During a case, investors move in and out to maximize their profits or augment their clout. Amid this gamesmanship, there may be few shared objectives among the investors, making it impossible to assume that everybody agrees that the goal is to create a healthy, restructured company.
"If somebody figures they can get more recovery in a courtroom than in a conference room, then that means complex litigation at a high cost," said Jack Butler, a leading bankruptcy attorney at Skadden, Arps, Slate, Meagher & Flom in Chicago. "Once you're in that kind of spiral, it's very difficult to turn it around."
Precisely because of the potential for courtroom chaos, most big insolvent companies try to avoid it altogether. Instead, they negotiate a restructuring plan before they file for Chapter 11, a solution known as a prepackaged bankruptcy. Prepacks let even massive companies enter and exit bankruptcy in a matter of weeks, as General Motors Co. did in 2009.
But for Tribune Co., the fast track through bankruptcy was not really an option. The company's creditors were too scattered and its situation too complicated to forge a quick deal. Instead it chose what is ruefully called a "free-fall bankruptcy."
Tribune Co. and its advisers -- led by the company's general counsel, a former Zell attorney named Don Liebentritt -- were officially in control of the restructuring process. But within months, their hopes of brokering a quick settlement stalled amid the forces arrayed against compromise.
By the time Tribune Co. filed for bankruptcy in 2008, Oaktree and Angelo Gordon already had begun laying their bets. Independently they had amassed large chunks of the $8.7 billion in "senior" debt used to fund the Zell buyout, making them Tribune Co.'s most powerful creditors alongside JPMorgan and the three other banks that made the original buyout loans.
The buyout debt was "senior" because it had been given special guarantees of payback in case of a bankruptcy. And because their claim was more than $1 billion above the estimated total value of the bankrupt company itself, the holders of this debt would likely end up owning Tribune Co. once it was reorganized in bankruptcy court. For Oaktree and Angelo, that would amount to a bargain-priced backdoor takeover.
What they didn't expect was a militant response from several other investors who had trained their sights on $1.28 billion of Tribune Co. bonds that the company had issued long before the buyout.
Those bonds had been rendered "junior" to the buyout debt by the Zell deal and were trading for just a few cents on the dollar, reflecting their slim chances of recovery. But to some Wall Street specialists, including Jeffrey Aronson, co-founder of a distressed-debt firm called Centerbridge Partners, they represented a ripe opportunity, sources said.
Although the banks, Liebentritt and an official committee representing creditors at first assumed these junior bondholders would be happy with a relatively small payment pegged to market prices, Aronson argued that they were all ignoring a key fact: The company had collapsed less than a year after the buyout closed.
From where Aronson sat, the botched Zell deal was a classic case of "fraudulent conveyance," a legal concept meaning the deal left the company insolvent from the start by swamping it with $13 billion in debt (including obligations already on Tribune Co.'s books). If Centerbridge and others could convince the court that a fraudulent conveyance had taken place, a judge might invalidate the senior claims, leading to a big payout for the juniors, said attorney David Rosner of Kasowitz Benson Torres and Friedman, who represents the trustee for those bonds.
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