Tribune Co, the owner of the Los Angeles Times and Chicago Tribune newspapers, suffered a legal defeat on Monday after a judge late Monday rejected its plan to end its three-year stay in bankruptcy.
The judge also rejected a competing plan from the company's noteholders but said the company's plan had stronger creditor backing and could be a way out of bankruptcy.
"Neither the (company plan) nor the noteholder plan is confirmable. I am uncertain, at this point, what steps the debtors or other parties may take as a consequence of this decision," wrote Delaware's chief bankruptcy judge, Kevin Carey, in a 126-page opinion.
Carey was charged with deciding a range of legal questions, but the key issue was which plan was legally confirmable and offered the company the best path for repaying creditors and ending its bankruptcy.
Tribune, which also owns more than 20 television stations, filed for bankruptcy in 2008, one year after financier Sam Zell led a $13 billion leveraged buyout of the company.
The bankruptcy wiped out more than a billion dollars of the company's notes and the two bankruptcy plans essentially differed in how they treat legal claims from the buyout.
The company and lenders, led by JPMorgan Chase & Co and hedge funds, proposed a settlement payment of around $500 million to noteholders. Noteholders, led by Aurelius Capital Management LP, an uncompromising hedge fund, rejected that as too cheap and wanted to sue those responsible for the buyout.
In a victory for Tribune and its lenders, Carey said the settlement was reasonable and should be approved.
He also acknowledged that the company-backed plan had overwhelming support from various creditors. However, said he was bound by bankruptcy law that essentially allowed the supporters of the company plan to torpedo the noteholder plan and vice versa, making both plans unconfirmable.
Carey also found other flaws with both plans. He wrote that if both the noteholders and the company presented him with plans that fixed the flaws he identified, he would approve the company's plan.
Under either plan, the company would emerge from bankruptcy under the control of lenders. The company also needs the Federal Communications Commission to approve the transfer of the ownership of the broadcast licenses before it can exit bankruptcy.
Carey issued a warning, however, that if a viable exit strategy did not present itself, he would appoint a trustee to replace Tribune's management and find a way to end the bankruptcy.
He set a status hearing for November 22.
Tribune is the fifth-largest U.S. publisher measured by the daily circulation of its papers, according to Dirks, Van Essen & Murray, a newspaper brokerage firm.
The case is In re Tribune Co, U.S. Bankruptcy Court, District of Delaware, No. 08-13141.