• by Erik Sass  @eriksass1, October 8, 2010

This week brought another reversal in the rollercoaster-like Tribune bankruptcy -- which at first seemed to be in danger of falling apart, then looked suddenly hopeful, and now appears to be collapsing again, according to a report in the Chicago Tribune, the company's flagship newspaper.

The latest turn for the worse saw rival groups of creditors walk away from negotiations supervised by a court-appointed mediator, dashing hopes that they might achieve consensus on a new bankruptcy reorganization plan anytime soon.

As in previous skirmishes, the latest disagreement pitted unsecured creditors (including bondholders, whose securities pre-date the 2007 buyout deal) against the private-equity investors who arranged financing for the ill-fated transaction to take Tribune private.

At least three different groups of creditors have left the negotiating table and are now preparing their own, separate bankruptcy reorganization plans, according to the Chicago Tribune, including Aurelius Capital Management and the Official Committee of Unsecured Creditors on one side, and Oaktree Capital Management, Angelo, Gordon & Co. (with support from Tribune's management) on the other. JP Morgan Chase may also file its own bankruptcy reorganization plan.

The Delaware bankruptcy judge has set a deadline of October 15 for rival plans, which will be considered and put up for a vote on that date. It's unclear, however, what the next step would be, as none of the rival creditors have been able to marshal majority support for their different plans in the past -- necessitating the current round of negotiations.

Last month, Aurelius threatened to upend the entire bankruptcy process by demanding that Tribune's current management be removed and replaced with court-appointed trustees. This bold suggestion, which may have been presented as a negotiating tactic at the time, could be revisited more seriously if the stalemate continues.

Aurelius also wants the entire value of the two-step transaction to placed in a litigation trust, with payouts depending on the outcome of lawsuits between creditors that will take place after the bankruptcy reorganization.

Meanwhile, senior creditors are contending that only the smaller second step should be placed in a litigation trust, focusing on what they claim is a key finding in the report filed by independent examiner Kenneth Klee several months ago.

While Klee found that the second step of the two-step transaction to take Tribune private would probably be considered fraudulent, senior creditors believe they can rightly claim ownership based on the legitimate first transaction alone, which involved over $8 billion in debt.

This would give them the right to direct the bankruptcy reorganization disposing of most of the company's value, leaving about $2 billion for the step-two transaction to be divided among unsecured creditors pending the outcome of future lawsuits -- a much smaller amount than the unsecured creditors stand to recoup if they were to succeed in having entire two-step transaction placed in a litigation trust.