have been issued and are actively trading
on the open market; the Reorganized Debtors have incurred $1.1 billion in new debt, completed
multiple corporate restructuring transactions, appointed a new Board, and hired a new Chief
Executive and other officers; and dozens of pending lawsuits .and causes of action have been
dismissed with prejudice or transferred to new plaintiffs." (D.I. 86 at 1.)
Further, the DCL Plan has been substantially consummated due in part to the Appellants'
failure to obtain a stay. Neither Wilmington Trust nor EGI requested a stay. Aurelius and the
Trustees did seek a stay and, after a full-day hearing, the Bankruptcy Court granted that request,
but conditioned the stay on the posting of a supersedeas bond in the amount of $1.5 billion. (D.I.
59 at 2.) Aurelius and Trustees did not post the bond. They argue that the bond amount was
prohibitive and more than the total value of their claims at issue. (D.I. 75 at 4; D.l 80 at 5.)
Accordingly, the court finds that first two factors favor the Reorganized Debtors, but those
factors are not dispositive of the equitable mootness issue before the court.
"[T]hus [the court] tum[ s] to whether granting [the Appellants] relief will have the feared
6

outcomes--collapsing the plan and significantly injuring third parties who reasonably relied on its
implementation--with which equitable mootness is ultimately concerned." SemCrude, 728 F.3d
at 323.

2.

Success of the Plan and Injury to Third Parties
a.

Aurelius

"Aurelius is the largest holder of senior and subordinated notes issued by the Tribune
Company prior to the highly leveraged buyout in 2007 that drove the company into bankruptcy."
(D.I. 80 at 2.)

It seeks modification of the DCL Settlement, which Aurelius argues is

unreasonable because it provides "meager consideration" to senior and subordinated noteholders
in light of the fact that the LBO-related claims, if successful, would have resulted in payment in
full to those noteholders. (!d. at 4.) Aurelius estimates that the LBO-related claims released by
the DCL Settlement would return a judgment ''up to approximately $1.60-1.68 billion" in
addition to the distributions already made under the DCL Plan. (!d. at 17.) It contends that there
are at least three remedies related .to the DCL Settlement that the court could implement that
would grant senior and subordinated noteholders complete or partial relief and not unravel the
DCL Plan. (!d. at 16-20.) Specifically, Aurelius suggests that the court could 1) order the
Reorganized Debtors to fund any liability resulting from the ultimate outcome of the LBOrelated claims; 2) allow the Litigation Trust to pursue the LBO-related claims directly against the
LBO Lenders 5 ; or 3) strike the releases granted to the LBO Lenders and allow the Litigation

5

According to Aurelius, there are twenty LBO Lenders. Of those twenty, three -- Oaktree,
Angelo Gordon, and JPMorgan --received more than $3 billion, which is half of the distributions under
the DCL Plan. Aurelius contends that amount exceeds the balance of the LBO-related claims. Therefore,
it suggests that the court allow the LBO-related claims to proceed against just those three parties. (See
D.I. 80 at 19 n.46.) However, Aurelius was unsuccessful advancing an identical argument in the past, and
the court cannot endorse such a measure in the present case. See In re Adelphia Commc 'ns Corp., 367

7

Trust to pursue the LBO-related claims, but limit the senior and subordinated noteholders'
recovery to the 35% payable to the LBO Lenders under the terms of the Litigation Trust
distribution waterfall. 6 (Id. at 17-20.)
Regarding Aurelius' first option, it argues that a $1.68 billion judgment would not
threaten the Reorganized Debtors' ongoing business because they emerged from bankruptcy with
an enterprise value of $7.37 billion. (Jd. at 17-18.) The court disagrees. As an initial matter,
making the Reorganized Debtors liable for the LBO-related claims would nullify the purpose of
the DCL Plan -- discharge of Tribune's prepetition debt -- and amount to a reinstatement of
$1.68 billion of that debt. Courts generally allow potential claims to proceed when they are a
relatively small fraction of the reorganization plan. See SemCrude, 728 F.3d at 324 (finding a
potential $207,000 claim would not destabilize a $160 million settlement provision and "pale[d]
even more in the context of the entire reorganization plan, which involved over $2 billion."); In
re Aurora Foods, No. 04-166-GMS, 2006 U.S. Dist. LEXIS 91659, at *15-16 (D. Del. Dec. 19,

