In re Tribune Media Co.

799 F.3d 272

In re TRIBUNE MEDIA COMPANY f/k/a Tribune Company, f/k/a Times Mirror Corporation, et al., Debtor.

Aurelius Capital Management, L.P., Appellant (14–3332)

Deutsche Bank Trust Company Americas; Law Debenture Trust Company of New York, Appellant (14–3333).

Nos. 14–3332

14–3333.

United States Court of Appeals, Third Circuit.

Argued April 15, 2015.

Opinion Filed Aug. 19, 2015.

Roy T. Englert, Jr., Esquire, (Argued), Matthew M. Madden, Esquire, Hannah W. Riedel, Esquire, Mark T. Stancil, Esquire, Robbins, Russell, Englert, Orseck, Untereiner & Sauber, Washington, DC, Counsel for Appellants, Aurelius Capital Management, L.P., Law Debenture Trust Company of New York.

David J. Adler, Esquire, McCarter & English, New York, N.Y., Katharine L. Mayer, Esquire, McCarter & English, Wilmington, DE, Counsel for Appellant, Deutsche Bank Trust Company Americas.

James F. Bendernagel, Jr., Esquire, Sidley Austin, Washington, DC, James O. Johnston, Esquire, (Argued), Jones Day, Los Angeles, CA, Candice L. Kline, Esquire, Jeffrey C. Steen, Esquire, Sidley Austin, Chicago, IL, J. Kate Stickles, Esquire, Cole Schotz, Wilmington, DE, Counsel for Appellees, Tribune Media Company.

Before: AMBRO, VANASKIE, and SHWARTZ, Circuit Judges.

OPINION OF THE COURT

AMBRO, Circuit Judge.

Aurelius Capital Management, L.P. (“Aurelius”), along with the Law Debenture Trust Company of New York and Deutsche Bank Trust Company Americas (the “Trustees”), appeal the District Court's dismissal as equitably moot of their appeals from the Bankruptcy Court's order confirming Tribune's Chapter 11 plan of reorganization. We agree with the District Court that Aurelius's appeal, which seeks to undo the crucial component of the now consummated plan, should be deemed moot. However, we reverse and remand with respect to the Trustees. They seek disgorgement from other creditors of $30 million that the Trustees believe they are contractually entitled to receive. As the relief the Trustees request would neither jeopardize the $7.5 billion plan of reorganization nor harm third parties who have justifiably relied on plan confirmation, their appeal is not equitably moot.

I. Facts and Procedural History

In December 2007, the Tribune Company (which published the Chicago Tribune and the Los Angeles Times and held many other properties) was facing a challenging business climate. Sensing an opportunity, Sam Zell, a wealthy real estate investor, orchestrated a leveraged buy-out (“LBO”), a transaction by which a purchaser (in this case, an entity controlled by Zell and, for convenience, referred to by that name in this opinion) acquires an entity using debt secured by assets of the acquired entity. Before the LBO, Tribune had a market capitalization of approximately $8 billion and about $5 billion in debt.

The LBO was taken in two steps: Zell made a tender offer to obtain more than half of Tribune's shares at Step One, followed by a purchase of all remaining shares at Step Two. In this LBO, as is typical, Zell obtained financing (called here the “LBO debt”) to purchase Tribune secured by Tribune's assets, meaning that Zell had nothing at risk. The transaction took Tribune private and saddled the company with an additional $8 billion of debt. Moreover, as a part of the sale, Tribune's subsidiaries guaranteed the LBO debt. The holders of the debt that Tribune carried before Zell took it over (the “pre-LBO debt”) had recourse only against Tribune, not against the subsidiaries. Thus the LBO debt, guaranteed by solvent subsidiaries, had “structural seniority” over the pre-LBO debt.

Unsurprisingly, Tribune, in a declining industry with a precarious balance sheet, eventually sought bankruptcy protection. It filed under Chapter 11 in December 2008, and at some later point Aurelius, a hedge fund specializing in distressed debt, bought $2 billion of the pre-LBO debt and became an active participant in the bankruptcy process. (We do not know how much Aurelius paid for this debt.)

Ten days after the filing, the U.S. Trustee appointed the Official Committee of Unsecured Creditors (the “Committee”), which obtained permission to pursue various causes of action (e.g., breach of fiduciary duty and fraudulent conveyance) on behalf of the estate against the LBO lenders, directors and officers of old Tribune, Zell, and others (collectively called the “LBO–Related Causes of Action,” see In re Tribune Co., 464 B.R. 126, 136 n. 7 (Bankr.D.Del.2011)¹ ). As the Bankruptcy Court put it, “[f]rom the outset ... 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.” Id. at 142.

