Judge opens Tribune bankruptcy trial with warning

Mon Mar 7, 2011 5:16pm EST

* Trial pits hedge fund against company plan

* Court must choose whether settling or suing is best

By Tom Hals

WILMINGTON, Del., March 7 (Reuters) - A judge warned he might reject both proposals for the bankrupt Tribune Co media company as a two-week trial began on Monday into the rival reorganization plans.

"Both (sides) may be so effective in your objections that you might convince me that neither (plan) should be confirmed," said Delaware's chief federal bankruptcy judge, Kevin Carey. "What then?"

The company backs a plan that would settle legal claims among the parties to the bankruptcy. Lenders would end up owning the company and bondholders would receive about 34 cents on the dollar, with more possible.

A group of bondholders led by hedge fund Aurelius Capital Management wants to establish a trust that would pursue legal claims against banks, real estate developer Sam Zell, and shareholders who sold into the buyout and others. [ID:nN03103414]

Carey might have been trying to nudge the two sides to work things out among themselves rather than slug it out in court, but there were no immediate signs of compromise.

Bruce Bennett, of the Dewey & LeBoeuf law firm, accused Aurelius of holding the owner of the Los Angeles Times, Chicago Tribune and more than 20 television stations in bankruptcy to extract a bigger settlement.

"The people holding people hostage are sitting on that side of the room," said Bennett, indicating Aurelius.

Both approaches anticipate the operations would emerge from bankruptcy relatively quickly from Chapter 11.

The plans differ in how to treat the sprawling legal claims stemming from company's 2007 leverage buyout, which was followed in less than a year by bankruptcy.

The bankruptcy wiped out the value of the company's bonds that were issued long before the Zell-led buyout.

Under plan backed by the company, banks that arranged more than $8 billion of leveraged buyout debt will contribute the bulk of the $600 million that will go to bondholders and other unsecured creditors to compensate for their losses from the bankruptcy.

The company would emerge under the control of lenders JPMorgan Chase & Co (JPM.N) and hedge funds Angelo Gordon & Co and Oaktree Capital Management.

The company's "plan provides certainty through a reasonable settlement," said James Sottile of Zuckerman Spaeder, arguing for the Tribune plan.

But the group of bondholders led by Aurelius have dug in their heels against what they argue is a cheap, unreasonable settlement.

"We think it's a pretty lousy settlement," said David Zensky of Akin Gump Strauss Hauer & Feld, which represents Aurelius.

The company argues its plan works out to about 34 cents on the dollar for bondholders, with more possible.

If Aurelius is able to win on some of its biggest legal claims, it bondholders could be paid in full for their $2.5 billion in claims.

The control of the company would not be immediately settled under the noteholder plan.

The case is In re Tribune Co, U.S. Bankruptcy Court, District of Delaware, No 08-13141. (Reporting by Tom Hals; Editing by Tim Dobbyn)

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