• by Erik Sass  @eriksass1, September 13, 2010

The long, tortuous Tribune bankruptcy case -- never exactly a model of cooperation or coherency -- may be disintegrating altogether, judging by the latest legal moves by unsecured creditors. On Monday, they filed a petition with the Delaware bankruptcy court to ensure they have the right to sue Sam Zell if the current round of negotiations fail.

That outcome seems increasingly likely, following a critical report about the original buyout deal from an independent examiner and the subsequent collapse of management's first proposed bankruptcy reorganization plan.

The committee of eight unsecured creditors outlined a number of areas where they might find a legal basis to sue not only Sam Zell, but also Tribune's current and previous board of directors, as well as Valuation Research Corp., a financial consulting firm that gave the stamp of approval for the buyout deal in October 2007.

The committee accuses all these groups of cooperating "in a pattern of misconduct to enrich themselves at the expense of their debtors and their stakeholders." The list of potential allegations includes fraud, fraudulent transfer of funds, fiduciary negligence and "unjust enrichment."

The latest filing may reflect dimming prospects for an agreement between the company's management and its senior and unsecured creditors.

Two weeks ago, Tribune's current management team (mostly execs appointed by Sam Zell or his subordinates since the buyout) handed over responsibility for formulating a new bankruptcy reorganization plan to a four-person committee drawn from the company's board of directors. The Delaware bankruptcy court also appointed a mediator, U.S. Bankruptcy Judge Kevin Gross, to oversee Tribune's negotiations with its various creditors.

The hand-off was essentially an admission of defeat by management, following the collapse of its proposed bankruptcy reorganization plan. Senior lenders, including JP Morgan Chase, withdrew their support for the plan after a court-appointed examiner found evidence that some of the key elements of the 2007 buyout may have been fraudulent.

In August, 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 initial undertaking. Klee was investigating allegations brought by some bondholders that Tribune was doomed to bankruptcy from the start.

Although Klee found no evidence of wrongdoing on the part of the buyout team led by real-estate mogul Sam Zell, he said certain information suggested that some individuals in the company's former management team may have known it was not financially viable, making it a "fraudulent conveyance."

His 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 is 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."

Klee's findings provided ammunition for junior bondholders trying to stop the bankruptcy reorganization plan proposed by Tribune's management. These bondholders, who would be compensated after senior lenders and therefore stand to receive little, allege that the entire deal was insolvent from the start and therefore a "fraudulent conveyance."