2006) (concluding that a $930 million reorganization "[p]Ian need not be undone to satisfy a

B.R. 84, 97 (S.D.N.Y. 2007) (finding "selective disgorgement from cherry-picked creditors as opposed
to ordering disgorgement from all creditors ... is it equitable because those [select few] creditors would
not be able to recoup their losses by pursuing other creditors as they agreed to relinquish those claims as
part of the Global Settlement.").
6
The DCL Plan classified various creditor claims and interests against Tribune. The
classifications relevant to the present appeal include: IC- Senior Loan Claims; ID- Bridge Loan Claims;
lE - Senior Noteholder Claims; lF -Other Parent Claims; I G -Convenience Claims; 11 - EGI Notes
Claims; and 1J- PHONES Claims. (D.I. 60-I ("DCL Plan") at A8-A9.)
The Litigation Trust distribution "waterfall" (the protocol for distribution and priority) requires
that: (a) the first $90 million in net proceeds recovered by the Litigation Trust to be distributed to Senior
Noteholders (Class IE) and other "non-LBO creditors" who elected to receive Litigation Trust Interests
(Class IF), pro rata, after enforcing subordination of claims in the EGI Notes (Class I) and the PHONES
(Class lJ); (b) the next $20 million in net proceeds to be used to repay Reorganized Tribune's loan to the
Litigation Trust; and (c) 65% of any additional net proceeds to be distributed to be split pro rata among
holders of Class IE and IF Litigation Trust Interests until paid in full, then to holders of Class 1J and 11
Litigation Trust Interests, with the remaining 35% of such proceeds to be distributed to the Senior
Lenders (ClassIC and ID Litigation Trust Interests). (D.I. 72 at 5; D.I. 86 at 29 n.71.)

8

$6.85 million contested payment" because the reorganized debtor had sufficient projected
strength to pay the potential claim if validated.). In contrast, the potential $1.68 billion judgment
in this case amounts to approximately 22% of the over $7 billion reorganization plan. Thus, the
court concludes it would be inequitable to make the reorganized debtors liable for the LBOrelated claims.
In response to Aurelius' remaining proposals, the Reorganized Debtors argue that the
relief requested would eviscerate the DCL Plan. (D.I. 86 at 7.) They argue a fundamental flaw
in Aurelius' proposals is that the Senior Noteholders and thousands of other creditors would keep
the $400 million in settlement compensation provided by the LBO Lenders and distributed under
the DCL Plan, but the LBO Lenders would not receive the benefit for which they paid -- the
release and discharge of the LBO-related claims. (Id. at 7-8.) As such, Aurelius' proposals are
directly at odds with the bargain negotiated among the parties and ultimately reflected in the
DCL Settlement. The Reorganized Debtors assert that the court does not have power to rescind
the releases without restoring the settlement consideration the LBO Lenders provided to other
creditors for those releases. Rather, the Reorganized Debtors contend that the court would be
required to rescind the entire bargain and reverse the DCL Settlement. (Id. at 8-9.) The court
agrees.
The Bankruptcy Court found that the LBO Lenders provided sufficient consideration for
the release of the LBO-related claims, and that the release of those claims is "connected to the
[DCL Settlement], which is integral to the DCL Plan." In addition, it correctly concluded that
"release of the [LBO Lenders] is necessary to the Debtor's reorganization." (2011 Confirmation
Opinion at 90.) As such, the court finds that the release of LBO-related claims under the DCL

