Court Opinion

ID: 4558816
Source: CourtListenerOpinion
Date Created: 2020-08-26 17:00:16.68345+00
Date Added: 2024-06-11T10:37:07.530892
License: Public Domain

PRECEDENTIAL

      UNITED STATES COURT OF APPEALS
           FOR THE THIRD CIRCUIT

                      No. 18-2909

         In re: TRIBUNE COMPANY, et al.,
                              Debtors

           DELAWARE TRUST COMPANY,
               as successor indenture trustee
          for certain series of Senior Notes and
DEUTSCHE BANK TRUST COMPANY AMERICAS,
solely in its capacity as successor Indenture Trustee for
              certain series of Senior Notes,
                                         Appellants

     Appeal from the United States District Court
               for the District of Delaware
   (D.C. Civil Action Nos. 1-12-mc-00108, 1-12-cv-
             00128/01072/1073/1100/1106)
      District Judge: Honorable Gregory M. Sleet

              Argued November 12, 2019

Before: AMBRO, KRAUSE, and BIBAS, Circuit Judges

           (Opinion filed: August 26, 2020)
Roy T. Englert, Jr. (Argued)
Matthew M. Madden
Mark T. Stancil
Robbins Russell Englert Orseck Untereiner & Sauber
2000 K Street, N.W., 4th Floor
Washington, DC 20006

      Counsel for Appellant
      Delaware Trust Company

David J. Adler
McCarter & English
825 Eighth Avenue
Worldwide Plaza, 31st Floor
New York, NY 10019

      Counsel for Appellant
      Deutsche Bank Trust Co Americas, as Successor
      Indenture Trustee

Kenneth P. Kansa
Sidley Austin
One South Dearborn Street
Chicago, IL 60603

James O. Johnston (Argued)
Jones Day
555 South Flower Street, 50th Floor
Los Angeles, CA 90071

J. Kate Stickles
Cole Schotz
500 Delaware Avenue, Suite 1410

                              2
Wilmington, DE 19801

      Counsel for Appellee
      Tribune Co.

Adam Hiller
Hiller & Arban
1500 North French Street
2nd Floor
Wilmington, DE 19801

Jay Teitelbaum (Argued)
Teitelbaum Law Group
1 Barker Avenue, Third Floor
White Plains, NY 10601

      Counsel for Appellee
      TM Retirees

               OPINION OF THE COURT

AMBRO, Circuit Judge

        Many of the contentious battles in bankruptcy involve
the allocation of distributions among similarly situated
creditors. We have such a battle here, where certain creditors
of the Tribune Company, called the “Senior Noteholders,”
claim Tribune’s plan of reorganization (the “Plan”) misapplies
their rights under the Bankruptcy Code by not according them
the full benefit of their subordination agreements with other
Tribune creditors. The Bankruptcy Court confirmed the Plan
over the Senior Noteholders’ dissenting votes. In bankruptcy
parlance, they were “crammed down.”

                               3
      The provision in play was 11 U.S.C. § 1129(b)(1),
which provides (with explanatory annotations) as follows:

      Notwithstanding section 510(a) of this title
      [making subordination agreements enforceable
      in bankruptcy to the extent they would be in non-
      bankruptcy law], if all of the applicable
      requirements of subsection (a) of this section
      [1129] other than paragraph (8) [for our
      purposes, this paragraph requires that each class
      of claims has accepted the plan] are met with
      respect to a plan, the court, on request of the
      proponent of the plan, shall confirm the plan
      notwithstanding the requirements of such
      paragraph [8] 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.

To unpack terms of art, “discriminate unfairly” is a horizontal
comparative assessment applied to similarly situated creditors
(here unsecured creditors) where a subset of those creditors is
classified separately, does not accept the plan, and claims
inequitable treatment under it. Bruce A. Markell, A New
Perspective on Unfair Discrimination in Chapter 11, 72 Am.
Bankr. L.J. 227, 227–28 (1998). “[F]air and equitable” (a
redundant term) should be pictured vertically, as it “regulates
priority among classes of creditors having higher and lower
priorities,” id. at 228. For example, secured creditors are a
higher priority for payment than unsecured creditors. For the
sake of completeness, “impaired” means a creditor whose
rights under a plan are altered (obviously adversely). 11
U.S.C. § 1124(1).
      In our case, the Senior Noteholders were assigned their
own class (1E) of unsecured creditors in Tribune’s Plan. When

                               4
they did not accept the Plan but other classes did, the
Bankruptcy Court confirmed it under the cramdown provision,
and they became bound by it. They appeal to us, contending
that “[n]otwithstanding” in § 1129(b)(1) entitles them to their
full recovery from the strict enforcement of the subordination
agreements, and, in any event, the Plan’s proposed
distributions were unfairly discriminatory in favor of another
unsecured class (1F) that shared in the subordinated sums.

       We agree with the Bankruptcy and District Courts that
the text of § 1129(b)(1) 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. Applying that standard here, we
affirm the result determined by those Courts.
       The facts that follow, as typical in the transactional
world, are complicated, and so at times is the legal analysis.
Frame them, however, in the context set out above.

