Wilmington Sav. Fund Soc'y, FSB v. Iheartcommunications, Inc. (In re Iheartmedia, Inc.)

• Decision Date: 15 January 2019
• Docket Number: CASE NO: 18-31274,ADVERSARY NO. 18-03052
• Citation: 597 B.R. 339
• Parties: IN RE: IHEARTMEDIA, INC., et al., Debtors. Wilmington Savings Fund Society, FSB, Solely in Its Capacity as Successor Indenture Trustee to the 6.875% Senior Notes Due 2018 and 7.25% Senior Notes Due 2027, and Not in Its Individual Cap, Plaintiffs v. iHeartCommunications, Inc., f/k/a Clear Channel Communications, Inc., et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Texas

597 B.R. 339

IN RE: IHEARTMEDIA, INC., et al., Debtors.

Wilmington Savings Fund Society, FSB, Solely in Its Capacity as Successor Indenture Trustee to the 6.875% Senior Notes Due 2018 and 7.25% Senior Notes Due 2027, and Not in Its Individual Cap, Plaintiffs
v.
iHeartCommunications, Inc., f/k/a Clear Channel Communications, Inc., et al., Defendants.

CASE NO: 18-31274
ADVERSARY NO. 18-03052

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed January 15, 2019

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Timothy Alvin Davidson, II, Ashley L. Harper, Hunton Andrews Kurth LLP, Houston, TX, Harrison Denman, White & Case LLP, Mark Franke, Michael A. Garza, Michele Meises, White & Case LLP, Seth H Lieberman, Patrick Sibley, Matthew W. Silverman, Pryor Cashman LLP, New York, NY, Erin Rosenberg, White & Case LLP, Miami, FL, Jason N. Zakia, White & Case LLP, Chicago, IL, for Plaintiffs.

Gavin Campbell, Kirkland & Ellis LLP, Los Angeles, CA, Yates M. French, Stephen C. Hackney, Richard U.S. Howell, Jeffery Lula, Kirkland & Ellis LLP, Chicago, IL, Patricia Baron Tomasco, Jackson Walker LLP, Houston, TX, for Defendants.

MEMORANDUM OPINION

Marvin Isgur, UNITED STATES BANKRUPTCY JUDGE

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Wilmington Savings Fund Society, FSB, the successor indenture trustee to the 2016, 2018, and 2027 Legacy Notes, filed this adversary proceeding against iHeartCommunications, Inc. et al in order to protect the Legacy Noteholders' rights to equal and ratable treatment based on a "Springing Lien" that exists under its bond indenture. Wilmington seeks to vindicate its rights through the imposition of an equitable lien or a constructive trust, or through damages for unjust enrichment or tortious interference.

iHeart, its subsidiary defendants, and the Senior Creditors holding the May 13, 2008 Term Loans and various Priority Guaranteed Notes oppose the relief Wilmington seeks, arguing that the complaint is based upon baseless factual allegations, and that the relief sought is fatally flawed under controlling law.

The Court holds that the Springing Lien in the PGN Indenture has not been triggered, and the relief Wilmington seeks is denied.

Background

Creation of the Legacy Indentures

On October 1, 1997, iHeartCommunications, Inc. ("iHeart") entered into a Senior Indenture (the "Legacy Indenture") with Bank of New York Mellon Trust Co., N.A. ("BNY Mellon Trust"). BNY was Wilmington's predecessor in interest. (ECF No. 236 at 15).

Under the Legacy Indenture, iHeart issued three Legacy Notes: the 5.50% Senior Notes due in 2016 with a principal amount of $250,000,000.00 (the "2016 Legacy Notes"); the 6.875% Senior Notes due in 2018 with a principal amount of $175,000,000.00 (the "2018 Legacy Notes"); and the 2027 Senior Notes with a principal amount of $300,000,000.00 (the "2027 Legacy Notes"). (ECF No. 236 at 15).

Section 1006 of the Legacy Indenture contains an Equal and Ratable Clause which restricts iHeart's rights to grant certain liens unless equal and ratable liens are granted to the Legacy Noteholders. This restriction applies to restrict the ability of iHeart or an iHeart Subsidiary to mortgage any stock or indebtedness of a Restricted Subsidiary or to encumber Principal Property. (ECF No. 1-1 at 39). The full text of Section 1006 is:

Section 1006. Limitation on Mortgages. [iHeart] will not, nor will it permit any Restricted Subsidiary to, create, assume, incur or suffer to exist (i) any Mortgage upon any stock or indebtedness of any Restricted Subsidiary ... and (ii) any Mortgage upon any Principal Property, whether owned or leased on the date of this Indenture, or thereafter acquired, to secure any Debt of the Company or any other person (other than the Securities) without in any such case making effective provision whereby all of the Securities Outstanding shall be directly secured equally and ratably with such Debt.

