Friday, March 5, 2010

Tribune Bondholders Sue Lenders Over Bankruptcy

WILMINGTON, Del., March 4 (Reuters) - Holders of bankrupt Tribune Co bonds have filed a lawsuit to disallow claims by banks that funded the company's $8.2 billion leveraged buyout, according to court documents filed on Thursday.

The lawsuit, filed in Delaware's bankruptcy court by Wilmington Trust Co on behalf of holders of $1 billion of bonds, blames the bankruptcy on the banks that financed the buyout that put real estate developer Sam Zell in control of the Tribune.

"The lead banks structured the LBO knowing that it would add a tremendous amount of debt to Tribune and render it insolvent," said the complaint.

The owner of the Chicago Tribune and Los Angeles Times filed for bankruptcy a year after Zell completed the buyout.

Bondholders want the leveraged-buyout debt, which currently has priority over bond debt, to be disallowed or subordinated so that bondholders are paid first.

For bondholders, litigation represents their best hope for a recovery from a company that is likely worth less than the senior, buyout-related debt.

A similar claim was made successfully against lenders to Tousa Inc (TOUSQ.PK), a bankrupt Florida homebuilder. Banks in that case were ordered to return $600 million.

The complaint said that the Tribune and its creditors did not benefit by incurring the leveraged buyout debt, which was used to pay Tribune's existing shareholders and refinance the company's senior loans -- which were held by the same lenders who financed the leverage buyout.

The complaint was filed against operations of JPMorgan Chase & Co (JPM.N), Bank of America (BAC.N), Citigroup Inc (C.N), Barclays PLC (BARC.L) and Morgan Stanley (MS.N).

Last month, Kevin Carey, the bankruptcy judge overseeing the case, gave Tribune to the end of this month to file a plan of reorganization before he allows competing plans.

Carey also postponed ruling on a request by Wilmington Trust to appoint an examiner to investigate the leveraged buyout. Wilmington Trust has complained the company and senior lenders were cutting bondholders out of talks to reorganize the company.

The case is In re Tribune Co, U.S. Bankruptcy Court, District of Delaware, No. 08-13141.
Thursday's adversary lawsuit is Wilmington Trust Co, as Successor Indenture Trustee v JP Morgan Chase Bank et al, U.S. Bankruptcy Court, District of Delaware, No. 10-50732.

(Reporting by Tom Hals; Editing by Lincoln Feast)

In an earlier Reuters article:

Feb 12 (Reuters) - Tribune Co's senior creditors warned that allowing bondholders to sue over the legitimacy of $10 billion of the bankrupt company's debt would touch off "World War III" and upend settlement talks, according to court documents.

A group of hedge funds that holds $4.6 billion in senior secured claims on the bankrupt media company also said in court papers that if claims about the legitimacy of the debt exist, they should be pursued by Tribune and not unsecured creditors.

"The committee seeks authorization to initiate the bankruptcy equivalent of World War III -- with the apparent objective of avoiding upwards of $10 billion of debt -- without a single statement about why commencement of litigation at this critical junction in the reorganization is necessary or appropriate," said the group in a court document.

The dispute stems from a request by the official committee of unsecured creditors to begin pursuing claims relating to the debt that financed the 2007 leveraged buyout of Tribune.
Real estate developer Sam Zell took control of Tribune in 2007 through the leveraged buyout and the company, which owns the Chicago Tribune and Los Angeles Times, filed for bankruptcy in 2008.

The committee said there is evidence that $10 billion of LBO debt was fraudulently incurred and therefore holders of the debt should have their claims disallowed or subordinated below the claims of bondholders. The committee also wants to recover fees and interest paid on the debt.

The dispute over the leveraged buyout debt is the final major roadblock to the company's emergence from bankruptcy. For the unsecured creditors, subordinating senior debt may be their best avenue for a recovery.

Creditors often begin investigations of fraudulently incurred debt and arrive at a settlement that may improve the recovery for unsecured claimants, as was recently the case in the bankruptcy of Magna Entertainment Corp.

The group of senior secured creditors in the Tribune case have countered the push to pursue fraudulent debt claims with a proposal to bring Tribune's newspapers and television stations out of bankruptcy, largely under their control.

They proposed leaving the parent in Chapter 11 until the dispute over the leveraged buyout is settled. The judge rejected that proposal.

JPMorgan Chase & Co (JPM.N), which holds senior claims against Tribune, requested the court deny the committee's request to begin litigating its claims regarding the leveraged buyout debt.
The bank said negotiations should be given more time "rather than allowing the process to be overtaken by a rash of competing motions by various parties jockeying for position."

The case is In re Tribune Co, U.S. Bankruptcy Court, District of Delaware, No. 08-13141.
(Reporting by Tom Hals; Editing by Phil Berlowitz)

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