9

Settlement was an integral component of the DCL Plan for which the LBO Lenders paid
approximately $400 million. Accordingly, the court cannot rescind the DCL Settlement releases
without reversing the entire plan. 7 See In re SLI Inc., No. 04-4231,2006 U.S. App. LEXIS 5188,
at *9 (3d Cir. Mar. 1, 2006) (quoting Continental II, 203 F.3d at 209) ("Because they are
consideration for investment that was crucial to the [reorganization plan], the releases form an
'integral nexus with the feasibility of the ... plan of reorganization."').
Finally, the Reorganized Debtors correctly characterize the Litigation Trust distribution
waterfall as "a heavily negotiated, integral component of the DCL Settlement" that "includes
elaborate, detailed provisions identifying the creditor classes with Litigation Trust Interests and
specifying the manner in which the Litigation Trust recoveries are to be allocated." (D.I. 86 at
29; see also Note 6, supra.) As part of that negotiation, the senior lenders agreed to forgo some
of their natural recoveries and bargained to retain a 35% share of the Litigation Trust recoveries.
(See D.I. 86, Ex B, Supplemental Declaration of David Kurtz ("Supp. Kurtz Decl."), ~ 11.). The

Bankruptcy Court specifically found that "it was appropriate for the parties to include this
element as part of the DCL Plan Settlement." (D.I. 60-4, 2011 Bankruptcy Court Memorandum
on Reconsideration ("Reconsideration Opinion Decision") at 19). Accordingly, the Court rejects
Aurelius' third proposal --that senior and subordinated noteholders receive the Senior Lenders'
35% share of Litigation Trust proceeds -- because it would fundamentally alter the terms of the

7

Aurelius argues that "releases (or some of the releases) could be stricken from the plan without
undoing other portions of it." (D.I. 58 at 19 (quoting PWS, 228 F.3d at 236).) The court is not convinced.
The releases at issue in PWS were not integral to the reorganization plan. Rather, they released
individuals who had provided services after the petition date from certain liability for their work in the
reorganization. PWS, 228 F.3d at 235. The PWS Court concluded that the equities did not require
dismissal because striking the releases would not necessitate reversal or unraveling of the entire
reorganization plan. Id. 237-38. In contrast, the releases at issue here are the heart of the DCL
Settlement, which is an integral part of the DCL Plan.

10

DCL Settlement.
The court concludes that Aurelius' requested relief directly attacks the DCL Settlement,
which is an integral component of the DCL Plan. Therefore, the court finds that if Aurelius'
requested relief was granted, it would have the feared outcome of collapsing the DCL Plan.

b.

The Trustees

The Trustees represent Senior Noteholders, which are the holders of pre-leverage buyout
debt. (See No. 12-1073, D.I. 36 ("Trustee Appeal") at 3.) They raise an intercreditor dispute and
contend that the DCL Plan violates the Subordination Agreements 8 by improperly dispersing $29
million to a different class of creditors. (D.I. 75 at 5.) Specifically, the Trustees argue that only
Senior Noteholders (Class 1E creditors) are entitled to the benefit of the Subordination
Agreements and that holders of Other Parent Claims (Class 1F creditors)-- consisting of retirees,
trade creditors, and the Swap Claim -- should not share in the "turn over" of settlement
consideration under the Subordination Agreements. 9 (Trustee Appeal ~t 3-8.) They contend that
the court can provide effective relief to Class 1E creditors (including the Trustees) by (A)
ordering either 1) the Reorganized Debtors to disburse the $29 million to Class 1E creditors, 2)
the Class 1F creditors to disgorge the $29 million wrongfully diverted to it and transfer such cash
8

