The Future of the Tribune, Part One:  Bankruptcy Basics

INTRODUCTION A lot of confusion concerning the Tribune Company’s filing for bankruptcy protection is the result of misunderstandings over the nature of bankruptcy. Most people are familiar with Chapter 7 bankruptcy, as it is the most common form for both individuals and business entities. This is the root of most of the confusion, because Chapter 7 is a form of liquidation. In contrast, the Tribune Co. has filed for voluntary Chapter 11 protection, which is a form or reorganization. A brief discussion of Chapter 7, 11, 12, and 13 procedures should clarify the differences. CHAPTER SEVEN To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity. 11 U.S.C. §§ 101(41), 109(b). It is worth noting that a corporation would have to be virtually insolvent to qualify for Chapter 7 protection. Due to other various legal requirements (such as the need for adequate capitalization under the various states’ laws), a large corporation would normally be limited to a Chapter 11 reorganization. Chapter 7 bankruptcy is a process of liquidating (turning into money) all of the debtor’s nonexempt property for the benefit of creditors. The Bankruptcy Code defines property very broadly as all legal and equitable interests of the debtor (including the right to sue a creditor, for example) and any property that is community property of the debtor and his or her spouse. 11 U.S.C. § 541. Exempt assets include protected items such as the debtor’s home, one vehicle, and household effects. The nonexempt assets are known as the “bankruptcy estate,” which are the assets and funds available to creditors. Essentially, the bankruptcy estate is created from the assets liquidated by the U.S. Trustee, and the proceeds are distributed according to the rules set out in the Bankruptcy Code. In practical terms, this means that most ordinary consumer creditors will receive either nothing or only a tiny percentage of the debt actually owed. The vast majority of Chapter 7 cases are categorized as “no asset cases.” If all the debtor’s assets are exempt or subject to valid liens (i.e. a lien on real estate), there will be no distribution to unsecured creditors. In a no asset case, the debtor receives a general discharge. That is, all of the nonsecured debts are rendered null and void, whether the debtor listed them for the U.S. Bankruptcy Court or not. (This is done to prevent forgotten or overlooked creditors from attempting to re-open the case when there are no available assets to pay anyone.) In “asset” cases, the final judgment of the U.S. Bankruptcy Court is essentially a listing of creditors receiving funds and a listing of the discharged individual debts. Since it may be necessary to re-open the case and reallocate funds at some future date, the debtor does not receive a blanket general discharge. NON-DISCHARGEABLE DEBTS UNDER CHAPTER SEVEN It is worth noting at this point an important distinction that often confuses people. Assets (property) are either exempt from the bankruptcy estate or included (nonexempt). Liabilities (debts) are classified as either dischargeable or non-dischargeable. In short, some debts simply cannot be discharged through bankruptcy. The Bankruptcy Code “limits the opportunity for a completely unencumbered new beginning to the honest but unfortunate debtor.” Grogan v. Garner, 498 U.S. 279, 287 (1991). A debtor has no constitutional or “fundamental” right to discharge in bankruptcy; therefore some debts may not be discharged for reasons of public policy. United States v. Kras, 409 U.S. 434, 445-446 (1973). Non-dischargeable debts include, but are not limited to, the following: debts for alimony and child support, certain taxes, debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for certain criminal restitution orders. 11 U.S.C. § 523(a). Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and malicious injury by the debtor to another entity or to the property of another entity will be discharged unless a creditor timely files and prevails in an action to have such debts declared non-dischargeable. 11 U.S.C. § 523(c); Fed. R. Bankr. P. 4007(c). Some of the debts listed here are in fact dischargeable in a Chapter 13 proceeding. CHAPTER THIRTEEN We will now “skip” to Chapter 13, as it is the second most common form of bankruptcy proceeding. Individuals, even if self-employed or operating an unincorporated business, are eligible for Chapter 13 relief as long as the individual’s unsecured debts are less than $336,900.00 and secured debts are less than $1,010,650.00. 11 U.S.C. § 109(e). (These amounts are adjusted periodically to reflect inflation, etc.) A corporation or partnership may not be a Chapter 13 debtor. Chapter 13 is best viewed as a repayment plan for individual wage earners. (As such, there is no “reorganization,” per se.) Chapter 13 bankruptcy is a repayment plan that protects the debtor from collection action over a three to five year period (the duration of the plan) and discharges any unpaid balance on dischargeable debts at the end of the plan. The discharge in Chapter 13 covers some debts that cannot be discharged in Chapter 7, such as taxes, child support, and marital property settlements. Chapter 13 is also preferable to an individual that has liens on his or her property that are larger than the value of the assets securing the debt and/or has assets