Bankruptcy Twists: Tribune Moves Forward, Philly Newspapers Push Back

Philadelphia Inquirer/LA Times

The long, twisting legal sagas of Tribune Co. and Philadelphia Newspapers are getting even more complicated, although in opposite directions.

The last two weeks have seen new actions in bankruptcy proceedings, seeking to push up the date for Tribune to exit Chapter 7 reorganization against the will of management while delaying the planned auction of Philadelphia Newspapers. Whatever happens, the latest developments in the these high-profile newspaper bankruptcies will lead to more legal wrangling.

First, the Tribune Co. saga. On Tuesday, the beleaguered publisher's management came under fire from senior creditors led by JPMorgan Chase, which filed a motion with the bankruptcy court aiming to block management's plans to extend the period of Chapter 7 reorganization under management control by four months.

If the senior creditors succeed in terminating this phase of the bankruptcy reorganization, it would clear the way for them to take the reins and implement their own reorganization plan -- in essence, taking full possession of the company, which is under the control of a team assembled by Sam Zell, who engineered the ill-starred debt-laden buyout of Tribune in December 2007.

The senior creditors are also trying to out-maneuver junior (subordinate) creditors, who have mounted a parallel legal campaign to have the whole deal declared illegitimate, which would negate senior creditors' claims to precedence and give the subordinate creditors a bigger piece of the rapidly diminishing pie.

The subordinate creditors filed legal documents with the court claiming that Zell's and Tribune's previous management failed to perform due diligence in vetting the current state and future prospects of the company's finances. If they can prove that Zell and the previous management were negligent, the whole deal could be declared a "fraudulent conveyance" -- meaning that it was financially unsound from day one.

On the Philadelphia front, Philadelphia Newspapers just received a reprieve that will extend the period of management reorganization -- giving the current owners the exclusive right to formulate a reorganization plan until the end of January, if not longer, depending on when an appeals court hands down an important ruling.

Several weeks ago, a federal judge ruled that senior creditors could not use money owed to them by Philadelphia Newspapers to bid for the company in a planned auction. The senior creditors, including Citizens Bank and CIT, appealed the decision in the Third Circuit Court of Appeals.

As the various parties await the appeals court's decision, the bankruptcy court ruled that in the interim, Philadelphia Newspapers' management will retain the right to propose a reorganization plan until at least Jan. 31, or a month after the appeals court issues its ruling, if later.

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