The Subordination Agreements provide, in pertinent part, that all payments that otherwise
would repay the PHONES and EGI Notes must be turned over to more senior creditors until their claims
are paid in full. (See Note 6, supra.)
9
Class 1F Other Parent Claims is composed of7 holders of the Swap Claim (approximately 57%
-- $151 million), 191 retirees (approximately 40% -- $105 million), and 517 unsecured trade and other
creditors (approximately 3%--$8.8 million). (2011 Confirmation Opinion at 109; D.I. 72 at 17 n.13; D.I.
86, Ex. A, Supplemental Declaration of Brian Whittman ("Supp. Whittman Decl."), ~ 34.) The class
members were presented the opportunity to choose between (a) larger distributions on their claims
(35.18%) while forgoing future litigation interests; and (b) smaller initial distributions (32.73%)
accompanied by Litigation Trust Interests. (Supp. Whittman Decl. at 14 n.8.) The holders of the Swap
Claim chose option one -- to receive a higher distribution on their claim. As such, of the 715 class
members, 113 (16% by number, but 77% of all distributions to Class 1F creditors) chose the first option
and received a slightly higher distribution on their claim, while 602 (84% by number, but only 23% by
claim amount) chose to receive Class 1F Litigation Trust Interests. (Jd., ~~ 35, 39, 47.)
11

to Class IE creditors, or 3) the modification or additional distribution under the Litigation Trust
distribution waterfall to redirect Class IF creditors' recoveries to Class IE creditors; and (B) the
modification ofthe "spin-up" provisions of Class II (EGI Notes Claims) and Class 1J (PHONES
Claims) Litigation Trust Interests to require future distributions to be turned over to only Class
IE creditors (and not Class IF) until their claims are paid in full. (D.I. 75 at 5-6.)
The Reorganized Debtors argue, and the court agrees, that the Trustees requested relief
would adversely affect key provisions of the DCL Plan and inequitably impact third parties not
before the court. (D.I. 86 at 22.) The Trustees first option-- that the Reorganized Debtors pay
$29 million to remedy the alleged inappropriate distribution to Class IF creditors -- would be
inequitable because it would require the .Reorganized Debtors to pay that sum twice and would
harm new creditors and shareholders. The Reorganized Debtors indicate that between December
20I2 and February 20I3, over I6 million shares of common stock and over I million new
warrants have been freely traded in open Plarkets. (D.I. 86 at 24 n.54; Supp. Whittman Decl.,

~

7.) Accordingly, the Trustees requested relief would adversely impact innocent parties not
before the court. See In re SemCrude L.P., 456 F. App'x I67 (3d Cir. 20I2) (affirming appeal as
equitably moot where payment of judgment would impact the rights of persons holding "stocks
and warrants issued as part of the consummation of the plan [that] have been freely tradable
since their issuance").
In addition, the Reorganized Debtors convincingly argue that the court cannot practically
or equitably order disgorgement from Class IF creditors because it consists of more than 700
members, the majority of which are individuals and small-business trade creditors. 10 (D.I. 86 at
10

The Reorganized Debtors state that, excluding the Swap Claim, the average initial distribution
paid to Class IF creditors was approximately $51,150. (See Supp. Whittman Decl., ~ 36.)

I2

27; see also Note 9, supra.) The proposed disgorgement would also be difficult to implement
uniformly given that 16% of the class creditors received only cash distributions, while the
remaining 84% received part of their distributions in Litigation Trust Interests. (See Supp.
Whittman Decl.,

~

35.)

Accordingly, the court rejects this proposal because it would be

inequitable to numerous individuals and extremely difficult to implement.
Finally, the Trustees requested modifications to the Litigation Trust distribution waterfall
would have an inequitable impact on third parties not before the court.

The Class 1F creditors

were given the opportunity to choose between (a) larger distributions on their claims while
forgoing future litigation interests; and (b) smaller initial distributions accompanied by Litigation
Trust Interest_s. (See Note 9, supra.) Hundreds of individuals and small-business trade creditors,
who not parties in the present appeal, elected to participate in the Litigation Trust. (!d.) In
making that election, they were entitled to rely upon the finality of the Confirmation Order. See
Nordhojj1nvs._, Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 189 (3d Cir. 2001) (finding parties that

"are not currently before [the appellate reviewing court] and relied on the plan confirmation ...
merit protection under the equitable mootness doctrine."). Thus, the court concludes that equity
requires protecting the hundreds of Class IF creditors that would be adversely impacted by the
Trustees requested relief.
c.

