In the last several months, a number of major mass media companies have filed for chapter 11 relief, including Ion Media Networks, Sun-Times Media Group, Tribune Company, Young Broadcasting and NV Broadcasting. With the economy still struggling to recover, and asset values continuing to decline, commentators speculate that even more mass media related bankruptcies are on the horizon. Certain aspects of a mass media bankruptcy present unique challenges for the various stakeholders due to the special regulatory requirements involved. Interested parties should be cognizant of certain basic principles particularly applicable to a mass media bankruptcy.
Debtor in Possession
As with other chapter 11 cases, mass media reorganizations begin with the "debtor-in-possession" and control of its assets and affairs, rather than an independent trustee. The "debtor-in-possession" has all the rights and powers of a trustee, except for the right to receive compensation, and performs essentially the same functions and duties as a trustee, with certain notable exceptions, such as the duty to liquidate the assets of the estate. Absent unusual circumstances, the management in control of the debtor prior to the bankruptcy remains in control of the business operations and the direction of the bankruptcy case following the filing of the bankruptcy petition.
Upon the commencement of a bankruptcy case, § 362 of the United States Bankruptcy Code stays the commencement or continuance of any action against the debtor or its property subject to limited exceptions. This is generally referred to as the "automatic stay." Accordingly, a creditor that has filed a lawsuit prior to the filing of a bankruptcy petition cannot continue that suit unless the bankruptcy court grants "relief from the stay." Foreclosures and other non-judicial efforts by secured creditors to enforce security interests are likewise stayed. The automatic stay is extremely broad in scope and is the most important protection afforded a debtor under the Bankruptcy Code. It becomes effective immediately, without prior notice. Violation of the automatic stay by a creditor may result in sanctions being imposed by the court. Accordingly, parties are well advised to seek counsel prior to taking any actions against the debtor or its property that might fall within the scope of the automatic stay.
However, certain actions are not stayed. For example, actions before the Federal Communications Commission (FCC) are not stayed to the extent the FCC is operating solely under its police or regulatory powers. These enforcement actions are usually allowed to proceed. Likewise, the automatic stay does not prevent a creditor from taking actions against non-debtors absent a further order of the court. Thus, in the event of a bankruptcy filing, a creditor is well within its rights to proceed against a guarantor, letter of credit or a surety for payment of amounts owed. In certain limited cases, the bankruptcy court may order that the automatic stay be extended to non-debtor entities.
Due to the decline in value of many media enterprises, the "cramdown" provisions of chapter 11 may afford a viable media company an ability to restructure its debt obligations and reduce interest rates. Such a restructure is typically accomplished through a "cramdown plan." "Cramdown" means, simply, obtaining confirmation of a chapter 11 plan of reorganization over the objection of one or more dissenting classes of creditors. Often, the objecting class or creditor is the pre-petition lender holding a loan which the debtor seeks to modify by reducing the amount of the loan to the current value of the assets. This technique has been used in countless bankruptcy cases to save businesses large and small.
Where a secured creditor has a claim which exceeds the value of its collateral, a successful cramdown can result in both the reduction of the loan balance secured by the collateral, and a reduction in the interest rate to be paid. The unsecured portion of the loan, or deficiency balance, is paid in "bankruptcy dollars," often a few cents on the dollar, like most claims in a bankruptcy case.
Cramdown plans are governed by § 1129(b) of the Bankruptcy Code, which allows confirmation of a plan if "the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan" despite objections from creditors and other parties. Thus, the debtor must convince the bankruptcy court that the proposed plan is fair and equitable despite objections. So long as the plan provides that a secured lender will retain its lien and receive deferred cash payments equal to the present value of the collateral securing the loan, as opposed to the face amount of the loan, the judge may find the plan fair and equitable. Generally, this means that payments must be made at a market rate of interest, which may be substantially less than is required under the loan documents.
In media bankruptcy cases, the debtor's operations and a successful reorganization often depend upon the continued use of licenses issued by the FCC. The filing of a bankruptcy case does not prevent a debtor from broadcasting or otherwise operating under the auspices of its FCC license. Section 525 of the Bankruptcy Code specifically prohibits discrimination by the FCC or other governmental units against the debtor solely on the basis of a bankruptcy filing. In addition, the Supreme Court has held that the FCC may not cancel licenses as a result of a debtor's failure to pay certain amounts to the FCC that may later be discharged in bankruptcy. However, the sale of assets in a bankruptcy case or other transfer under a plan of reorganization often requires FCC approval in addition to the authorization from the bankruptcy court. Accordingly, the FCC often has an important role in a mass media bankruptcy case.
Contracts and Leases
During the bankruptcy case, a mass media debtor will have the opportunity to determine which contracts to assume (i.e., keep) and which contracts to reject (i.e., eliminate). Examples include talent and advertising contracts. This determination is made under a business judgment standard, and the court will typically yield to the debtor's wishes with respect to contracts. However, in order to assume a contract, the debtor must cure all defaults and provide adequate assurance of future performance. Thus, parties to assumed contracts are made whole in the bankruptcy process. In addition, many mass media companies will have contracts that include authorization to use certain trademarks, copyrights and other intellectual property. The debtor may be prohibited from assuming and assigning certain intellectual property licenses where the court finds that applicable non-bankruptcy law (e.g., federal patent, copyright or trademark law) excuses the non-debtor party from accepting performance from a party other than the debtor or "debtor-in-possession."
Section 363 Sales
In some mass media cases, a sale of substantially all of the debtor's assets to a third party may be preferable to a plan of reorganization. Sales of substantially all of a debtor's assets outside of the plan process are commonly referred to as "Section 363 Sales," a name derived from the section of the Bankruptcy Code which permits such sales. Generally bankruptcy courts will approve such sales where a sound business justification exists and where the purchaser is paying the highest and best price for the assets. Often, auction procedures are approved in advance that allow the debtor to market its assets for sale and establish deadlines for bids.
The Section 363 Sale process allows a purchaser to cherry-pick the desired assets of a company, leaving undesirable assets to remain in the bankruptcy estate. In addition, the bankruptcy code allows the assets to be transferred free and clear of liens and other interests. A Section 363 Sale may be accomplished through a motion and requires only a relatively short, 20-day notice period. It is therefore not surprising that purchasers and other parties often prefer Section 363 Sales to the more lengthy plan confirmation process.
The number of mass media bankruptcy filings, including print, radio and television, continues to increase at a rapid pace. This article discusses only a few of the many issues that may arise in these bankruptcy cases. In the coming months, additional media enterprises are likely to be forced into chapter 11. Those in the industry should prepare themselves for this unfortunate set of circumstances, seek advice from counsel and take an active role in the bankruptcy proceeding in order to protect their rights.