   I.       FACTS AND PROCEDURAL HISTORY
        Prior to its bankruptcy, Tribune was the largest media
conglomerate in the country, reaching 80% of American
households each year. It owned 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”), 1 which left it with

        1
         An LBO is typically a transaction where the purchaser
acquires an entity with borrowings secured by the assets of that
entity. The LBO here left Tribune saddled with debt, while the

                               5
almost $13 billion of debt and a complex capital structure. In
2012, after years of contentious proceedings, the Bankruptcy
Court confirmed the Plan over the dissenting votes of the
Senior Noteholders. 2 Initial distributions under the Plan were
made at the end of that year, as the Bankruptcy Court rejected
the Senior Noteholders’ request for a stay.
       This is the second time Tribune’s dissenting creditors
are before us. In In re Tribune Media Co., 799 F.3d 272 (3d
Cir. 2015) (“Tribune I”), we reversed in part the District
Court’s determination that the Senior Noteholders’ claims
were, because the Plan’s distributions had already occurred,
equitably moot and sent them back for further proceedings on
the merits. On remand, that Court affirmed the Bankruptcy
Court’s confirmation order over the Senior Noteholders’
objections. In re Tribune Media Co., 587 B.R. 606 (D. Del.
2018). We review their appeal here.
       1. Overview of Tribune’s creditors

       Prior to the 2007 LBO, Tribune had a market
capitalization of $8 billion and $5 billion in debt, which had
been amassed over decades. The Senior Noteholders loaned to
Tribune unsecured debt between 1992 and 2005 (the “Senior

purchaser put none of its own money at risk. In re Tribune
Media Co., 799 F.3d 272, 275 (3d Cir. 2015).
       2
           Appellants technically are the Delaware Trust
Company and Deutsche Bank Trust Company Americas (the
“Trustees”), which, in their capacities as successor indenture
trustees, represent the interest of the Senior Noteholders. For
simplicity, we refer throughout this opinion to the Senior
Noteholders and the Trustees collectively as the Senior
Noteholders.

                              6
Notes”). Covenants in the Senior Notes’ indentures require
that they are paid before any other debt incurred by the
company.     When Tribune filed for reorganization, the
outstanding amount due on those Notes was $1.283 billion.3
        In 1999, Tribune also issued $1.256 billion of unsecured
exchangeable subordinated debentures (the “PHONES
Notes”). Their indenture provided that they are subordinate in
payment to all “‘Senior Indebtedness’ of Tribune,” which
included the Senior Notes. In re Tribune Co., 464 B.R. 126,
138 (Bankr. D. Del. 2011) (the “2011 Opinion”). At the time
of its bankruptcy, the outstanding principal on the PHONES
Notes was $759 million.

      The LBO added approximately $8 billion of debt to
Tribune’s capital structure. As part of the merger financing,
Tribune issued $225 million of unsecured debt (the “EGI
Notes”). That indenture also subordinated repayment to
“Senior Obligations.” 4

       Also among the billions of dollars of Tribune’s debt are
an unsecured $150.9 million “Swap Claim” (which is tied to
the termination of an interest rate swap agreement to offset the
interest rate exposure from the LBO); $105 million of

       3
         For consistency, we use the claim amounts from the
Stipulated Recovery Percentage Table set out below.
       4
          The Bankruptcy Court determined that the definition
of “Senior Obligations” in the EGI Notes was broader than the
definition of “Senior Indebtedness” in the PHONES Notes. As
any creditor determined to be Senior Indebtedness would also
qualify as a Senior Obligation, for simplicity we refer to both
provisions collectively as the Senior Obligations.

                               7
unsecured claims by Tribune Media Retirees (the “Retirees”);
and $8.8 million of unsecured claims by trade and
miscellaneous creditors (the “Trade Creditors”).
       From Tribune’s perspective, these unsecured
creditors—the holders of Senior Notes, the PHONES and EGI
Notes, and Swap Claim, plus the Retirees and the Trade
Creditors—are of equal priority. But the subordination
provisions in the PHONES and EGI Notes’ indentures—which
were entered outside Tribune’s bankruptcy—limit their
repayment until all Senior Obligations are paid in full. Thus,
whether a creditor should benefit from these subordination
provisions depends on its claim qualifying as a Senior
Obligation.

      2. The Bankruptcy Court Proceedings

       During the bankruptcy proceedings, several groups of
stakeholders proposed plans to reorganize Tribune’s debt. The
Bankruptcy Court’s 2011 Opinion on competing plans
coalesced support around the Plan sponsored by Tribune, its
Official Committee of Unsecured Creditors, and certain
lenders. It settled many of the Creditors’ Committee’s claims
against the LBO lenders, directors and officers of the old
Tribune, real estate investor Samuel Zell (who orchestrated the
LBO 5), and others, for $369 million paid to Tribune’s estate.

       The Plan organized Tribune’s unsecured creditors into
distinct classes. The Senior Noteholders, which comprise

       5
         Mr. Zell called it “the deal from hell.” Michael Arndt
and Emily Thornton, Sam Zell Speaks His Mind, Bloomberg
Bus.     News       (July      30,     2008,     12:00    AM),
https://www.bloomberg.com/news/articles/2008-07-29/sam-
zell-speaks-his-mind.

                              8
Class 1E, argue that the Plan favored Class 1F, which is made
up of the Swap Claim, the Retirees, and the Trade Creditors
(collectively this class includes over 700 unsecured creditors).
It paid both Class 1E and Class 1F creditors 33.6% of their
outstanding claims from the initial distributions under the Plan.
In re Tribune Co., 472 B.R. 223, 237 & n.17 (Bankr. D. Del.
2012) (the “Allocation Opinion”). These payments included
monies from the subordination of the PHONES and EGI Notes.

       The Senior Noteholders objected to the Plan. They
argued that it allocated more than $30 million of their recovery
from the subordinated PHONES and EGI Notes to Class 1F
when only the Senior Noteholders in Class 1E qualified as
Senior Obligations, and thus they alone should benefit from
those subordination agreements. Specifically, they asserted
that the Plan violated the Bankruptcy Code’s standards for
confirmation because it did not fully enforce the subordination
provisions per § 510(a). In the alternative, they claimed that
the allocation of subordination payments to Class 1F unfairly
discriminated against their Class 1E.