Wilmington Trust and EGI

Wilmington Trust is "the Successor Indenture Trustee" for the PHONES notes
Indenture. (D.I. 72 at 1.) EGI is a general unsecured creditor of Tribune that lent it $235 million
prior to the bankruptcy filings. (D.I. 71 at 2.)

Both parties challenge the Bankruptcy Court's

ruling on subordination issues.
Specifically, the core issue in Wilmington Trust's three appeals is whether the PHONES
13

are entitled to participate, on an unsubordinated basis, in the DCL Settlement, including initial
distributions for settlement of the LBO-related claims, as well as future distributions by the
Litigation Trust. (D.I. 72 at 2.) Its requested relief would require modification of the Litigation
Trust distribution waterfall to "first repay the PHONES to provide for the same 32.73% recovery
received under the DCL Settlement by holders Class 1E and 1F claims" that elected to receive
Litigation Trust Interests, and after that recovery is reached, to make distributions "to holders of
Class 1E, 1F, and 1J Litigation Trust Interests on a pari passu basis." (D.I. 72 at 12.)
Unlike Wilmington Trust, EGI does not seek to recoup an initial distribution made to
creditors under the DCL Plan, but it does propose to modify the Litigation Trust distribution
waterfall. EGI appeals the bankruptcy court's determination that it is subordinated to all of
Tribune's other unsecured creditors, and alternatively argues that it should be superior to or pari
passu with the PHONESY (D.I. 71 at 3.)

Wilmington Trust argues that its requested relief would not unravel the DCL Plan
because it will not affect the initial distributions or create any unforeseen financial difficulties for
the Reorganized Debtors. (D.I. 72 at 12.) In addition, it argues that reordering the Litigation
Trust distribution waterfall would not upset the DCL Plan core elements because the Litigation
Trust Interests are not freely tradable and the Litigation Trust has not yet made any distributions.
(Id. at 16.) Finally, it contends that any parties that would be adversely affected are either before

the court or were aware of Wilmington Trust's appeals as a result of disclosures made available

11

The second issue that EGI appeals is the Bankruptcy Court's ruling that EGI may not recover
from a Creditor Trust that was deleted from the confirmed DCL Plan. EGI contends that the "advisory
opinion may have confusing and mischievous affects on matters beyond the scope of the Confirmation
Order, EGI asks only that this Court excise this advisory ruling from the Confirmation Order." (D.I. 71 at
1-2.) This issue is discussed in detail in Part B below.

14

to creditors prior to electing Litigation Trust Interests. 12 (!d. at I7 -I8.)
In response, the Reorganized Debtors argue that Wilmington Trust's proposed
modification would materially impact Litigation Trust distributions to Class IE and IF creditors,
which are entitled to pro rata shares of the first $90 million of Litigation Trust proceeds, and
65% of any proceeds over $110 million. (D.I. 86 at 32.) They calculate that Class IE and IF
creditors with Litigation Trust Interests would likely receive a 13% to 25% lower recovery. (See
Supp. Whittrnan Decl.,

~

46, Ex. C.) Similarly, the Reorganized Debtors contend that EGI's

proposal would likely result in a 1.9% to 5.2% lower recovery for Class IE and IF Litigation
Trust Interests. (ld.,

~

49.) They further argue that, like the Trustees proposal, supra, these

proposals would disproportionately impact the Class IF creditors that elected to receive
Litigation Trust Interests and make them bear the burden of the proposal for all Class IF
claimants. 13 (ld., ~ 47.)
The court finds the Reorganized Debtors' argument more persuasive.