worth more than the available exemptions. In plain English, Chapter 13 is more useful for people who are drastically behind in their house payments but want to keep their home. The Chapter 13 plan does not have to pay debts in full; it can provide for only fractional payment. How much the plan has to pay to creditors is a function of the confirmation tests (regulations tied to individual income). The Bankruptcy Code does require that priority claims be paid in full. Priority claims are those granted special status by the bankruptcy law, such as most taxes and the costs of bankruptcy proceeding. Secured claims are those for which the creditor has the right take back certain property (i.e., the collateral) if the debtor does not pay the underlying debt. In contrast to secured claims, unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by the debtor. CHAPTER TWELVE Briefly, Chapter 12 bankruptcy proceedings are designed for “family farmers” or “family fishermen” with “regular annual income.” Unlike Chapter 7, there is no liquidation of assets. Chapter 12 represents a streamlined process to enable these individuals to repay their outstanding debts over a three to five year period. Chapter 12 is essentially a hybrid of Chapter 11 and 13 in that there is a repayment plan with a fixed time like Chapter 13, but the plan is designed to repay all outstanding debts, not just priority claims. Chapter 12 is intended to meet the specific needs of family farmers and fishermen, who tend to have significant debt associated with depreciating assets (such as tractors, boats, etc.). CHAPTER ELEVEN Chapter 11 Bankruptcy proceedings are characterized as a reorganization of debts. In other words, the entity’s debts are not discharged, but the terms and conditions of their repayment are compromised in some way. Generally, this means extending the period of time in which the entity has to repay its loans. If the entity has reached the point that it can no longer meet accounts payable for operating expenses, it is not a candidate for Chapter 11 protection (see below). I use the term “entity,” rather than company or corporation, because individuals with extraordinarily high personal incomes also qualify for Chapter 11 protection under the right circumstances. Reorganization is a much more complicated process than a simple liquidation or repayment plan. A Chapter 11 case may take many years, and it typically requires close cooperation with the U.S. Bankruptcy Trustee assigned to the case. There are two major differences between Chapter 11 proceedings, versus other forms of bankruptcy protection. First, Chapter 11 is essentially a planned repayment of existing debt, which is similar to Chapter 12 and 13 proceedings. However, Chapter 11 plans are much more elaborate and do not have statutory time limits. The debtor entity files a proposed plan for repayment, which must be approved by the creditors, U.S. Trustee, and U.S. Bankruptcy Court as a final Plan of Reorganization. So long as the Plan is compliant and represents a good faith attempt to repay its creditors in a timely fashion, the debtor has the freedom to pick and choose the property or assets included in the bankruptcy estate. See 11 U.S.C. § 1123. In the case of a large and complicated entity like the Tribune Co., this means that the debtor has the options of not including a subsidiary in the bankruptcy estate, including the subsidiary, and/or merging and consolidating subsidiaries. 11 U.S.C. § 1123(a)(5). In practical terms, this means that the Cubs (actually “The Chicago National League Ballclub”) and Wrigley Field were not included in the Tribune’s bankruptcy estate thus far, nor is there any compelling reason to believe that they will ever be implicated. The other major difference between Chapter 11 proceedings and other bankruptcy proceedings is the creation of a new legal entity. Upon filing, the debtor becomes known as a Debtor in Possession. Like other debtors in bankruptcy proceedings, the Debtor in Possession benefits from an automatic stay of collection and litigation in the state courts. As the name suggests, the Debtor in Possession continues to operate the business entity under the supervision of the U.S. Trustee. Operations must be in conformity with the Plan of Reorganization. The various creditors are categorized as either secured, priority unsecured, or general unsecured (“trade”) creditors. The largest trade creditors are permitted to form a Creditor’s Committee for the purposes of negotiating and enforcing the Plan. In order for the U.S. Bankruptcy Court to approve and confirm a Final Plan, the majority of “impaired” (affected) creditors must vote to accept the Plan. Generally speaking, the vast majority of Debtors in Possession fail to achieve final confirmation within a year of filing. These cases are either dismissed or converted to a proceeding under Chapter 7, 12, or 13, as necessary. In practical terms, a Debtor in Possession must have adequate working capital, adequate cash flow, and at least minimal profitability in order to work out a viable Plan of Reorganization that will be approved. In the next installment, we will be taking a closer look at Chapter 11 procedures and I will outline what to expect in this case over the course of 2009. It’s a little thing I like to call: The Future of the Tribune, Part Two: The Realities of Chapter 11 Litigation