• by Erik Sass  @eriksass1, December 8, 2010

Randy Michaels, the former CEO of the bankrupt Tribune Co., is in the hot seat again for erasing emails and data related to the ongoing controversy over bankruptcy reorganization plans from his computer, after a forensic examiner was unable to locate the relevant messages and data. However, the examiner was able to retrieve 15 emails from the ex-CEO's corporate phone.

The loss of the emails on Michaels' computer may not be an insuperable obstacle, since Tribune should also have copies of the emails on its servers; investigators are currently trying to locate them there. However, it's not clear whether the other data (which wasn't described) was duplicated anywhere else; Tribune is recovering "back-up" tapes from September 2009 which may contain some of the deleted data.

Meanwhile, the company's current management is asking the Delaware bankruptcy court to investigate the circumstances surrounding Michaels' deletion of the emails and data, and is also requesting that Michaels' colleagues and associates save all their email exchanges with him, to allow examiners to reconstruct missing exchanges.

The Delaware bankruptcy court is said to be close to approving four competing bankruptcy reorganization plans for consideration by Tribune's creditors, who will vote at a special meeting beginning December 22. The plans were submitted by rival groups of creditors, including senior lenders led by JP Morgan Chase and bondholders who have affiliated themselves in an Official Committee of Unsecured Creditors.

The drawn-out Tribune bankruptcy has been marked by controversy and conflict between various groups of creditors, who have disagreed over the correct apportionment of debt repayments based on when and how they loaned funds to the beleaguered company.

Banks and private equity firms that arranged funding for the $8 billion transaction to take Tribune private in 2007 have claimed priority in the division of spoils, but they have been challenged by Tribune bondholders and companies which specialize in buying up distressed debt. These latter groups have argued that the entire going-private deal was doomed to insolvency from the beginning, and therefore constitutes a "fraudulent conveyance."

In the latest phase, the legal conflict has centered on a disagreement over whether to separate the bankruptcy claims based on the nature and timing of the original loans. Some parties, including senior lenders and mediators, have proposed setting aside claims relating to the disputed -- and possibly fraudulent -- Step 2 funding in a litigation trust, where they can be settled by lawsuits pitting unsecured creditors and bondholders against banks, Tribune's management, and financial advisory firms.

This process would allow the settlement of claims related to the larger Step 1 funding phase through one of the bankruptcy reorganization plans now under consideration; these plans are expected to differ in their apportionment of competing Step 1 and Step 2 claims.

In fact, the lawsuits have already begun. In November 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.

Separately, another lawsuit was brought in November 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.