Tribune Shareholders That Sold To Zell Could Lose Billions

by , Apr 19, 2011, 5:35 PM
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What originally looked like an outside chance bargaining maneuver is coming closer to reality in the never-ending saga of the Tribune Co. bankruptcy, as the one group of clear winners -- the former shareholders who sold their stakes in the company to Sam Zell in 2007 -- now stand to lose billions from these payouts, according to The Wall Street Journal.

This scenario, which the WSJ described as an "unprecedented legal development," depends on the outcome of litigation brought by plaintiffs contending that the entire deal was illegitimate because it was knowingly based on false assumptions.

Altogether, some $8 billion in payouts to ex-Tribune shareholders are at stake, although creditors are unlikely to win back more than $3 billion. Among those threatened by the lawsuits are Stark Investments, a hedge fund, the Chandler family, the McCormick and Cantigny foundations, and former Tribune CEO Dennis FitzSimons, all of whom received large payouts from Sam Zell's deal to take Tribune private as an employee-owned company.

The aggrieved creditors and bondholders demanding their money back include Aurelius Capital Management LP, which in September demanded that Tribune's current management be removed and replaced with court-appointed trustees. (Tribune's senior management has since been replaced.)

The Tribune bankruptcy has turned into a legal roller coaster, with bankruptcy protection followed by litigation as rival groups of creditors, bondholders and former and current management press competing claims to cash and company equity.

Back in October, Tribune bondholders Angelo, Gordon & Co. and Oaktree Capital Management LP (which both purchased distressed Tribune debt) reached a deal with senior lenders, including JP Morgan Chase and Bank of America, allowing Tribune to exit Chapter 11 bankruptcy protection.

The agreement preserved a multipart plan agreed to (at great length) by various parties, which calls for settling claims related to the $6 billion "Step 1," but allows claims related to the $2 billion "Step 2" to be decided in separate litigation, now in motion.

The deal essentially anticipated lawsuits against members of Tribune's former management, their advisors and other parties by the unsecured creditors.

This agreement placed all of the claims related to the $2 billion "Step 2" transaction in a litigation trust -- a legal device created to allow the uncontested parts of the bankruptcy reorganization to proceed while leaving others unresolved, pending further legal wrangling. According to Tribune, the unsecured creditors could recover up to 50% of their claim in cash from this plan.

The whole bankruptcy process was thrown for a loop in August 2010, when a report by independent examiner Kenneth Klee suggested that members of the company's former management may have known the deal 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. Tribune management 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. As a result, he warned that it was "somewhat likely that a court would conclude that the Step Two Transactions [when the company assumed $3.6 billion in debt] constituted intentional fraudulent transfers and fraudulently incurred obligation."

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