Independent Examiner Urged In Tribune Bankruptcy Dispute

By Michael Oneal, Tribune reporter

In advance of what promises to be a closely watched hearing Thursday in Tribune Co.'s Chapter 11 bankruptcy case, the U.S. trustee's office asked U.S. Bankruptcy Judge Kevin Carey to appoint an examiner to investigate charges that Sam Zell's 2007 leveraged buyout of the Chicago-based media conglomerate was improper.

The move supports a motion filed by a deeply subordinated group of Tribune Co. bondholders represented by Wilmington Trust Co. that has argued that the transaction was an example of "fraudulent conveyance," meaning the debt-heavy LBO itself rendered Tribune Co. bankrupt from the start.

Wilmington Trust's filing came in response to an earlier motion by the Official Committee of Unsecured Creditors, which petitioned Carey for permission to file its own complaint alleging fraudulent conveyance against the senior lenders and various other parties involved in the 2007 deal.

The difference is, Wilmington Trust said that the creditor's committee is unlikely to bring a strong enough case because of conflicts of interest. An independent examiner, it argued, would be better suited to pursue the claims without bias.

An attorney for the U.S. trustee, which is charged with enforcing bankruptcy laws, offered no opinion on the merits of a fraudulent conveyance case. But she agreed with Wilmington Trust that it was important that an independent examiner scrutinize the evidence. An arbiter who is not conflicted, she argued, likely would speed up a settlement between the myriad constituencies battling over Tribune Co.'s assets.

Tribune Co., owner of the Chicago Tribune, and its senior creditors likely would be the defendants in a fraudulent conveyance case if the judge allows it and, not surprisingly, have argued against it. Tribune Co. contends that further litigation would only generate more confusion and expense. The company has asked for more time to negotiate a settlement, which would take the potential charges into account.

Tribune has been trying to get creditors with the largest claims in the bankruptcy to agree to a plan that splits the company among them and avoids a lawsuit over the buyout. Those creditors include bondholders, hedge funds that hold bank debt, and banks that funded the more than $8 billion buyout.

The committee will seek to recover as much as $2.5 billion paid to prior lenders, $2 billion in principal and interest payments on the new debt, and $200 million in fees collected by the buyout lenders.

The buyout dispute pits bondholders owed as much as $1.26 billion against the hedge funds and JPMorgan Chase Bank NA, the agent for another lender group.

The bondholders, including Law Debenture Trust Co. of New York and Centerbridge Credit Advisors, hold most of the debentures issued in 1996, which are due in 2027 and 2096. The hedge funds include Anchorage Advisors LLC, Contrarian Funds LLC and KKR Strategic Capital Holdings I.

One large group of senior creditors has opposed giving Tribune Co. more time. It has offered a separate blueprint for reorganizing Tribune Co. assets that essentially would dodge the fraudulent conveyance charges.

The committee says there are grounds for objecting to $10 billion in claims asserted by the LBO lenders against the operating companies. In addition, the committee wants to have permission from the judge to sue to recover $2.5 billion paid to prior lenders, $2 billion in principal and interest payments on the new debt, and $200 million in fees to the LBO lenders.

The committee's proposed complaint was filed in secret with the bankruptcy judge who must decide if the complaint will be made public.

The Feb. 18 hearing will also see the company asking for an extension until June 8 of the exclusive right to propose a Chapter 11 plan. The company promised that if a plan wasn't filed before the hearing it would tell the court about progress toward a plan that includes a global settlement or one that provides a framework for resolving issues that have divided creditor classes.

Late last year, senior secured lenders owed $4.4 billion didn't succeed in their effort at being allowed to propose a reorganization plan for the operating subsidiaries. By taking the operating companies out of bankruptcy, they would have left the holding company in bankruptcy while everyone litigates over the alleged fraudulent transfers.

The Chapter 11 reorganization, begun in December 2008, has been hung up in investigations over whether the leveraged buyout gave rise to fraudulent transfer claims. Tribune listed $13 billion in debt for borrowed money and assets of $7.6 billion. It owns the Chicago Tribune, Los Angeles Times, six other newspapers and 23 television stations.

The case is In re Tribune Co., 08-13141, U.S. Bankruptcy Court, District of Delaware (Wilmington).