Tribune Co. creditors seek to sue Zell over LBO

By Michael Oneal
Posted Sep. 13, 2010 at 5:31 p.m.

The unsecured creditor’s committee in Tribune Co.’s bankruptcy case asked a Delaware judge Monday for the right to sue Chicago real estate magnate Sam Zell, company officials and others who participated in the company’s ill-fated 2007 leveraged buyout.

The motion followed a similar filing the committee made in February seeking the right to bring claims against the banks that lent more than $8 billion to finance the buyout, including JPMorgan Chase and Citibank.

Monday’s filing was partly procedural and the document said the request is not aimed at disrupting a court-ordered mediation in the case, which is scheduled for later this month.

Lawyers for the committee had signaled at a previous court hearing that they would likely file a new complaint in the case and ask for permission to pursue it since U.S. bankruptcy law would require bringing litigation surrounding the buyout within two years of the company’s filing for Chapter 11 protection.

Tribune Co. made its initial filing on Dec. 8, 2007, so the committee would have to win approval to bring its complaint before December this year.

Whether the committee actually launches its buyout-related litigation will likely depend on the outcome of the court-ordered mediation effort, which has yet to begin.

Tribune Co. and a welter of warring creditor groups, including the committee, have been working since Sept. 1 to prepare position papers for the mediator, U.S. Bankruptcy Judge Kevin Gross. Gross will then try to broker a compromise settlement of the buyout charges at sessions scheduled for Sept. 26 and 27.

Sources on all sides of the case acknowledged that forging a workable compromise will pose a stiff challenge for Gross. But in its papers Monday, the Official Committee of Unsecured  Creditors said it “wholeheartedly supports the mediation process and the efforts of Judge Gross and the parties to achieve a consensual plan.”

According to the motion, the committee’s complaint would focus on allegations that Zell’s two-step, $8.2 billion buyout  left the company insolvent, benefitting certain directors, officers and shareholders of the company, including Zell, at the expense of junior creditors and the bankruptcy estate. Those claims would be added on to claims made in the February that the lenders to the transaction also benefitted improperly.

The motion notes that the complaint would depend on the committee’s own investigation and that of Kenneth Klee, an independent, court-appointed examiner in the case who filed his own assessment of the potential charges in late July.

Yet unlike the Klee report, Monday’s filing raised specific charges of breach of fiduciary duty against Zell, Tribune Co.’s board at the time of the buyout and officers of the company.

“Zell acted in the pursuit of his own personal interests and ignored the foreseeable catastrophic consequences of the LBO transaction,” the motion said.

The complaint goes on to single out large Tribune Co. shareholders at the time of the transaction, including the wealthy Chandler family of California, and claims they aided and abetted the board’s breach of fiduciary duty. It also claims that officers who got payments and stock grants related to the buyout profited unjustly. Finally, the motion targets Valuation Research Corp., which it said aided and abetted the fiduciary breach and committed professional malpractice by issuing a solvency opinion supporting the deal that could not be “justified in light of applicable professional standards.”

Under bankruptcy law, the debtor holds the right to bring such claims, since the so-called “fraudulent conveyance” ultimately damaged the bankruptcy estate. But since Tribune Co. officers and directors are potential targets of the litigation, the committee argued that it should be allowed to stand in for the debtor to avoid conflicts of interest that would weaken the case.

A spokesman for Tribune Co., which owns the Chicago Tribune, Los Angeles Times, WGN- Ch. 9 and other media properties, declined to comment.

In a separate motion Monday that highlights the persistent contentiousness the Tribune Co. case,  Aurelius Capital Management, a hedge fund that owns junior Tribune Co. bonds, asked the judge to disqualify New York law firm Chadbourne & Parke from representing the creditors committee when it comes to the buyout claims.

The filing argued that Chadbourne is conflicted because it also represents some of the buyout lenders, including JPMorgan, in other matters and, therefore, can’t be counted on to take a hard line against them. Chadbourne has acknowledged the conflicts in the past but has taken measures to isolate itself from decisions involving the lenders.

Aurelius wants the judge to disqualify Chadbourne  before the mediation sessions and asked for a hearing on the matter as soon as possible.

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One comment:

  1. SueSantoFan Sep. 13, 2010 at 4:22 pm

    How do you sue for stupidity? Oh, wait, Zell could sue Pig Virus and his bosses for such!