• by Erik Sass  @eriksass1, August 18, 2010

The judge presiding over Tribune Co.'s bankruptcy case has extended the deadline for the company to put its bankruptcy reorganization plan up for a vote by creditors and shareholders. That gives the company more time to negotiate with aggrieved bondholders, who recently got more ammunition in the form of critical findings from an independent examiner appointed by the court.

The judge granted the open-ended extension (canceling the vote scheduled for this Friday, without setting a new date) in response to a request from Tribune, which hopes to eventually obtain the support of the dissenting bondholders for its reorganization plan.

A new date for the vote may be set at a follow-up hearing on Friday, according to Tribune's attorneys.

Earlier this month, Kenneth Klee, the independent examiner appointed by the bankruptcy court to review the deal, filed a report that was critical of some aspects of the deal. Klee was investigating allegations brought by some bondholders that Tribune was doomed to bankruptcy from the start.

Although he found no evidence of wrongdoing on the part of the buyout team led by real-estate mogul Sam Zell, Klee said certain information he uncovered suggested the company's former management team and lenders behind the deal (including JP Morgan and Bank of America) may have known it was not financially viable, making it a "fraudulent conveyance."

Klee's report included the revelation that at least one investment bank, Houlihan Lokey, refused to give the deal a stamp of approval by rendering a favorable "solvency opinion" in March 2007; it considered the deal "DOA."

This detail is important because it suggests that responsible parties among the sellers and lenders may have understood that the deal was bound to lead to insolvency. However, they skirted the issue by simply taking the transaction to another firm, Valuation Research Corp., which agreed to render a favorable solvency opinion, allowing the buyout to move forward.

Klee's report also criticized VRC for failing to investigate the financial condition of the company more thoroughly.

In excerpts from his report to the bankruptcy court, Klee cast suspicion on Tribune's assumption of $3.6 billion in debt, saying: "It is somewhat likely that a court would conclude that the Step Two Transactions constituted intentional fraudulent transfers and fraudulently incurred obligation."

By having the entire deal declared illegitimate from the beginning, the bondholders hope to halt the bankruptcy reorganization plan proposed by Tribune's current management, which would compensate banks and senior credits involved in the buyout before the bondholders.