NEW YORK, Sept. 8 — A federal bankruptcy judge cut short the start of a hearing today on WorldCom Inc.’s plan to emerge from bankruptcy in order to give rival groups of creditors more time to negotiate a settlement and avoid a lengthy court battle.
U.S. Bankruptcy Judge Arthur J. Gonzalez said he agreed to temporarily halt the proceeding because he had been told during a closed-door meeting with attorneys that a deal “could be reached within a relatively short period of time.”
The two sides have been negotiating intermittently for months in advance of a hearing on WorldCom’s reorganization plan that could last three weeks or more. After today’s adjournment, Edward Weisfelner, a lawyer representing one group of creditors, expressed optimism that an agreement could be reached. “I don’t think we would ask the court to adjourn the hearing if we didn’t think it would bear fruit,” he said.
WorldCom filed for bankruptcy in July 2002 after revealing a massive accounting scandal that eventually ballooned to $11 billion in improper bookkeeping. In an effort to distance itself from its scandal-tainted past, WorldCom has replaced dozens of top executives and its entire board of directors. It has also reached a $750 million settlement with the Securities and Exchange Commission to resolve fraud charges and plans to formally take the name of its long-distance subsidiary, MCI.
WorldCom’s bankruptcy is the largest ever. In order to accommodate a gallery of more than 100 observers, including lawyers, financial advisers and reporters, Gonzalez moved out of his regular courtroom at the U.S. Bankruptcy Court in Manhattan and into the ceremonial courtroom in the U.S. District Court for the Southern District of New York.
The reorganization plan, which lays out how much each creditor will be paid when the company emerges from bankruptcy, is often a contentious issue in bankruptcy. It is not unusual for a judge to delay a proceeding to allow parties to negotiate, said one bankruptcy lawyer involved in the case.
WorldCom’s reorganization plan has been approved by creditors controlling more than 96 percent of the company’s debt, but a faction of creditors claim they should get more money under the proposal.
One group of dissident creditors who own “trade debt” related to WorldCom’s unpaid bills to other companies would get 36 cents for each dollar owed by the Ashburn-based telecommunications company. They argue that they should be paid in full.
Another group of creditors — who own bonds issued by the MCI unit — would get nothing under the current proposal. They claim they also deserve to be paid in full.
Very few, if any, of the current creditors are the original owners of the debt. A group of 14 hedge funds control much of the trade debt. The creditors who control MCI’s bonds are typically investors who bought up the debt for pennies on the dollar after WorldCom filed for bankruptcy.
If no settlement is reached, the hearing will resume and take the form of a trial with opposing sides presenting witnesses and offering evidence. If the dissidents prevail, WorldCom’s majority creditors would likely be forced to come up with a new reorganization plan, possibly delaying the company’s exit from bankruptcy for months.
In addition to small groups of creditors, AT&T Corp. has filed an objection to WorldCom’s reorganization plan, and Verizon Communications Inc. has called on the federal government to take steps to punish WorldCom for its accounting fraud that would effectively block the company from ever emerging from bankruptcy.
Earlier this month, Oklahoma Attorney General W.A. Drew Edmondson charged WorldCom with violating state fraud and securities laws.
Reported By TechNews.com, http://www.TechNews.com
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