Law Debenture Trust Co. of N.Y. v. Tribune Media Co. (In re Tribune Media Co.), 587 B.R. 606

Background

Tribune and affiliates filed Chapter 11 in Dec. 2008 after a $12 billion leveraged buyout; substantial pre-LBO debt included Senior Notes (Class 1E), PHONES and EGI subordinated notes, and Other Parent Claims (Class 1F) including a $151M Swap Claim and $105M retiree claims.
Trustees (representing Senior Noteholders) claimed contractual subordination entitling them to distributions from PHONES and EGI recoveries that the Plan instead split pro rata with Other Parent Claims.
The Bankruptcy Court held extensive evidentiary hearings, issued an Allocation Ruling and confirmed a Fourth Amended Joint Plan in 2012; it concluded any discrimination from sharing subordinated recoveries was immaterial and permissible under 11 U.S.C. § 1129(b)(1) despite § 510(a).
Distributions were made and the Plan was substantially consummated; district court initially found appeals equitably moot as to some parties, but the Third Circuit held the Trustees’ appeal was not equitably moot and remanded for merits consideration.
On remand the district court reviewed mixed questions of law and fact and affirmed the Bankruptcy Court: § 1129(b)(1) permits confirmation notwithstanding § 510(a), the Plan did not unfairly discriminate, and the Swap Claim qualified as senior under the subordination agreements.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether § 1129(b)(1) requires enforcement of prebankruptcy subordination agreements despite its “notwithstanding § 510(a)” clause	Trustees: §1129(b)(1)’s “notwithstanding” preserves enforcement of subordination in cramdown—statute and policy require full enforcement	Debtors/Appellees: "Notwithstanding" allows confirmation over subordination where the plan meets §1129(a)/(b) tests (no unfair discrimination; fair & equitable)	Court: Agrees with Bankruptcy Court—§1129(b)(1) permits confirming a cramdown plan notwithstanding §510(a); enforcement of subordination is not automatic.
Whether the Plan "discriminates unfairly" against Senior Noteholders by sharing subordinated recoveries with Other Parent Claims	Trustees: Sharing subordinated recoveries materially reduces their recovery (2.3–2.9 percentage points or larger depending on assumptions) and thus is unfair discrimination	Debtors: The percentage difference is immaterial under Markell rebuttable-presumption framework; discrimination was factually immaterial and justified	Court: Affirmed—applied the Markell test; differences were immaterial and no rebuttable presumption of unfair discrimination arose.
Whether the Swap Claim qualifies as "Senior Indebtedness/ Senior Obligation" under PHONES and EGI subordination agreements	Trustees: Swap Claim is not "in connection with" the Credit Agreement or is an ordinary-course accrued expense, so it should not share seniority	Debtors: Swap Claim was treated as debt in financials, was guaranteed and connected to the Credit Agreement and LBO hedging obligations—thus qualifies as senior	Court: Affirmed Bankruptcy Court—Swap Claim qualifies as Senior Indebtedness/Obligation; recognizing it reduces alleged discrimination further.

Key Cases Cited

In re Goody's Family Clothing, Inc., 610 F.3d 812 (3d Cir. 2010) (interpreting "notwithstanding" in Bankruptcy Code context)
In re Federal-Mogul Global, Inc., 684 F.3d 355 (3d Cir. 2012) (affirming Goody's interpretation in related statutory reading)
In re Exide Techs., 607 F.3d 957 (3d Cir. 2010) (mixed standard of review for bankruptcy appeals: factual findings vs. legal questions)
Armstrong World Indus. v. AlliedSignal Inc., 432 F.3d 507 (3d Cir. 2005) (discussion of §1129(b) and legislative history usage)
Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635 (3d Cir. 1991) (deference to bankruptcy court factual findings absent clear error)
NLRB v. Bildisco & Bildisco, 465 U.S. 513 (U.S. 1984) (Chapter 11 flexibility and equity principles)