       To resolve these and other intercreditor claims, the
Bankruptcy Court established an allocation dispute process,
which called for extensive briefing followed by a hearing on
the Senior Noteholders’ objections. As a starting point, the
creditors stipulated to their initial recovery percentages under
the Plan depending on which creditors ultimately qualified as
Senior Obligations under the PHONES and EGI indentures. It
was undisputed that the Class 1E Senior Notes were Senior
Obligations and thus entitled to payments from the
subordinated creditors. A principal dispute concerned whether
other creditors also qualified; if so, they would recover
additional payment from the subordination provisions in the
PHONES and EGI Notes. Thus the Senior Noteholders stood
to increase their recovery by limiting which, if any, other
creditors qualified as Senior Obligations. The chart below

                               9
Allocation Opinion, 472 B.R. at 238 (describing recovery
under the Plan); J.A. 327.6

       In its Allocation Opinion, the Bankruptcy Court
determined that § 1129(b)(1) does not require that the
subordination agreements be strictly enforced for a plan to be
confirmed. It also rejected the Senior Noteholders’ unfair-
discrimination claim, explaining that it failed even if the Court
“assume[d] (without deciding) that[ ] none of the [Class 1F
creditors] are Senior [Obligations] [ ] and are not entitled to the
benefit of either subordination agreement.” 472 B.R at 238.
However, it resolved in a footnote that the Swap Claim, which
comprised 57% of Class 1F’s aggregate claims, was a Senior
Obligation and thus should benefit from the partial
enforcement of the subordination agreements.7 Id. at 238–39

       6
         The parties stipulated that the Swap Claim would
recover under the Plan 36.0% of its claim on J.A. 327.
However, given descriptions of the Plan in the Bankruptcy
Court’s Allocation Opinion and the parties’ briefs, this looks
to be incorrect, see 472 B.R. at 238; Trustees’ Br. 39; Tribune’s
Br. 3. All Class 1E and 1F creditors, including the Swap
Claim, appear to have recovered under the Plan 33.6% of their
respective claims.
       7
        The Senior Noteholders appealed this categorization
of the Swap Claim to the District Court, which affirmed the
Bankruptcy Court’s determination. 587 B.R. at 618–19. They
do not appeal that ruling to us.

                                11
n.19. Notably, the Court did not decide whether the Retirees’
claim qualified as a Senior Obligation.8 Id.

        The Court’s footnote stating that the Swap Claim
qualified as a Senior Obligation reduced the Senior
Noteholders’ unfair-discrimination claim of approximately
$30 million by over $17 million, thereby leaving roughly $13
million in dispute (a small sum relative to their overall $1.283
billion claim). 9 To put this in a picture, they ask us to reallocate
payments to reflect the fourth row of the Stipulated Recovery
Percentage Table (“If Class 1E and the Swap Claim benefit
from subordination”) rather than the first row, increasing initial
distributions toward their claim recovery from 33.6% to
34.5%. 10

       8
         In their Brief to us, the Retirees contend that, should
we not affirm and remand the case, this issue remains for
determination. Retirees’ Br. 14–15. Yet, they state two pages
later that they “are not subject to the subordination
agreements.” Id. at 17. Though this is ambiguous, we affirm
the Bankruptcy and District Courts here, and thus we do not
need to resolve this issue or remand for its resolution.
       9
         Aligning the Swap Claim with the same benefits
accorded the Senior Noteholders begs us to ask whether it was
misclassified by being assigned to Class 1F. That is a good
question, but no one teed it up for resolution on appeal. Thus
it is not before us.
       10
          We, like the parties, stick with initial Plan
distributions that do not include hypothetical future recoveries
that may be gained by a litigation trust under the Plan.

                                 12
         3. The Senior Noteholders’ appeal

       The Senior Noteholders appealed the Plan’s
confirmation to the District Court, renewing their argument
that it violated § 1129(b)(1) by not exactly enforcing the
subordination agreements. In the alternative, they challenged
the particulars of the Bankruptcy Court’s unfair-discrimination
analysis, arguing that it erred, first, by including the recoveries
due them from the subordination agreements in their Plan
distributions, and second, by failing to compare their recovery
under the Plan to that of Class 1F.

       While the appeal was pending, Tribune consummated
the Plan by making the distributions called for in it. We
nonetheless held that the Senior Noteholders’ arguments
before us now could proceed. 11 Tribune 1, 799 F.3d at 283–
84. They still came up short on remand, and appeal to us again.

   II.        JURISDICTION        AND       STANDARD           OF
              REVIEW

      We have jurisdiction over this appeal under 28 U.S.C.
§§ 158(d) and 1291. We exercise plenary review of the District
Court’s conclusions of law, including its interpretation of the
Bankruptcy Code. In re Goody’s Family Clothing Inc., 610
F.3d 812, 816 (3d Cir. 2010). “Because the District Court sat
as an appellate court to review the Bankruptcy Court, we
review the [latter’s] legal determinations de novo, its factual

         11
           In Tribune I we explained that, as payments under the
Plan have already been distributed, if the Senior Noteholders
(referred to there as the Trustees) are successful, their relevant
relief, inter alia, is an increase in recovery payments through
disgorgement “ordered against those Class 1F holders who
have received more than their fair share.” 799 F.3d at 282–83.

                                13
findings for clear error, and its exercises of discretion for abuse
thereof.” Id.

