Somewhere in the third year of Tribune Co.'s marathon Chapter 11 proceeding, U.S. Bankruptcy Judge Kevin Carey looked out at a Delaware courtroom packed with high-priced attorneys and conceded the case had broken down into what he called a "multiconstituent melee."
"The parties are represented by some of the best lawyers in the field," he said. "You know how to fight well ... but nobody ends up the better for it, really."
Carey was trying to make a point about the foundation of bankruptcy law, which recognizes that a company and its creditors are better off hammering out a settlement than fighting endless court battles.
But his exasperation reflected a difficult new reality. Aggressive investment funds and their lawyers, who earn as much as $1,000 an hour, can turn big corporate bankruptcies into gang wars fought in pinstripes — with companies, their employees and business partners feeling powerless over the outcome.
In the same way that Chicago billionaire Sam Zell's disastrous leveraged buyout of Tribune Co. in 2007 drew back the curtain on an era of amped-up Wall Street deal-making, the Chicago-based media company's lengthy journey through Chapter 11 exposed a powerful but little-known industry thriving in the midst of the American bankruptcy court system.
It's a business built on the bewildering complexity of the global markets, and it attracts some of the brightest minds in law and finance.
They are members of a clubby group of specialist investors who buy up a troubled company's "distressed debt" and other securities for pennies on the dollar. Then they match wits at the negotiating table or in court to see who can walk away with the biggest pieces of bankrupt companies' value.
These players serve an important function. Their willingness to buy up claims provides a ready exit for creditors who are unable or unwilling to fight for their rights in bankruptcy court. But their participation can come at a staggering cost. For Tribune Co., which owns The Baltimore Sun among other newspapers across the country, Chapter 11 broke into a free-for-all that lasted four years, leaving the company hindered at a crucial moment in the transformation of the media industry.
Even before Tribune Co. filed for Chapter 11 protection, its fate was largely in the hands of a group of banks led by JPMorgan Chase & Co. and two investment funds with a combined $106 billion in assets — Oaktree Capital Management and Angelo, Gordon & Co. Their conflict with other funds, including Centerbridge Partners and Aurelius Capital Management, turned what might have been a basic restructuring effort into a war of attrition.
The difference between the funds and the banks is that the distressed-debt specialists chose to buy into the company's debt specifically to turn a profit, not recover losses. And many succeeded brilliantly, most notably Oaktree and Angelo Gordon, which emerged from the fray in control of a much healthier company with an array of iconic media assets, including the Chicago Tribune and the Los Angeles Times.
The Tribune Co. case raises many questions about the impact of investment funds on the bankruptcy process. Many scholars say the system is still the best way to protect creditors' rights, noting that the complexity of the Zell deal and its timing on the cusp of the economic crisis created a legal morass that was hardly typical. Some participants in the case questioned the effectiveness of Carey, arguing his seeming indecisiveness and insistence on a broad consensual settlement dragged out the case needlessly.
But for those trapped in the Tribune Co. saga against their will, arguments about creditors' rights and legal process seem more like a smoke screen to justify how Wall Street interests are allowed to profit with little or no concern for the health of a company or its employees.
For Tribune Co., its employees and many of its smaller creditors, bankruptcy became a debilitating period of missed opportunities and stalled strategy. The cost to Tribune Co. in legal and professional fees alone will likely run to more than $500 million.
Astoundingly, as many as 35,000 unwitting former Tribune Co. shareholders are now the target of pending creditor litigation that could potentially force them to give back money they received more than five years ago. Most can't fathom how the simple act of buying and selling stock in a major U.S. company could someday land them in front of a judge.
"What seems grossly unfair," Colorado investor Mark Lies wrote to Carey in 2011, "is there doesn't appear to be any adult supervision looking out for the average investor like myself. ... (Y)ou have unemotional, ruthlessly efficient and litigious investors attempting to extract whatever they can from whomever they can."
Carey sounded his own concerns in an opinion at a pivotal moment in the case.
"There is no moral to this story," the judge wrote, citing the fable of the Scorpion and the Fox, a tale of mutually assured destruction. "Its meaning lies in the exposition of an inescapable facet of human character: the willingness to visit harm upon others, even at one's own peril."
Corporate bankruptcy was never supposed to be easy, but it didn't become blood sport until specialized Wall Street investment firms got involved.
For decades, Chapter 11 protection was used by struggling companies and their managers to negotiate with lenders and anyone else owed money. The goal was to restructure the debt, with the guiding principle of preserving the company's long-term prosperity. Ownership often changed, but the idea was to maximize recovery for all.