Although

Wilmington Trust's and EGI's proposed remedies would not require the Reorganized Debtors to
reenter bankruptcy or completely unravel the DCL Plan, they would adversely affect numerous

12

Wilmington Trust argues that the Trustees and Aurelius make up Class lE, those parties
vigorously opposed the DCL Plan, and the bankruptcy court imposed the plan on them. Therefore, it
contends the alternative relief sought would not deprive the Class lE creditors of benefit of their bargain.
(D.I. 72 at I7.) The court disagrees. Wilmington Trust is correct that Class IE rejected the DCL Plan. A
closer examination of the record, however, reveals that 85% of Class IE creditors (by number, but only
IO% by total claim amount) actually voted to accept the plan. (D.I. 60 at A-256.)
Wilmington Trust additionally argues that Class IF creditors that elected to receive a reduced
initial distribution and Litigation Trust Interests, did so with knowledge of the PHONES subordination
appeals and accepted the risk that the PHONES appeals would be successful. (D.I. 72 at I7-I8.)
13
The Reorganized Debtors state that approximately I6% by number and 77% by allowed Claim
Amount Class IF creditors elected cash-only distributions that would be unaltered and entirely unaffected
by the Wilmington Trust proposal. They estimate that a Class IF claim that opted out of the Litigation
Trust would receive approximately 36% of their allowed claim while a Class IF claim that participated in
the Litigation Trust would receive approximately 33.6% of their allowed claim. (Supp. Whittman Decl.,
'i]47.)

I5

Class 1F individuals and small-business entities that are not presently before the court.
Accordingly, like the Trustees proposal, supra, the court rejects Wilmington Trust's and EGI's
proposals that would inequitably impact hundreds of parties that relied on the plan confirmation
and are not presently before the court. See Nordhoff, 258 F.3d at 189.
EGI's alternative remedy that it is subordinated to all creditors except for the PHONES
ts distinguishable.

EGI correctly argues that PHONES appealed the Bankruptcy Court's

confirmation order, and therefore, cannot claim that they relied on the correctness of that order.
(See D.I. 88-1 at 2.) Accordingly, the court could order the requested limited relief if EGI's

appeal succeeds.
3.

Policy Considerations

The Third Circuit's rationale underpinning the general public policy affording finality to
bankruptcy judgments is highly relevant in the present case.
Our inquiry should not be about the "reasonableness" of the Inve~tors'
reliance or the probability of either party succeeding on appeal. Rather, we
should ask whether we want to encourage or discourage relianee of
investors and others on the finality ofbankruptcy confirmation orders. The
strong public policy in favor of maximizing debtor's estates and
facilitating successful reorganization, reflected in the code itself, clearly
weighs in favor of encouraging such reliance. Indeed, the importance of
allowing approved reorganizations to go forward in reliance on
bankruptcy court confirmation orders may be the central animating force
behind the equitable mootness doctrine. Where, as here, investors and
other third parties consummate a massive reorganization in reliance on an
unstayed confirmation order that, explicitly and as a condition of
feasibility, denied the claim for which appellate review is sought, the
allowance of such appellate review would likely undermine public
confidence in the finality of bankruptcy confirmation orders and make
successful completion of large reorganization like this more difficult.
Continental I, 91 F.3d at 565 (citations omitted) (emphasis added).

Similarly, the reorganized debtors

in this
16

case, "consummate[ d]

a massive

reorganization" in excess of $8 billion; the Appellants advance on appeal the same arguments
considered and rejected by the Bankruptcy Court in four detailed opinions; the Bankruptcy Court
confirmed the fourth revision of a reorganization plan; and the Bankruptcy Court's confirmation
order "explicitly and as a condition of feasibility, denied the claim[ s] for which appellate review
[are] sought." See id.

4.