   III.    DISCUSSION
       Cramdown plans are an antidote to one or more classes
of claims holding up confirmation of an otherwise consensual
plan. See generally Kenneth N. Klee, All You Ever Wanted to
Know About Cram Down Under the New Bankruptcy Code, 53
Am. Bankr. L.J. 133 (1979). The cramdown provision in 11
U.S.C. § 1129(b)(1) waives § 1129(a)(8)’s mandate that all
classes either vote to accept the plan or recover their debt in
full under it. Yet the provision also affords unique safeguards:
the fair-and-equitable and unfair-discrimination standards.
While we have spent considerable time outlining the
boundaries of what is fair and equitable (as noted below, not at
issue here), see, e.g., In re Armstrong World Indus., Inc., 432
F.3d 507, 512–13 (3d Cir. 2005); In re PWS Holding Corp.,
228 F.3d 224, 237–42 (3d Cir. 2000); see also Bank of Am.
Nat’l Tr. and Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S.
434, 444–49 (1999), the unfair-discrimination standard has
received little analysis.

       A. Subsection 1129(b)(1)   does     not    require
          subordination agreements to be enforced strictly.

       The Senior Noteholders first contend that the
Bankruptcy Court should not have confirmed the Plan because
it does not enforce strictly the PHONES and EGI Notes’
subordination agreements under Code § 510(a). Thus we must
determine the effect of 11 U.S.C. § 1129(b)(1)’s explicit
reference to the earlier provision. Put another way, how does
the cramdown provision’s authority interact with intercreditor
subordination agreements?

                                14
       The Senior Noteholders argue § 1129(b)(1) “explain[s]
that the cramdown safeguards must be applied
‘[n]otwithstanding section 510(a),’” Trustees’ Br. 18 (quoting
11 U.S.C. § 1129(b)(1)), meaning that subordination
agreements cannot be interfered with in cramdown cases. Both
the Bankruptcy and District Courts rejected this argument,
explaining that it is at odds with the plain meaning of
§ 1129(b)(1). We agree.

       1. The text of § 1129(b)(1)

       Section 510(a) provides that “[a] subordination
agreement is enforceable in [bankruptcy] to the same extent
that such agreement is enforceable under applicable
nonbankruptcy law.”      But § 1129(b)(1) states that a
nonconsensual plan may be confirmed “[n]otwithstanding
section 510(a).”
       We     have      previously    defined    the     phrase
“notwithstanding” in the bankruptcy context to mean “‘in spite
of’ or ‘without prevention or obstruction from or by.’”
Goody’s, 610 F.3d at 817 (quoting Webster’s Third Int’l
Dictionary 1545 (1971)); see also In re Federal-Mogul Global
Inc., 684 F.3d 355, 369 (3d Cir. 2012) (reading the lead-in to
Bankruptcy Code § 1123(a)—“notwithstanding any otherwise
applicable non-bankruptcy law”—to mean that what follows in
subsection (a) displaces conflicting state nonbankruptcy law).
Although these cases interpret different sections of the Code,
their analysis applies equally to § 1129(b)(1) because,
“[p]resumptively, identical words used in different parts of the
same act are intended to have the same meaning.” U.S. Nat’l
Bank of Or. v. Indep. Ins. Agents of Am., Inc., 508 U.S. 439,
460 (1993) (internal quotation marks and citation omitted).
Further, as we explained in Federal-Mogul, “[w]hen a federal
law contains an express preemption clause, we focus on the
plain wording of the clause, which necessarily contains the best

                              15
evidence of Congress’ preemptive intent.” 684 F.3d at 369
(internal quotation marks omitted).

         Applying the lessons of Goody’s and Federal-Mogul
here, § 1129(b)(1) overrides § 510(a) because that is the plain
meaning of “[n]otwithstanding.” Thus our holding becomes
simple: Despite the rights conferred by § 510(a), “if all of the
applicable requirements of subsection (a) of this section [1129]
. . . are met with respect to a plan, the court . . . shall confirm
the plan . . . if [it] does not discriminate unfairly, and is fair and
equitable,” for each impaired class that does not accept the
plan.

       2. The purpose of § 1129(b)(1)

       Section 1129(b)(1)’s purpose affirms this analysis. The
provision allows a court to confirm a plan if it protects the
interests of a dissenting class, here the Class 1E Senior
Noteholders. Those interests are primarily preserved by the
fair-and-equitable test (not in play here, as our dispute involves
only unsecured creditors) and the unfair-discrimination test,
the latter protecting the relative payments to same-rank
creditor classes whose recovery has been affected, inter alia,
by intercreditor subordination agreements.             11 U.S.C.
§ 1129(b)(1); Armstrong World Indus., 432 F.3d at 512; In re
Aztec Co., 107 B.R. 585, 589 (Bankr. M.D. Tenn. 1989).

       Both § 510(a) and the cramdown provision’s unfair-
discrimination test are concerned with distributions among
creditors. The first is by agreement, while the second tests,
among other things, whether involuntary reallocations of
subordinated sums under a plan unfairly discriminate against
the dissenting class. Only one can supersede, and that is the
cramdown provision. It provides the flexibility to negotiate a
confirmable plan even when decades of accumulated debt and
private ordering of payment priority have led to a complex web

                                 16
of intercreditor rights. It also attempts to ensure that debtors
and courts do not have carte blanche to disregard pre-
bankruptcy contractual arrangements, while leaving play in the
joints. 12
       To date, we are aware of only one court that has spoken
in a published opinion to the effect of § 1129(b)(1)’s
notwithstanding proviso. See In re TCI 2 Holdings, 428 B.R.
117, 141 (Bankr. D.N.J. 2010) (“The phrase ‘[n]otwithstanding
section 510(a) of this title’ removes section 510(a) from the
scope of 1129([b])(1)[.]”). That decision aligns with ours here.

