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Signing Off with a Bankruptcy Case Made for TV

posted by Michelle Harner
I thought I would wrap up my week of blogging with a little entertainment—the Trump Entertainment chapter 33 case.  Yes, this is Trump Entertainment’s third trip through chapter 11 of the U.S. Bankruptcy Code, and its adventure rivals any episode of Survivor, The Amazing Race or even The Apprentice.

Trump Entertainment’s first chapter 11 filing occurred in 1992 on the heels of the 1990-91 recession.  Although Donald Trump lost control of the company after the bankruptcy, he was able to maneuver his way back in (see here).  Nevertheless, his luck appeared to run out again in 2004, when the company filed its second chapter 11 case, forcing Mr. Trump to significantly reduce his holdings in the company and resign his executive position.  (Mr. Trump cited numerous causes for the second filing, including “competition and fuel prices” (see here).)  But it appears that Mr. Trump may be back in the game again.

Trump Entertainment’s most recent chapter 11 filing in February 2009 is just now coming to an end—maybe.  (For Mr. Trump’s views on why the first two bankruptcies failed, see here.  That topic of course is beyond the scope of this light-hearted post.)  At the time of filing, the company listed $2.06 billion in assets and $1.74 billion in debt.  Notably, approximately $1.31 billion of the debt was held by the company’s bondholders.  The bonds were junior to Beal Bank, which held a $500 million secured claim.  The company’s initial plan of reorganization contemplated Beal Bank and Donald Trump teaming up to take control of the company given the undersecured nature of Beal Bank’s debt.  This plan would have eliminated all junior debt and equity, including the bond debt.

As you might guess, the bondholders were not in favor of the proposed plan, and Avenue Capital led the charge for upsetting the plan.  In a somewhat unexpected move, Donald Trump changed sides and threw his support behind the bondholders’ plan (in exchange for 10% of the reorganized company).  The move left Beal Bank without a partner and the namesake of the casinos.  Enter Carl Icahn, who purchased a majority interest in the bank debt and put forth a competing plan with Beal Bank.

The stage was set for a major showdown, and two veterans of the bankruptcy world had their day in court in February 2010.  The bankruptcy court ultimately approved the bondholders’ plan under the cramdown provisions of section 1129(b) of the Code.  I suspect that the transcript from the nine-day hearing makes for wonderful beach reading.

The story of course does not end there.  Mr. Icahn appealed the confirmation order and, despite withdrawing his motion for a stay, the appeal remains pending.  Although I suspect that Mr. Icahn will have to settle for the scheduled payments on his debt under the bondholders’ plan, the disposition of the appeal could still be interesting.  For example, the appeal does raise issues regarding the bankruptcy court’s confirmation of the bondholders’ plan notwithstanding potential subordination concerns under section 510(a) of the Bankruptcy Code and the doctrine of equitable mootness.  So stay tuned . . . .

In closing, I want to thank the authors of Credit Slips for the opportunity to share some random bankruptcy thoughts with their readers.  I truly enjoyed my time, and I hope that I convinced at least a few that chapter 11 bankruptcies not only are incredibly useful but also very entertaining.

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