Various groups of stakeholders proposed plans of reorganization; the important ones for the purposes of this appeal are Aurelius's (the “Noteholder Plan”) and one sponsored by the Debtor, the Committee, and certain senior lenders, called the “DCL Plan” (for Debtor/Committee/Lender) or simply the “Plan.” The primary difference between the Noteholder and the DCL Plans was that the proponents of the former (the “Noteholders”) wanted to litigate the LBO–Related Causes of Action while the DCL Plan proposed to settle them.

Kenneth Klee, one of the principal drafters of the Bankruptcy Code of 1978, was appointed the examiner in this case, and he valued the various causes of action to help the parties settle them. Professor Klee concluded that whether Step One left Tribune insolvent (and was thus constructively fraudulent) was a “very close call” if Step Two debt was included for the purposes of this calculation. Id. at 159. He further concluded that a court was “somewhat likely” to find intentional fraud and “highly likely” to find constructive fraud at Step Two. Id. He also valued the recoveries to Aurelius's and the Trustees' classes of debt under the various litigation scenarios and concluded that the DCL Plan settlement offered more money ($432 million) than all six possible litigation outcomes except full avoidance of the LBO transactions, which would have afforded the pre-LBO lenders $1.3 billion. Id. at 161. Given these findings for both steps of the LBO, full recovery was a possibility.

The DCL Plan restructured Tribune's debt, settled many of the LBO–Related Causes of Action for $369 million, and assigned other claims to a litigation trust that would continue to pursue them and pay out any proceeds according to a waterfall structure whereby the pre-LBO lenders stand to receive the first $90 million and 65% of the Trust's recoveries over $110 million (this aspect of the Plan we refer to as the “Settlement”). Aurelius objected because it believes the LBO–Related Causes of Action are worth far more than the examiner or Bankruptcy Court thought and that it can get a great deal more money in litigation than it got under the Settlement. The Bankruptcy Court's opinion on confirmation, thoroughly done by Judge Kevin Carey, discussed the parties' disagreement at length and ultimately concluded that it was “uncertain” that litigation would result in full avoidance of the LBO. Id. at 174. And full avoidance was the only result the Bankruptcy Court's opinion suggests could plausibly result in greater recovery than the Settlement. See id. at 161 (citing examiner's opinion that only full avoidance could exceed settlement value); 174 (rejecting contrary expert opinions). Thus the Court held that the Settlement was reasonable, and, on July 23, 2012, the DCL Plan was confirmed over Aurelius's objection.

Aurelius promptly moved for a stay pending appeal under Bankruptcy Rule 8007. The Bankruptcy Court held a hearing on the motion at which it considered whether to issue a stay and, if so, whether to condition it on a bond. Aurelius opposed posting a bond in any amount. The Court stayed its confirmation order, but it also considered how much an unsuccessful appeal by Aurelius would cost Tribune. As a result of this valuation, the Court conditioned its stay on Aurelius's posting a $1.5 billion bond to indemnify Tribune against the estimated costs associated with staying the order for the likely time to appeal. In re Tribune Co., 477 B.R. 465, 482 (Bankr.D.Del.2012).

With the threat of equitable mootness looming, Aurelius and the Trustees filed emergency motions to vacate the bond requirement and to expedite their appeals. The District Court, however, denied the motions and ordered that the briefing schedule for these appeals would be the same as for other appealing parties (who are not before us). Aurelius appealed the denial of the motions related to the bond requirement, but we dismissed the appeal for want of appellate jurisdiction (the denials were not final orders). Aurelius objected that the amount of the bond was prohibitively high, but it has never argued to any court that a lower amount would be reasonable; rather, it has consistently tried to eliminate the bond requirement altogether.

The appeals were fully briefed in the District Court on October 11, 2012, when Aurelius and the Trustees again moved to have their appeals heard separately from the other pending appeals; the District Court did not rule on this motion (which Tribune opposed). On December 5, 2012, Aurelius again moved for expedition (the Court again denied the motion), and the Plan was consummated on December 31. On January 18, 2013, Tribune moved to dismiss the appeals as equitably moot. About 18 months later, the District Court granted that motion.

As all agreed, the plan was substantially consummated, and Tribune persuaded the District Court that it could not effectively afford relief without causing undue harm either to reorganized Tribune or to its investors. Aurelius appeals, arguing that the case is not equitably moot and that the Settlement was unreasonably low. The fund seeks modification of the confirmation order to reinstate the LBO–Related Causes of Action that the Settlement resolved so that the claims can be fully litigated or re-settled.

The Trustees...