       The House Report for the Bankruptcy Code also
supports this interpretation. Though the Report’s discussion of
unfair discrimination is quite brief, its examples exclusively
involve the relative treatment of like-kind creditors affected by
subordination agreements. See H.R. Rep. No. 95-595, at 416–
17 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6372–73 (the

       12
          Further, as illustrated by the facts of this case, diverse
groups—including former employees, trade creditors, and
bondholders—typically make up a debtor’s unsecured
creditors. Agreements reached regarding repayment outside of
the Chapter 11 context may no longer serve the creditors or the
debtor “when each [creditor] does not contribute
proportionately to [the reorganized debtor’s] creation and
maintenance.” 7 Collier on Bankruptcy ¶ 1129.03 (16th ed.
2020).     Thus the flexibility provided by the unfair-
discrimination test may be a welcome relief.

                                17
“House Report”). They rely on that discrimination principle,
and not on § 510(a), to enforce subordination agreements. 13 Id.

       To save their reading of § 1129(b)(1), the Senior
Noteholders cite the 1995 article by Professor Kenneth Klee
(one of the principal drafters of the Bankruptcy Code and,
coincidentally, an examiner appointed by the Bankruptcy
Court in this case) recommending that Congress delete the
reference to § 510(a) in § 1129(b) to prevent the “anomalous
result of overriding § 510(a) and eliminating the enforcement
of subordination agreements in cases in which the class rejects
the plan.” Kenneth N. Klee, Adjusting Chapter 11: Fine
Tuning the Plan Process, 69 Am. Bankr. L.J. 551, 561 (1995).
They urge that we adopt this recommendation to “avoid that
bizarre result.” Trustees’ Br. 29. Their problem is that
Professor Klee’s recommendation to Congress is not evidence
of the legislature’s intent to favor § 510(a) (indeed, by
inference he acknowledges that the cramdown provision
prevails). As Congress has not changed the law to reflect

       13
          The Report’s discussion of unfair discrimination has
received criticism over the years. See In re Armstrong World
Indus., Inc., 348 B.R. 111, 121 (D. Del. 2006) (“Unfair
discrimination is not defined in the Bankruptcy Code, nor does
the statute’s legislative history provide guidance as to its
interpretation.”); Markell, A New Perspective, supra, at 237–
38 (describing the examples of unfair discrimination in the
legislative history as “roundabout, almost otiose”).
Nevertheless, Professor (and former Judge) Markell relies on
this legislative history to guide in part his analysis of the
provision, ultimately arriving at the test used by the
Bankruptcy Court here. Id. at 236–38, 249–50. We too find
some guidance in the Report, even as we acknowledge that it
is no model of clarity on our issue.

                              18
Professor Klee’s proposal, we rely on the plain language of
§ 1129(b)(1).

        Hence we affirm the holding of the Bankruptcy and
District Courts that subordination agreements need not be
strictly enforced for a court to confirm a cramdown plan. They
correctly evaluated the Senior Noteholders’ claim under the
unfair-discrimination test rather than a rigid application of
§ 510(a).

      B. The Plan’s allocation of a small portion of
         subordinated sums to Class 1F creditors does not
         unfairly discriminate against the Senior
         Noteholders.
        As we resolved the first issue in favor of Tribune, we
turn to the Senior Noteholders’ alternative argument: The Plan
unfairly discriminates against them. The Bankruptcy Court’s
unfair-discrimination analysis compared Class 1E’s initial
distribution recovery percentage under the Plan—33.6%—to
its recovery were there strict enforcement of the subordination
agreements—34.5%—and determined that 0.9% was not a
material difference in recovery. Allocation Opinion, 472 B.R.
at 243 n.21. Thus it held there was no unfair discrimination to
bar Plan confirmation.

        The Senior Noteholders allege two flaws in that
analysis. First, they claim the Court failed to compare only
recoveries from the Tribune estate. That is, it should have
compared Class 1E’s and Class 1F’s Plan recoveries as if no
subordination agreements were in effect. As the parties
stipulated in the Stipulated Percentage Recovery Table that the
Senior Noteholders in Class 1E recovered only 21.9% of their
claims absent subordination payments, this meant, they argue,
that the rest of their 33.6% recovery under the Plan came from

                              19
the subordinated creditors and should be excluded from the
unfair-discrimination analysis.

       Second, they claim that the Court’s refusal to compare
their Class IE percentage recovery with Class 1F’s percentage
recovery, and its decision to compare instead only Class 1E’s
recovery under the Plan with its recovery had the subordination
agreements been fully enforced, were incorrect. Once these
errors are addressed, they assert the difference between Class
1E’s recovery under the Plan absent subordination (21.9%),
and the Plan recovery of Class 1F’s non-Swap Claim creditors
including subordination benefits (33.6%), is material,
evidencing unfair discrimination that should have prevented
the Plan’s confirmation.

       The Bankruptcy Code does not define unfair
discrimination. It “is something of an orphan in Chapter 11
reorganization practice. . . . [J]ust what suffices to avoid unfair
discrimination is uncertain.” Markell, A New Perspective,
supra, at 227. “Generally speaking, this standard ensures that
a dissenting class will receive relative value equal to the value
given to all other similarly situated classes.” In re Armstrong
World Indus., Inc., 348 B.R. 111, 121 (D. Del. 2006) (quoting
In re Johns-Manville Corp., 68 B.R. 618, 636 (Bankr.
S.D.N.Y. 1986)). Since unfair discrimination’s inclusion in the
Bankruptcy Code (it appeared for a short time in the 1930s in
revisions to the Bankruptcy Act of 1898), courts have relied
primarily on one of four tests to determine what unfairness
means and, in some of those tests, whether, if a presumption of
unfairness exists, it can be rebutted. See generally Denise R.
Polivy, Unfair Discrimination in Chapter 11: A
Comprehensive Compilation of Current Case Law, 72 Am.
Bankr. L.J. 191, 196–208 (1998) (collecting and discussing
cases applying the various tests).

