Tribune Creditors Assert 'Fraudulent Conveyance'
As expected, junior unsecured creditors have filed a motion in bankruptcy court alleging that the multibillion-dollar deal to take Tribune Co. private in 2007 was insolvent from the start -- and proceeded despite the fact that relevant parties knew this to be the case.
That makes the transaction a "fraudulent conveyance" and effectively cancels current bankruptcy proceedings -- if the court agrees with these charges. The move is a bid by the junior creditors to recover more money than they would get from the current bankruptcy plan filed by Tribune Co. management with support from senior creditors.
The document asserting fraudulent conveyance was filed by Wilmington Trust on behalf of a group of junior creditors who stand to recover virtually nothing from the Tribune bankruptcy as it is currently planned.
The motion read, in part: "In the months and weeks leading to the LBO [leveraged buyout], Tribune knew that actual results were falling short of its projections and that the proposed LBO was incredibly risky for company." It added that "the LBO banks also consciously disregarded the market's prediction and their own internal analysis," counting on the unsecured creditors to absorb most of the damage from the bankruptcy -- in essence, serving as financial cannon fodder.
The documents were filed following the unsecured creditors' examination of internal financial documents and communications from Tribune management, the takeover team led by Sam Zell, and the banks that helped fund the deal.
Among other things, the unsecured creditors want the court to appoint an independent examiner representing their interests who can investigate the matter further. They allege that the existing committee of examiners appointed to represent unsecured creditors has failed to look into the claims of fraudulent conveyance.
Like the Watergate scandal, the outcome of the Tribune bankruptcy would appear to hinge on who knew what, and when they knew it.
If Zell's buyout team was acting in good faith, it will be harder to prove the allegation that the deal was a fraudulent conveyance. Evidence here is ambiguous. In 2008, for example, Zell told the newsroom of the Baltimore Sun that Tribune's previous management apparently overestimated cash flow in 2007 by up to 20%, misrepresenting (accidentally or deliberately) a key element in the company's credit covenants.
On the other hand, it struck some observers as odd that a savvy financial operator like Zell could be duped so easily.