(ECF No. 1-1 at 39) (emphasis added). The Legacy Indenture broadly defines a Mortgage as "any mortgage, pledge, lien, encumbrance, charge or security interest of any kind." (ECF No. 1-1 at 7). Principal Property is "any radio broadcasting, television broadcasting or outdoor advertising property located in the United States owned or leased by the Company or any Subsidiary." (ECF No. 1-1 at 8).

The initial dispute between iHeart and Wilmington is whether Section 1006 serves

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to grant a lien to Wilmington or serves to prohibit iHeart from granting liens to others. The Court sees no ambiguity in the language of Section 1006. It is a prohibition and not a grant.

Section 1006 also lists two exceptions of allowed Mortgages which would not trigger the Equal and Ratable Clause: (i) all Permitted Mortgages as defined in the Legacy indenture, and (ii) Mortgages on Principal Property "if the aggregate amount of all Debt then outstanding secured by such Mortgage and all similar Mortgages does not exceed 15% of the total consolidated stockholders' equity..." (ECF No. 1-1 at 39–40).

The Legacy Notes issued across the three series totaled $725,000,000.00. (See ECF No. 236 at 15).

2008 Leveraged Buyout

In 2008, iHeart was acquired by two private equity firms through a leveraged buyout which necessitated the acquisition of additional debt. (ECF No. 236 at 17). To facilitate the buyout process, iHeart entered into a credit agreement and a series of Term Loans on May 13, 2008. (ECF No. 234 at 15). The Term Loans were guaranteed by iHeart's subsidiaries and Principal Property Security Agreements ("PPSAs") were issued. One PPSA granted security interests over Principal Property belonging to iHeart's subsidiaries which secured debt corresponding to 15% of the shareholder's equity. (ECF No. 234 at 15). This security interest was specifically identified in Section 1006 of the Legacy Indenture and did not trigger the Equal and Ratable Clause. (ECF No. 1-1 at 39).

A second Term Loan PPSA granted a right to a lien which would encumber iHeart's equity interest in its subsidiaries and all Principal Property; however, the lien rights were not triggered until the balance of outstanding Legacy Notes dropped below $500,000,000.00. (ECF No. 234 at 15). The parties have referred to this arrangement interchangeably as a "Springing Lien" or a "Collateral Flip." For convenience, the Court adopts the term "Springing Lien" throughout this opinion.

No security interest on Principal Property existed (beyond the 15% equity exception referenced above) until and unless the amount of outstanding Legacy Notes fell below $500,000,000.00. The Springing Lien, in combination with the Legacy Indenture's Equal and Ratable Clause, forms the basis of the dispute between the parties.

Between 2011 and 2015, iHeart refinanced the Term Loan debt by issuing five Priority Guaranteed Notes ("PGNs"). (ECF No. 236 at 17). The PGNs did not rely on the 15% equity exception. Instead, the agreements granted identical Springing Liens which would be triggered if the balance of Legacy Notes dropped below $500,000,000.00. (ECF No. 234 at 16). The PGN PPSAs also allowed for the filing of "all asset" UCC-1 financing statements. (ECF No. 236 at 18).

iHeart's Acquisition of Certain Legacy Notes

Shortly after the leveraged buyout, the United States economy entered into an economic recession. The recession, along with other factors, placed substantial economic pressure on iHeart. iHeart's leveraged capital structure further exacerbated this financial pressure, and despite attempts to refinance this debt, iHeart's debt began to trade on the public markets at a substantial discount from par. (ECF No. 236 at 20).

iHeart created CC Finco, LLC, an indirect iHeart subsidiary, to purchase securities (at a discount on the open market) issued by iHeart and its affiliates. (ECF No. 231 at 19). On October 20, 2014, CC

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Finco purchased $57,100,000.00 in outstanding 2016 Legacy Notes on the open market. (ECF No. 231 at 19). CC Finco then transferred this portion of the 2016 Legacy Notes to Clear Channel Holdings ("CC Holdings"), a direct iHeart subsidiary. (ECF No. 231 at 19). This purchase was part of a larger financial strategy to manage iHeart's balance sheet by purchasing multiple debt instruments at market discounts. (ECF No. 251 at 35).

iHeart's subsidiaries still held the $57.1 million of 2016 Legacy Notes as the December 15, 2016 bond maturity date approached for the 2016 Legacy Notes. (ECF No. 236 at 22). On October 5, 2016, iHeart's Board of Directors appointed Frederic Brace and Charles Cremens to serve on a special committee and determine the best strategy for iHeart to pursue with regard to the maturing 2016 Legacy Notes. (ECF No. 234 at 20). The committee retained independent legal and financial advisors and examined multiple options ranging from having a third party hold the Notes, delaying the Springing Lien, or filing for bankruptcy before the maturity date. (ECF No. 234 at 20).

Ultimately, iHeart's Special Committee determined to pursue a third course of action—continue paying interest on the...