                                20
        The “mechanical” test prohibits all discrimination, that
is, it requires that similarly situated creditors’ recoveries be
100% pro rata. See In re Greystone III Joint Venture, 102 B.R.
560, 571–72 (Bankr. W.D. Tex. 1989) (reasoning that paying
the trade creditors a higher percentage of their claims than
other unsecured creditors would constitute unfair
discrimination), rev’d on other grounds, 995 F.2d 1274 (5th
Cir. 1992). The “restrictive” approach narrowly defines unfair
discrimination such that, “[i]n the absence of subordination, . .
. no disparate treatment of similarly situated creators would
qualify,” Polivy, supra, at 200. Both tests have support in the
House Report: it noted “there is no unfair discrimination as
long as the total consideration given all other classes of equal
rank does not exceed the amount that would result from an
exact aliquot distribution,” House Report, supra, at 416, and
the examples given involved subordinated creditors, id. at 416–
17; see also In re Acequia, Inc., 787 F.2d 1352, 1364 & n.18
(9th Cir. 1986). Neither of these tests appears to be widely
adopted, however. See Polivy, supra, at 200–201 (collecting
cases); cf. Aztec, 107 B.R. at 588–89 (rejecting both the
restrictive and mechanical tests).

        The “broad” approach is generally applied as a four-
factor test that originated in the Chapter 13 case In re Kovich,
4 B.R. 403, 407 (Bankr. W.D. Mich. 1980). To determine
whether the plan unfairly discriminates, the test considers
whether: (1) a reasonable basis for discrimination exists; (2)
the debtor cannot consummate its plan without discrimination;
(3) the discrimination is imposed in good faith; and (4) the
degree of discrimination is directly proportional to its
rationale. 14 See, e.g., Aztec, 107 B.R. at 590 (laying out and

       14
        Some courts, finding the factors redundant, pared
down the test to ask whether there is “a rational or legitimate

                               21
applying the test). Although this analysis has received
criticism, see, e.g., In re Dow Corning Corp., 244 B.R. 696,
702 (Bankr. E.D. Mich. 1999); In re Brown, 152 B.R. 232, 235
(Bankr. N.D. Ill. 1993), rev’d on other grounds sub nom.
McCullough v. Brown, 162 B.R. 506 (N.D. Ill. 1993); Markell,
A New Perspective, supra, at 242–48, 254–55, it has been
applied often, see Polivy, supra, at 203 n.102 (collecting cases
applying the broad test). 15

       In response to criticisms of these tests, Professor Bruce
Markell proposed the “rebuttable presumption” test, which was
applied by the Bankruptcy Court in this case, 472 B.R. at 242.16

basis for discrimination” and if it is “necessary for the
reorganization.” In re Dow Corning Corp., 244 B.R. 696, 701
(Bankr. E.D. Mich. 1999) (citation omitted).
       15
         These critics reject the application of the broad test
because, among other things, it was developed for Chapter 13
cases, which require the protection of all creditors, as they do
not have voting rights, and provides amorphous limits on
discrimination. Dow Corning, 244 B.R. at 702. The rebuttable
presumption test, dealt with below and developed for the
Chapter 11 context, is tailored to the specific circumstances of
cramdown, where only the interest of the dissenting class is at
issue. Id. It also eschews concepts such as reasonableness,
whether a plan can be confirmed without discrimination, and
good faith.
       16
          This holding is not before us, as the Senior
Noteholders endorse it, Trustees’ Br. 37. Tribune accepts it,
Tribune’s Br. 17, as do we. See In re Tribune Media Co., 587
B.R. at 617–18; see also In re Nuverra Envtl. Sols., Inc., 590
B.R. 75, 90 (D. Del. 2018).

                              22
A rebuttable presumption of unfair discrimination exists when
there is

      (1) a dissenting class; (2) another class of the
      same priority; and (3) a difference in the plan’s
      treatment of the two classes that results in either
      (a) a materially lower percentage recovery for
      the dissenting class (measured in terms of the net
      present value of all payments), or (b) regardless
      of percentage recovery, an allocation under the
      plan of materially greater risk to the dissenting
      class in connection with its proposed
      distribution.

Markell, A New Perspective, supra, at 228, 249; see also Dow
Corning, 244 B.R. at 702.

      Under this test, a presumption of unfair discrimination
may be overcome if the court finds that

      a lower recovery for the dissenting class is
      consistent with the results that would obtain
      outside of bankruptcy, or that a greater recovery
      for the other class is offset by contributions from
      that class to the reorganization. The presumption
      of unfairness based on differing risks may be
      overcome by a showing that the risks are
      allocated in a manner consistent with the
      prebankruptcy expectations of the parties.
Markell, A New Perspective, supra, at 228; cf. Comm. on
Bankr. and Corp. Reorg. of the Ass’n of the Bar of the City of
New York, Making the Test for Unfair Discrimination More
“Fair”: A Proposal, 58 Bus. Law. 83, 106–07 (2002)
(proposing amendments to this test that narrow the

                              23
circumstances where it is appropriate to overcome the
presumption of unfair discrimination).

