Could Tribune ESOP Suit Ruling Foreshadow Outcome in ‘Fraudulent Conveyance’ Bankruptcy Dispute?

By: Mark Fitzgerald

Even the Chicago press paid little attention over the weekend to U.S. District Judge Rebecca R. Pallmeyer’s rulings on motions to dismiss charges and defendants in the lawsuit brought by six current and former Los Angeles Times reporters against Tribune Co. Chairman Sam Zell and former directors of the Chicago media giant.

Yet, Pallmeyer’s ruling, posted on her Web site late Friday, offers a hint of how the court overseeing Tribune’s Chapter 11 bankruptcy case in Delaware may view the issue of whether the Zell-led deal that took Tribune private was a “fraudulent conveyance” — that is, a transaction so loaded with debt that it made the company insolvent from day one.

Zell and his co-defendants offered numerous reasons why Pallmeyer should dismiss them from the complaint, which accuses them of breaching their fiduciary duty to the workers in setting up the Employee Stock Ownership Plan (ESOP) that provided a way of taking Tribune private without paying corporate taxes. After the December 2007 transaction, Tribune had nearly $13 billion in debt, and a year later sought bankruptcy protection.

Among the defense arguments was that the L.A. Times employees, who hope to represent the entire class of former and current Tribune workers, failed to state a claim by alleging sufficient facts to show a legal wrong was committed.

But in two key rulings — keeping Zell and the ESOP’s trustee, Greatbanc Trust Co., as defendants — Pallmeyer addresses the same claims being made in the bankruptcy case by junior creditors who allege the senior lenders who hold most of Tribune’s debt knew the deal was doomed from the start, but funded it anyway. If they are successful in this “fraudulent conveyance” argument, the junior creditors could replace the senior creditors in the line divvying up Tribune’s post-bankruptcy assets.

“Plaintiffs allegations,” Pallmeyer wrote, “include, among others, that the deal saddled Tribune with so much debt that the company was very unlikely to succeed, that GreatBanc failed to ensure that the expert advice it sought was reasonable, and that GreatBanc failed to conduct its own thorough review of the deal.

“Defendants impugn these allegations as ‘wild shots at GreatBanc’s work.’ The court finds that they are not so wild that the claim must be dismissed. In particular, Plaintiffs’ allegations raise serious questions regarding whether GreatBanc adequately considered the risk created by the great amount of debt Tribune would take on in the deal. …

“Thus, on the issue of GreatBanc’s prudence in agreeing to the deal, the court is satisfied that Plaintiffs have pleaded sufficient facts to nudge their claim ‘across the line from conceivable to plausible.'”

In another place in her memo, Judge Pallmeyer concludes that the employees’ lawsuit also “states a claim” against Zell for “knowingly participating in a fiduciary breach.”

Zell’s attorneys won a partial victory, however, when Pallmeyer dismissed the lawsuit’s claim that Zell was a fiduciary of the ESOP even before he had any official role at Tribune because he proposed the going-private deal. “If merely proposing a deal to an ESOP were sufficient to create a fiduciary duty, then anyone proposing a deal to an ESOP would have the same conflict of interest that Plaintiffs attempt to pin on Zell,” she wrote. “In short, adopting Plaintiffs’ argument would make it impossible for anyone to negotiate a transaction with an ESOP for fear that it might be deemed unfavorable to the plan beneficiaries.”


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