They allege the lenders knew the company was being made insolvent.
By Michael Oneal, Chicago Tribune
A group of hedge funds has sued the banks that funded Tribune Co.'s 2007 leveraged buyout, alleging that the lenders knowingly rendered the company insolvent and precipitated its 2008 bankruptcy.
The lawsuit, filed Friday in New York state court against banks owned by JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc., is not technically part of Tribune Co.'s contentious Chapter 11 case playing out in U.S. Bankruptcy Court in Delaware.
But it arises from the same failed transaction led by Chicago real estate magnate Sam Zell that has become the focus of the bankruptcy proceedings.
The suit is designed to put pressure on the banks in negotiations over how shares of Tribune will be divvied up among its creditors.
The plaintiffs hold more than $800 million of Tribune debt that was marketed by the banks in June 2007 after the first step of the controversial two-step buyout of the company, which owns the Los Angeles Times, KTLA-TV Channel 5, the Chicago Tribune and other media properties.
Although from the start there was a plan for Tribune to issue $3.7 billion in additional debt in a second step of the transaction, the hedge funds allege that the company's performance deteriorated so sharply after the first step that the banks never should have sold the second round of debt.
The lawsuit says the lenders knew the second step would render the company insolvent but pushed ahead anyway, "improperly motivated by tens of millions of dollars worth of fees and the desire to curry favor with the billionaire Zell."
Spokeswomen for Bank of America and Citigroup declined to comment on the suit. A JPMorgan representative couldn't be reached.
The hedge fund group this week said it also planned to file its own Chapter 11 restructuring plan for Tribune before a Friday night deadline. That plan would compete with one filed Oct. 22 by the banks, Tribune management and two other hedge-fund creditors.
Other creditors also were said to be preparing to file alternative reorganization plans.
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