       The Senior Noteholders’ unfair-discrimination claim
involves mixed questions of law and facts. A bankruptcy
court’s initial determination of which test to use is reviewed as
“a legal conclusion without the slightest deference.” U.S. Bank
Nat’l Ass’n ex rel. CWCapital Asset Mgmt. LLC v. Vill. at
Lakeridge LLC, 138 S. Ct. 960, 965 (2018). Reviewing the
Bankruptcy Court’s choice of legal test de novo, we agree that
it was appropriate in these circumstances to take a pragmatic
approach to measure the Plan’s discrimination. Thereafter,
Village at Lakeridge asks whether applying the law to the facts
“entails primarily legal or factual work.” Id. at 967. This
inquiry sounds simple, but often it will depend on how a court
approaches its analysis. Our approach here sets up a fact-
specific question: How does discrimination affect Class 1E’s
actual recovery? Thus we review the application of legal
precepts to the facts in this instance for clear error. (Even were
we instead to apply de novo review, the result would not
change).

       1. Principles framing the “unfair-discrimination”
          standard
       We distill the following principles from the various
unfair-discrimination analyses.
        First, though § 1129(b)(1)’s legislative history speaks
of discrimination as unfair once there is breached a pure pro
rata division of plan distributions among like-priority
creditors, that runs counter to the text. See Aztec, 107 B.R. at
588–89. “Discriminate unfairly” is simple and direct: you can
treat differently (discriminate) but not so much as to be unfair.
There is, as is typical in reorganizations, a need for flexibility

                               24
over precision. The test becomes one of reason circumscribed
so as not to run rampant over creditors’ rights.

        This reading is also consistent with our holding in
Section A above. A subordination agreement does not need to
be enforced to the letter in the case of a cramdown, and
subordinated amounts may be allocated to other classes not
entitled outside bankruptcy to benefit from subordination
agreements as long as that allocation is not presumptively
unfair (and, if so, the presumption is not rebutted).
       Second, the cramdown provision’s text also makes plain
that unfair discrimination applies only to classes of creditors
(not the individual creditors that comprise them), and then only
to classes that dissent. Thus a disapproving creditor within a
class that approves a plan cannot claim unfair discrimination,
and the standard does not “apply directly with respect to other
classes unless they too have dissented.” Klee, Cram Down,
supra, at 141 n.67.

        Third, unfair discrimination is determined from the
perspective of the dissenting class. House Report, supra, at
416–17.       What this means, however, is subject to
interpretation. Courts and commentators nearly always
consider this a comparison between the allegedly preferred
class and the dissenting class. See, e.g., In re Greate Bay Hotel
& Casino, Inc., 251 B.R. 213, 231 (Bankr. D.N.J. 2000)
(collecting cases comparing the recovery of the dissenting
class to that of the preferred class or classes); Klee, Cram
Down, supra, at 142 (“[I]f the plan protects the legal rights of
a dissenting class in a manner consistent with the treatment of
other classes . . . , then the plan does not discriminate unfairly
with respect to the dissenting class.”). However, as was done
in this case, a court may in certain circumstances consider the
difference between what the dissenting class argues it is
entitled to recover and what it actually received under the plan.

                               25
In other words, a comparison between the recovery of the
preferred class and the dissenting class is by far the preferred
but not always the only acceptable approach. Other measures
that allow courts to assess the magnitude of harm to the
dissenting class may also be appropriate in some cases.

        Fourth, the need for classes to be aligned correctly is a
precursor to an effective assessment. A typical refrain in
bankruptcy is that many plan disputes in § 1129 begin as
misclassifications under § 1122. 17 See, e.g., In re Woodbridge
Assocs., 19 F.3d 312, 317–321 (7th Cir. 1994) (considering
both the dissenting creditors’ misclassification and unfair-
discrimination claims); In re Unbreakable Nation Co., 437
B.R. 189, 200–202 (Bankr. E.D. Pa. 2010) (same); Greate Bay
Hotel, 251 B.R. at 223–32 (same); see generally G. Eric
Brunstad, Jr. and Mike Sigal, Competitive Choice Theory and
the Unresolved Doctrines of Classification and Unfair
Discrimination in Business Reorganizations Under the
Bankruptcy Code, 55 Bus. Law. 1, 72–73 & n.289, 78 (1999)
(discussing the need to enforce subordination principles at
classification to avoid “perverse incentives” and unfair-
discrimination claims).

       17
          Technically a plan objection, if made, would be under
§ 1129(a) by claiming that the plan did not comply with the
classification requirements of § 1122(a), which requires that
“substantially similar” claims be placed in the same class.
Markell, A New Perspective, supra, at 238 n.56. Where
subordination agreements are in play, a gateway to unfair-
discrimination determinations is to separate those whose
claims benefit from the agreements from those who do not.
Placing a subordination beneficiary with a non-beneficiary in
a single class bleeds over clear analysis.

                               26
       Fifth, courts should resolve how a plan proposes to pay
each creditor’s recovery “measured in terms of the net present
value of all payments” or the “allocation . . . of materially
greater risk . . . in connection with its proposed distribution.”
Markell, A New Perspective, supra, at 228. This allows future
distributions to be made reasonably equivalent to the actual
value distributed at the time of the unfair-discrimination
comparison.

        Sixth,     in    making      an     unfair-discrimination
determination, start by adding up all proposed plan
distributions from the debtor’s estate and divide by the number
of creditors sharing the same priority. This provides a pro rata
baseline. Then look at what actually happens if the plan is
implemented. Where there are no subordination agreements
involved, the analysis is simple: look at the difference between
the recovery percentage under the plan of a preferred class and
that of a dissenting class. Where subordination agreements are
involved, courts should resolve in the first instance which
creditors are entitled to benefit from those agreements. They
should make their comparisons after including subordinated
sums in the plan distributions, for what may be in dispute often
is the amount the dissenting class would be entitled under full
enforcement of § 510(a) but did not get under the plan.