Equitable Mootness Summary

The DCL Plan has been substantially consummated in a definitional sense and in reality.
The Appellants either did not seek a stay or were unsuccessful in obtaining a stay of the
confirmation order. Importantly, as discussed above, the court finds that, with the exception of
EGI's narrow requested relief with respect to the PHONES, the Appellants' proposed remedies
would either unravel the DCL Plan or adversely and inequitably effect parties that reasonably
relied on the finality of the confirmation order and are not before the court. Finally, the strong
public policy affording finality to bankruptcy ju.dgments weighs in favor of equitable mootness
in this case based on the sheer size and complexity of the reorganization and the extensive factfinding and detailed legal conclusions provided by the Bankruptcy Court's numerous opinions.
After weighing the five pertinent factors, the court finds that Reorganized Debtors have
presented sufficient factual evidence to prove that Aurelius', the Trustees', and Wilmington
Trust's appeals are equitably moot. With respect to EGI's appeal, if successful, the court finds
that it could fashion limited relief that would not unravel the DCL Plan or affect parties not
before the court. Therefore, the court grants-in-part and denies-in-part the Reorganized Debtors'
motion to dismiss the Appellant's appeals as equitably moot.

B.

EGI's Appeal

On appeal, EGI challenges the Bankruptcy Court's determination that the EGI Notes are
17

subordinated from all sources of recovery, including the Litigation Trust. (No. 12-11 00-GMS,
D.I. 32 at 1.) Specifically, EGI argues that the terms of the EGI Subordination Agreement only
subordinate its right to recover from "assets of the Company" and its right to receive payments
made ''by or on behalf of the Company," where the "Company" is expressly defined as "Tribune
Company." EGI contends that it did not agree to subordinate its right to recover from a Tribune
successor, like the post-bankruptcy Litigation Trust.

(Id. at 3.)

In addition, it argues the

fraudulent transfer claims, which are a subset of the LBO-related claims, are not "assets of the
Company." {Id.at 4.) Therefore, EGI asserts that when the Litigation Trust makes distributions
to creditors, it will not be making payments "by or on behalf of [Tribune Company]" of "assets
of [Tribune Compru:ty]."
After reviewing the Bankruptcy Court's April 9, 2012 Memorandum Regarding
Allocation Disputes ("Allocation Ruling") under a mixed standard of review, the court finds that
the Bankruptcy

Co~rt

properly subordinated the EGI Notes with regard to Litigation Trust

recoveries. (See D.I. 60 A-196 - A-247.) The Bankruptcy Court found "[t]he flaw in EGI's
argument is the focus on whether the fraudulent transfer claims belong to the Debtors." (Id. at
A-239.) The Bankruptcy Court explained "[f]raudulent conveyance law aims to make available
to creditors those assets of the debtor that are rightfully a part of the bankruptcy estate, even if
they have been transferred away." (!d. (quoting PWS, 303 F.3d at 313).) Further, "section
544(b) places the debtor in possession in the shoes of its creditors, giving it the right to prosecute
individual creditors' fraudulent transfer claims for the benefit of the bankruptcy estate. This
provision of the Bankruptcy Code is consistent with its objective of equitable distribution." PWS,
303 F.3d at 314. With that legal support, the Bankruptcy Court reasoned that the DCL Plan's

18

distributions of recoveries by the Litigation Trust for federal fraudulent transfer claims would be
payments by or on behalf of Tribune.
In this case, the Debtors have proposed a plan that will exercise their
power to resolve, or pursue through the Litigation Trust, potential
fraudulent transfer claims on behalf of creditors under Bankruptcy Code §
544(b) and § 548. Any recoveries will be property of the estate pursuant to
§541(a)(3) (Property of the estate includes "any interest in property that
the trustee recovers under section ... 550"). Since the DCL Plan Settlement
Proceeds and the Litigation Trust recoveries are property of the estate, the
distribution of those funds would be a distribution or payment "by or on
behalf of the Company" and the subordination provisions of the EGI
Subordination Agreement will apply to those distributions.
(D.L 60 at A-240.)
In addition, the Bankruptcy Court analyzed the subordination provisions relating to both
the PHONES Notes and EGI Notes and found them to be ambiguous regarding the relative
seniority. (Id. at A-225-A-227.) The Bankruptcy Court then reviewed parol evidence presented
by both parties and found that "the collective, contemporaneous understanding of the parties
negotiating the LBO was that the EGI Notes would be the most junior in Tribune's capital
structure." (Id. at A-234.) Therefore, the Bankruptcy Court concluded that the PHONES Notes
are senior to the EGI Notes. (Jd.)
The court finds no reason to deviate from the Bankruptcy Court's conclusions.
EGI's second issue on appeal is that the Bankruptcy Court's ruling that EGI is
subordinated as to state law fraudulent transfer claim recoveries from a Creditor Trust -- that was
never formed -- amounts to an advisory opinion and should be vacated.

