Tribune Meltdown: More Lawsuits, More Departures

This may be remembered as the week Tribune Co. finally imploded, with more top execs joining a high-profile exodus and creditors filing two lawsuits against members of the current and previous management, as long threatened.

The Committee of Unsecured Creditors, which includes eight Tribune bondholders, brought two lawsuits against most of the key principals involved in the original 2007 deal to take the company private. They include chairman Sam Zell, former CEO Dennis FitzSimons, Tribune board members past and present, including former directors Betsy Holden and William Osborn, major shareholders like the Chandler Trust, and some of the secured creditors who helped fund the deal.

Among the big banks named as defendants in the suit are JPMorgan Chase, Merrill Lynch, Citigroup, and Wells Fargo & Co.

Valuation Research Corp. is being sued for breach of fiduciary duty and unjust enrichment, while Morgan Stanley, which served as an adviser to Tribune's special committee overseeing the transaction, is being sued for professional malpractice.

advertisement

advertisement

Altogether, over 100 individuals or companies were named as defendants in the two lawsuits.

Calling the deal "among the worst in American corporate history," the Committee of Unsecured Creditors essentially accuses Tribune's former and current management of cooperating with banks and major shareholders to execute an untenable buyout deal, which left unsecured creditors, including bondholders, holding the bag.

These same unsecured creditors have consistently opposed a series of plans for bankruptcy reorganization proposed by Tribune's now-decimated current management and supported by lenders, including JP Morgan Chase and senior creditors Angelo Gordon & Co. and Oaktree Capital Management L.P.

The unsecured creditors have argued that the entire deal was doomed to bankruptcy from the beginning, making it a "fraudulent conveyance" and therefore illegitimate. By calling the legitimacy of the original buyout deal into question, the unsecured creditors also called into question the right of current management and lenders behind the deal to plan the bankruptcy reorganization.

The lawsuits were expected. In September, the unsecured creditors obtained explicit permission from the bankruptcy court to bring lawsuits against the principals in the 2007 deal, and the court has ordered about $2 billion set aside in a "litigation trust" to deal with their unresolved claims, which center on possibly fraudulent "Step 2" funding to the tune of $3.7 billion.

They are not contesting the planned settlement of claims relating to the "Step 1" transactions, which amounted to about $5 billion -- the majority of the debt involved in the Tribune bankruptcy.

Separately, another lawsuit (apart from the bankruptcy court case) was brought Friday by a group calling itself the Step-One Credit Agreement Lenders (SoCal, composed of distressed debt owners Alden Global Capital, Greywolf Capital, and Arrowgrass) against JPMorgan, Merrill Lynch, Citicorp and Bank of America. Like the unsecured creditors, the distressed debt holders cite findings by independent examiner Kenneth Klee, released this summer, suggesting that the second round of funding may have been fraudulent.

Specifically, their complaint asserts that "The Lead Banks knew that this financing was barred by the terms of the Credit Agreement and it was tainted with fraud and other misconduct," but went ahead anyway because they were "improperly motivated by tens of millions of dollars worth of fees and the desire to curry favor with the billionaire Zell."

Also on Wednesday, Crain's Chicago Business reported that John Martin, Tribune's interactive vice president for research and marketing, is leaving the company, along with Barb Buchwald, senior vice president for human resources, and human resources vice presidents Ken Perry and Louise Sheard.

Next story loading loading..