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Third Circuit Clarifies When Subordination Agreement Can Be Ignored in Bankruptcy Cramdown

Third Circuit Clarifies When Subordination Agreement Can Be Ignored in Bankruptcy Cramdown

Author: Joel R. GlucksmanDate: September 18, 2020

In In re Tribune Co., the Third Circuit Court of Appeals affirmed the order confirming  Tribune Co.’s Chapter 11 bankruptcy plan over the objections of creditors who argued that they were entitled to the benefit of a debt subordination agreement. As noted by the appeals court, the Bankruptcy Code’s cramdown provision “supplants strict enforcement of subordination agreements.” Instead, “when cramdown plans play with subordinated sums, the comparison of similarly situated creditors is tested through a more flexible unfair-discrimination standard.” After acknowledging that “[u]nfair discrimination is rough justice,” the Third Circuit went on to establish its own eight-factor test for unfairness.

The high-profile bankruptcy case involves Tribune Company (“Tribune”), which was once the largest media conglomerate in the country, owning the Chicago Tribune and the Los Angeles Times, as well as many regional newspapers, television and radio stations. The Company’s 2008 bankruptcy followed on the heels of its failed leveraged buyout (LBO), which left it with almost $13 billion of debt and a complex capital structure.

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