Essentially, the

Bankruptcy Court performed the above analysis again, but it interpreted the EGI Subordination
Agreement under Delaware law rather than bankruptcy law.

(See id. at A-240 - A-243.)

Because the Creditor Trust was removed from the fourth revision ofthe DCL Plan, EGI contends
19

that the Bankruptcy Court erred when it entered a final judgment order incorporating the entire
Allocation Ruling, which had become, in part, an advisory opinion about the Creditor Trust.
(No. 12-1100, D.L 14 at 27.) The court agrees. Therefore, the court vacates the Bankruptcy
Court's Allocation Ruling to the extent it opines on the Creditor Trust issue. 14
V.

CONCLUSION

For the reasons stated above, the court grants-in-part and denies-in-part the Reorganized
Debtors motion to dismiss the appeals as equitably moot (D.L 85). In addition the court grants
EGI the limited requested relief regarding the Allocation Ruling's discussion of the Creditor
Trust.

Dated: Juned, 2014

14

The pertinent portion begins at the last paragraph on page 45 of the Allocation Ruling and ends
in the middle of page 48. (See D.I. 60 at A-240- A-243.)

20

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

In re
TRIBUNE COMPANY, et al.,

Debtors.

WILMINGTON TRUST COMPANY,

et al.,
Appellants,
v.
TRIBUNE COMPANY, et al.,
Appellees.

)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)

Chapter 11
Bankruptcy Case No. 08-13141 (KJC)
Jointly Administered
Case No. 12-cv-128 GMS
Case No. 12-mc-108 GMS
Case No. 12-cv-1072 GMS
Case No. 12-cv-1073 GMS
Case No. 12-cv-1100 GMS
Case No. 12-cv-1106 GMS
CONSOLIDATED APPEALS

ORDER
At Wilmington, this J{'Jay of June, 2014,
IT IS HEREBY ORDERED THAT:
1.

EGI's Motion to File Sur-Reply (D.I. 88) is GRANTED;

2.

The Reorganized Debtors Motion to Dismiss Appeals as Equitably Moot (D.I. 58)

is GRANTED-IN-PART and DENIED-IN-PART;
3.

Wilmington Trusts' bankruptcy appeals (No. 12-cv-128-GMS, No. 12-mc-108-

GMS, and 12-cv-1106-GMS) are DISMISSED as Equitably Moot;

4.

Aurelius' bankruptcy appeal (No. 12-cv-1072-GMS) is DISMISSED as Equitably

Moot;
5.

The Trustees' bankruptcy appeal (12-cv-1073-GMS) is DISMISSED as Equitably

Moot;
6.

The court vacates the Bankruptcy Court's limited findings, as identified in the

Memorandum accompanying this order, regarding the Creditor Trust in the Bankruptcy
Court's April9, 2012 Memorandum Regarding Allocation Disputes;
7.

The court affirms the Bankruptcy Court's April 9, 2012 Order Regarding

Allocation Disputes (the "Allocation Order") to the extent it found the EGI Notes are
junior in priority to the PHONES Notes; and

t~at

the subordination provisions in the EGI

Subordination Agreement are applicable to distribution of Settlement Proceeds and
distribution of Litigation Trust proceeds; and
8.

The court affirms the July 23, 2012 Or9er of the Bankruptcy Court, Confirming

the Fourth Amended Joint Plan of Reorganization for Tribune Company and its
Subsidiaries to the extent it adopted the limited findings of the Allocation Order as
modified above.

22