Third Circuit Upholds Cramdown, Downplays Subordination Agreement

The U.S. Court of Appeals for the Third Circuit recently confirmed that bankruptcy plans need not always recognize subordination agreements among creditors.

The Tribune Company was the largest media conglomerate in the United States when, in 2008, an attempted leveraged buyout imploded, triggering Tribune's bankruptcy filing. On the filing date, Tribune carried almost $13 billion of debt, including $1.283 billion of senior unsecured notes (the "Senior Notes"), roughly $1.5 billion of subordinated notes (the "Subordinated Notes") and a $150.9 million swap termination claim, in addition to other unsecured debt owed to Tribune retirees and a panoply of trade and other creditors. From the debtor's perspective, all of this unsecured debt was equal in priority. But among the competing debtholders, the Senior Notes enjoyed, pursuant to the governing indentures, repayment priority over the Subordinated Notes until the "Senior Obligations" were paid in full.