WILMINGTON, Del. — Confirmation hearings in Tribune Co.’s bankruptcy case got under way Tuesday with a full day of testimony about the company’s tortured on-again-off-again effort to forge a settlement among its warring creditors.

Investment banker David Kurtz of Lazard Ltd., who spearheaded negotiations on behalf of Chicago-based Tribune Co. for two years, described a “painful and difficult” process paralyzed by the obstructionist behavior among the creditors.

He said efforts to broker a deal among creditors sparring over legal claims related to Tribune Co.’s 2007 leverage buyout were repeatedly undone by the aggressive tactics of hedge funds on all sides of the case who bought the company’s distressed debt hoping to profit from a restructuring.

But one of those hedge funds, Aurelius Capital Management, responded with evidence aimed at showing that Tribune Co.’s efforts to forge a deal fair to all parties may have been compromised by management’s close ties to Chicago billionaire Sam Zell, who sponsored the disastrous 2007 buyout and who is a potential defendant of legal claims at the center of the case. Tribune Co. owns the Chicago Tribune and other media properties.

In cross examining Kurtz, Aurelius attorney David Zensky of Akin Gump Strauss Hauer & Feld pressed evidence that Tribune Co. Chief Restructuring Officer Donald Liebentritt shared significant financial interests with Zell, including a $500,000 side investment in the Tribune Co. buyout (a stake that, like Zell’s, became essentially worthless when the company filed for Chapter 11).

An e-mail produced in the case shows that before becoming Tribune Co.’s general counsel after Zell took over, Liebentritt worked for the Chicago financier for close to 30 years. He continues to collect a salary for presiding over the Zell family trusts and has many investments in other Zell vehicles.

Zensky suggested that such ties made it impossible for Liebentritt to fairly represent a bankruptcy estate that has an interest in suing his former boss. But Kurtz responded that he never witnessed behavior that showed bias toward Zell and was satisfied that Liebentritt’s relationship did not affect the case.

Moreover, Tribune Co.’s board knew of Liebentritt’s ties to Zell. The email Zensky quoted was a communication from Liebentritt to the board officially disclosing his Zell relationship under a section beginning “Things you should recall/know about me.”

Over the next two weeks of hearings, lawyers for two competing restructuring plans will try to convince U.S. Bankruptcy Judge Kevin Carey that their plan provides the fairest recovery for the most constituents in the case.

Tribune Co., the Official Committee of Unsecured Creditors, JPMorgan Chase and hedge funds Oaktree Capital Management and Angelo, Gordon & Co. have proposed settling the case by offering junior bondholders around 35 cents on the dollar. But the junior group, led by Aurelius, hopes to squeeze out a higher recovery by dragging the senior group into years of ligation –or presenting a credible threat of doing so.

Kurtz’s testimony drew a vivid picture of how the case has stalemated. He noted that Tribune Co. and its creditors were so far apart in their estimations of how to resolve the case that they could only “talk about talking” in the early months of the case. Actually sitting down at the bargaining table was out of the question.

After months of trying, Tribune Co. was able to pull together a deal last April that even Aurelius, a much smaller player then, decided to accept. It included JPMorgan and Angelo, Gordon on the senior creditor side and Centerbridge Capital, then the biggest junior bondholder, on the other side. But Kurtz said senior creditor Oaktree Capital ultimately torpedoed that deal by insisting that the settlement paid way too much to junior bondholders like Centerbridge and Aurelius. Oaktree then took multiple steps to build up a blocking position on the senior side that made the plan impossible for Carey to confirm.

By October, the spoiler became Aurelius, which had bought out Centerbridge’s stake in August. That was after a court-appointed examiner in the case determined in late July that at least some of the legal claims related to the buyout were very likely to succeed. That undid the April settlement and left the case in limbo. Oaktree eventually joined a new settlement that became the heart of the current plan sponsored by senior creditors and the company. But Aurelius dug in its heels, saying the plan grossly underestimates the value of the legal claims.

Sensitive to the fact his client Aurelius is often held up as the poster child of the modern pugnacious world of bankruptcy court, Zensky pointed out a comment Kurtz made in a deposition taken last week.

Asked if he thought Aurelius or Oaktree was tougher to deal with Kurtz said “It would be an insult to one to say the other was more aggressive.”

mdoneal@tribune.com