Wilkow v. Forbes, Inc.

Easterbrook, J.

Forbes Magazine runs a column on pending litigation of interest to the business community. The October 5, 1998, issue of Forbes covered the grant of certiorari in what was to become Bank of America National Trust & Savings Ass'n v. 203 North LaSalle Street Partnership, which presented the question whether the absolute-priority rule in bankruptcy has a new-value exception. The absolute-priority rule, codified in 11 U.S.C. § 1129(b)(2)(B)(ii), forbids confirmation of a plan of reorganization over the objection of an impaired class of creditors unless "the holder of any claim or interest that is junior to the claims of such [impaired] class will not receive or retain under the plan on account of such junior claim or interest any property." In other words, creditors may insist on priority of payment: secured creditors must be paid in full before unsecured creditors retain any interest, and unsecured creditors must be paid off before equity holders retain an interest. But equity investors frequently argue that this rule may be bent if they contribute new value as part of the plan. Although this court had rejected other new-value arguments, in 203 North LaSalle we held that the equity investors could retain ownership of a commercial office building, in exchange for about $ 6 million in new capital over a five-year period, even though the principal lender would fall about $ 38 million short of full repayment. This was the decision on which Forbes published a short column, seven months before the Supreme Court held the plan "doomed, . . . without necessarily exhausting its flaws, by its provision for vesting equity in the reorganized business in the Debtor's partners without extending an opportunity for anyone else either to compete for that equity or to propose a competing reorganization plan."

The majority opinion in the Supreme Court required about 8,000 words to resolve the case--and without reaching a final decision on the vitality of the new-value exception (though the majority's analysis hog-tied the doctrine). The majority opinion in this court ran about 9,500 words, with 5,200 more in a dissent. A 670-word article such as the one Forbes published could not present either the facts of the case or the subtleties of the law. What the article lacked in analysis, however, it made up for with colorful verbs and adjectives. Taking lenders' side, Forbes complained that "many judges, ever more sympathetic to debtors, are allowing unscrupulous business owners to rob creditors." According to the article, a partnership led by Marc Wilkow "stiffed" the bank, paying only $ 55 million on a $ 93 million loan while retaining ownership of the building. The full text of this article appears in an appendix to this opinion. Its core paragraph reads:

By the mid-1990s, rents were not keeping up with costs. When the principal came due in January 1995, Wilkow and his partners pleaded poverty. To keep the bank from foreclosing, LaSalle Partnership filed for bankruptcy. Appraisals of the property came in at less than $ 60 million. In theory the bank was entitled to the entire amount. It suggested selling the property to the highest bidder. Determined to keep the building, LaSalle partners asked the bankruptcy court instead to accept a plan under which the bank would likely receive a fraction of what it was owed while the partners would keep the building. The bank, not the equity holder, would take the hit.

Wilkow replied with this libel suit under the diversity jurisdiction, contending that Forbes and Brigid McMenamin, the article's author, defamed him by asserting that he was in poverty (or, worse, "pleaded poverty" when he was solvent) and had filched the bank's money. According to Wilkow, Forbes should at least have informed its readers that the bank had lent the money without recourse against the partners, so that a downturn in the real estate market, rather than legal machinations, was the principal source of the bank's loss.

We don't think it necessary to consider either constitutional limits on liability for defamation or privileges under New York law, because this article is not defamatory under Illinois law in the first place. (The parties do not contest the district court's conclusion that Illinois law governs the claim and New York law the defense of privilege.) In Illinois, a "statement of fact is not shielded from an action for defamation by being prefaced with the words 'in my opinion,' but if it is plain that the speaker is expressing a subjective view, an interpretation, a theory, conjecture, or surmise, rather than claiming to be in possession of objectively verifiable facts, the statement is not actionable."

Characterizations such as "stiffing" and "rob" convey McMenamin's objection to the new-value exception. She expostulates against judicial willingness to allow debtors to retain interests in exchange for new value, not particularly against debtors' seizing whatever opportunities the law allows. Nothing in the article implies that Wilkow did (or even proposed) anything illegal; Forbes informed the reader that the district court and this court approved Wilkow's proposed plan of reorganization. Every detail in the article (other than the quotation in the final paragraph) comes from public documents; the article does not suggest that McMenamin knows extra information implying that Wilkow pulled the wool over judges' eyes or engaged in other misconduct. Colloquialisms such as "pleaded poverty" do not imply that Wilkow was destitute and failing to pay his personal creditors, an allegation that would have been defamatory. Read in context, the phrase conveys the idea that the partnership could not repay the loan out of rents received from the building's tenants. After all, inability to pay one's debts as they come due is an ordinary reason for bankruptcy, and 203 North LaSalle Street Partnership did file a petition in bankruptcy. Filing a bankruptcy petition is one way of "pleading poverty."

Although the article drips with disapproval of Wilkow's (and the judges') conduct, an author's opinion about business ethics isn't defamatory under Illinois law, as Haynes and Bryson explain. Informing the reader about the nonrecourse nature of the loan might have made Wilkow look better, but it would not have drawn the article's sting: that the partners got to keep the property even though the bank lost $ 38 million. The original deal's fundamental structure was that the partnership would repay the loan from rental income, and that if revenue was insufficient the bank could choose to foreclose (cutting its loss and reinvesting at the market rate elsewhere), to renegotiate a new interest rate with the partners, or to forebear in the hope that the market would improve and the full debt could yet be paid. These options collectively would be worth more than the market value of the building on the date of default. Yet the partners refused to honor these promises to the bank. They persuaded judges to eliminate the bank's rights to foreclose, to renegotiate, or to forebear and retain the full security interest. The plan of reorganization stripped down the security interest, prevented the bank from foreclosing, and required it to finance the partnership's operations for the next decade, at a rate of interest below what the bank would have charged in light of the newly revealed riskiness of the loan. If the real estate market fell further during that time, so that the partnership could not repay even the reduced debt, then the bank was going to lose still more money. The present value of the promises made to the bank in the plan of reorganization therefore was less than the appraised value of the building. But the partners stood to make a great deal of money if the market turned up again (as it did), for they had shucked $ 38 million in secured debt while retaining most appreciation in the property's value. Whether that was a sound use of bankruptcy reorganization, independent of the plan's new-value aspects, is open to question.

A reporter is entitled to state her view that an ethical entrepreneur should have offered the lender a better bargain, such as allowing the bank to foreclose and take its $ 55 million with certainty, avoiding the additional risk that this plan fastened on the lender. Foreclosure would have had serious consequences for the partners, who would have lost about $ 20 million in recaptured tax benefits. These potential losses created room for negotiation. Armed with the new-value exception, however, the partners were able to retain the tax benefits, sharing none with the bank in exchange for its approval of a restructuring, while depriving the bank of a security interest that would have been valuable when the market recovered. Although a reader might arch an eyebrow at Wilkow's strategy, an allegation of greed is not defamatory; sedulous pursuit of self-interest is the engine that propels a market economy. Capitalism certainly does not depend on sharp practices, but neither is an allegation of sharp dealing anything more than an uncharitable opinion. Illinois does not attach damages to name-calling. Wilkow's current and potential partners would have read this article as an endorsement of Wilkow's strategy; they want to invest with a general partner who drives the hardest possible bargain with lenders. By observing that Wilkow used every opening the courts allowed, Forbes may well have improved his standing with investors looking for real estate tax shelters (though surely it did not help his standing with lenders). No matter the net effect of the article, however, it was not defamatory under Illinois law, so the judgment of the district court is affirmed.