• by Erik Sass  @eriksass1, October 12, 2010

A chart of all the ups and downs of the Tribune Co. bankruptcy case would resemble a seismogram. After several months of alternating good and bad news, the bankruptcy case may finally be approaching resolution, thanks to an unexpected compromise between senior lenders and unsecured creditors.

The surprise agreement comes just a week after various parties walked away from the negotiating table to begin drawing up rival bankruptcy reorganization plans -- and a few days before the Friday deadline established by the bankruptcy court for the plans to be presented.

The latest version of the deal, agreed under the supervision of a court-appointed mediator, reconciles unsecured creditors, including Tribune bondholders Angelo, Gordon & Co. and Oaktree Capital Management LP, which both purchased distressed Tribune debt, and senior lenders, including JP Morgan Chase and Bank of America.

These parties have agreed to an expanded bankruptcy reorganization plan, which will allow Tribune to exit Chapter 11 bankruptcy protection and settle most outstanding claims. Unsecured creditors and Tribune bondholders now stand to receive about $420 million, up from $300 million under earlier plans.

The agreement preserves the multipart plan, which calls for settling claims related to the $6 billion "Step 1," but allows claims related to the $2 billion "Step 2" to be decided in separate litigation. The deal essentially anticipates lawsuits against members of Tribune's former management, their advisors and other parties by the unsecured creditors.

Tribune announced an initial agreement with Angelo, Gordon and Oaktree in late September, in which the various parties agreed to place the "Step 2" claims in a litigation trust, a legal device created to allow the uncontested parts of the bankruptcy reorganization to proceed while leaving others unresolved pending further legal wrangling.

Further litigation regarding these claims would have to be initiated by an impartial "litigation trustee." According to Tribune, the unsecured creditors could recover up to 50% of their claim in cash from this plan.

The agreement represents a compromise, taking into account the demands of unsecured creditors, who got an earlier bankruptcy reorganization plan scrapped by arguing that the original buyout deal was doomed to insolvency from the beginning and therefore illegitimate.

In August, they received more ammunition in the form of a report by independent examiner Kenneth Klee. He said certain information suggested that members of the company's former management may have known the deal was not financially viable, making it a "fraudulent conveyance."

As a result, he warned that it was "somewhat likely that a court would conclude that the Step Two Transactions [when the company assumed $3.6 billion in debt] constituted intentional fraudulent transfers and fraudulently incurred obligation." Senior lenders, including JP Morgan Chase, subsequently withdrew their support for the original bankruptcy reorganization plan proposed by Tribune.