       Seventh, to presume unfair discrimination, there must
be “a ‘materially lower’ percentage recovery for the dissenting
class or a ‘materially greater risk to the dissenting class in
connection with its proposed distribution.’” Greate Bay Hotel,
251 B.R. at 229 (quoting Dow Corning, 244 B.R. at 702). The
rebuttable presumption test intentionally leaves opaque what
is, under the circumstances, “material.” Such line drawing has
been left primarily to bankruptcy courts. See Bruce A.
Markell, Slouching Toward Fairness: A Reply to the ABCNY’s
Proposal on Unfair Discrimination, 58 Bus. Law. 109, 116
(2002) (“Congress has left the important area of nonconsensual

                               27
confirmation to the common law method of incremental
decision-making.”).   We too leave this for judicial
development.
        Eighth, if courts find plans materially discriminate
against the dissenting class and follow the rebuttable
presumption test or some variation, that finding is by definition
presumptive and can be rebutted. Though we could make
general suggestions for what qualifies as an adequate rebuttal
(e.g., contributions to the reorganization by a preferred class
may rebut unfair discrimination), those determinations are for
bankruptcy courts to decide initially. Id.

       2. Application of the principles

        To review, the Bankruptcy Court compared Class 1E’s
recovery under the Plan (33.6%) to its recovery if it and the
Swap Claim were the only creditors to benefit from the
subordination agreements (34.5%). 472 B.R. at 243 n.21. The
Senior Noteholders point out that typically a court will
compare the recovery percentages of the dissenting and
preferred classes and ask whether the difference in recovery, if
any, is material. Trustees’ Br. 41. If that analysis had been
applied here, the Court would have needed to resolve the
relative priority of all the creditors in Classes 1E and 1F to
determine which creditors qualified as Senior Obligations
under the PHONE and EGI Notes before comparing the
treatment of the two classes under the Plan.

       Yet neither the text of 11 U.S.C. § 1129(b)(1) nor the
rebuttable presumption test explicitly limits the unfair-
discrimination analysis to only a class-to-class comparison. As
the Bankruptcy Court noted, unfair discrimination requires that
a court evaluate whether “there was a materially lower
percentage recovery for the dissenting class.” 472 B.R. at 244
(internal quotation marks omitted) (quoting Greate Bay Hotel,

                               28
251 B.R. at 231). In cases where a class-to-class comparison
is difficult—for instance, here 57% of Class 1F (the Swap
Claim) is entitled to benefit from the subordination of the
PHONES and EGI Notes, while the Trade Creditors (and
perhaps the Retirees) are not—a court may opt to be pragmatic
and look to the discrepancy between the dissenting class’s
desired and actual recovery to gauge the degree of its different
treatment. Either way the perspective remains that of the
dissenting class.

       The Senior Noteholders argue that the Court should
have compared their recovery from the estate absent
subordination (21.9%) to the Trade Creditors’ recovery under
the Plan with the reallocated subordination payments (33.6%).
To measure discrimination this way is to ignore that the Plan
brought into the Tribune estate not only the subordinated sums
distributed to non-beneficiaries of that subordination, but all
payments from the subordinated creditors (and indeed it
allocated the overwhelming majority of those sums to the
Senior Noteholders and the Swap Claim).

       In this context, the Bankruptcy Court did not necessarily
err when it compared the Senior Noteholders’ desired recovery
under the fourth row of the Stipulated Recovery Percentage
Table (34.5%) to their actual recovery under the Plan (33.6%).
To repeat, this is not the preferred way to test whether the
allocation of subordinated amounts under a plan to initially
non-benefitted creditors unfairly discriminates. It may,
however, be an appropriate metric (or cross-check) given the
circumstances of a case.
       This is such a case. Because the claims of the Retirees
($105M) and Trade Creditors ($8.8M) are so substantially
smaller than the Senior Noteholders’ claims ($1.283B), the
increases in the recovery percentage for the Retirees’ and
Trade Creditors’ claims from reallocated subordinated

                              29
amounts result in only a minimal reduction of the recovery
percentage for the Senior Noteholders. Specifically, the
subordinated sums allocated to the Retirees and Trade
Creditors comprised 11.7 percentage points toward their 33.6
percentage recovery, but only reduced the Senior Noteholders’
recovery by nine-tenths of a percent. Thus we agree with the
Bankruptcy and District Courts that this difference in the
Senior Noteholders’ recovery is not material. Although the
Plan discriminates, it is not presumptively unfair when
understood, as ruled above, that a cramdown plan may
reallocate some of the subordinated sums.

        As an aside, we note that the Bankruptcy Court looked
to cases comparing the differences in the dissenting class and
the preferred class recoveries as a baseline for its materiality
determination. See Allocation Opinion, 472 B.R. at 243
(collecting cases). Because it adopted a different framework
for its analysis than the courts it cited, id. at 242–43, it did not
need to apply their metric for materiality. What constitutes a
material difference in recovery when analyzing the effect of a
plan on the dissenting class is a distinct and context-specific
inquiry. We do not address the outer boundary of that inquiry
here. Wherever it may lie, the nine-tenths of a percentage point
difference in the Senior Noteholders’ recovery is, without a
doubt, not material.
                  *      *       *      *       *
      Unfair discrimination is rough justice. It exemplifies
the Code’s tendency to replace stringent requirements with
more flexible tests that increase the likelihood that a plan can
be negotiated and confirmed. This flexibility is balanced by
the Code’s inherent concern with equality of treatment. We
seek to maintain this balance in our interpretation of
§ 1129(b)(1) here.

                                30
        The Code does not compel courts reviewing cramdown
plans to enforce subordination agreements strictly, though not
to do so must conform with the constraints set out in the
cramdown provision. The pragmatic approach taken by the
Bankruptcy Court, affirmed by the District Court, reached the
right result. Thus we also affirm.

                             31