Tribune Co. creditors seek special counsel to probe buyout, could sue to recover money

By Ameet Sachdev
Tribune reporter

Tribune Co. creditors have asked the bankruptcy court for permission to hire special counsel to further investigate the $8.2 billion leveraged buyout of the Chicago-based media company engineered by real estate magnate Sam Zell.

The inquiry is common practice when a bankruptcy follows closely on the heels of an LBO, said bankruptcy experts. Zell closed the transaction that took Tribune Co. private in December 2007.

The new debt obligations were too big a burden amid rapidly declining advertising revenues, sending the company, parent of the Chicago Tribune, into bankruptcy in December 2008.

Creditors have not filed a lawsuit seeking to recover money against parties that were involved in the going-private transaction, which established an employee stock ownership plan to become majority owner of the company.

But the court filing on Thursday signaled that they are considering pursuing litigation, said Chicago-based restructuring expert Bill Brandt.With creditors likely to collect only a small percentage of their debts, "it is an absolute certainty that creditors look to the realm of lawsuits to try and get more money out," Brandt added.

There is precedent for challenging LBOs in bankruptcy court on grounds of "fraudulent conveyance." Such suits argue that LBOs have left companies with too much debt to operate and benefited former executives, bankers, lawyers and financial advisers at the creditors' expense. There's usually not a question of fraud with the buyout, but rather the issue of whether the transaction was commercially reasonable.

Creditors have a big burden of proof, said Douglas Baird, a professor at the University of Chicago Law School who specializes in bankruptcy issues."You have to make sure you're not just a Monday morning quarterback," Baird said.

Howard Seife, an attorney at New York-based Chadbourne & Parke who represents the creditors committee, did not return a phone call seeking comment on the committee's request to hire special counsel.

The need for special counsel arose because Chadbourne, citing conflicts of interest, would not be able to investigate or bring lawsuits against certain parties in the LBO, court papers said.

The committee selected the Washington-based law firm of Zuckerman Spaeder as special counsel. Two members of the committee, affiliates of JPMorgan Chase & Co. and Merrill Lynch, are not participating in the review of the LBO because those companies helped finance the deal.

Fraudulent-conveyance suits in bankruptcy can target a number of entities, including financiers, current and former executives and even public shareholders who made possible or profited from a leveraged buyout.

In a statement Tribune Co. said, "We have been fully cooperating with the review of our 2007 going-private transaction by the unsecured creditors' committee."

The company, which declined to comment further, won an extension this week to file a reorganization plan with the court by Nov. 30.

The committee isn't the only one looking into the complicated ESOP.

A group of current and former employees of Tribune Co.'s Los Angeles Times have alleged in a suit that Zell and Tribune Co. failed to uphold their fiduciary duty. The U.S. Labor Department and the Internal Revenue Service also have opened probes into the ESOP.

Tribune reporter Julie Johnsson contributed to this report. asachdev@tribune.com8