Junior Creditors Press Their Case Against Banks, Zell in Tribune Co. Bankruptcy

By: Mark Fitzgerald Management at Tribune Co., Sam Zell and the banks that would finance the leveraged buyout (LBO) Zell led to take the Chicago media giant private all knew before the deal was sealed in December 2007 that it would likely bankrupt the company, a group of bondholders allege in documents filed in Bankruptcy Court in Delaware.

"In the months and weeks leading to the LBO, Tribune knew that actual results were falling short of its projections and that the proposed LBO was incredibly risky for company," wrote lawyers for Wilmington Trust, which is representing a group of holders of so-called PHONES and other unsecured notes who are well back in the line of Tribune creditors.

"Like Tribune, the LBO banks also consciously disregarded the market's prediction and their own internal analysis in large part because the PHONES and senior notes provided a cushion and would bear the brunt of insolvency," Wilmington Trust said.

In a flurry of court filings Thursday, all sides in the bankruptcy traded volleys over Wilmington Trust's request to be allowed to argue the Tribune LBO was a "fraudulent conveyance," that is, a deal that was known to be doomed from the start. The group of noteholders also want the court to appoint an examiner, claiming the official committee of unsecured creditors is not pursuing obvious wrongdoing in the deal.

Senior Tribune creditors, who would share most of Tribune's remaining assets when it emerges from bankruptcy reorganization, argue allowing the fraudulent conveyance allegations and appointing an examiner would be disruptive to "delicate" ongoing negotiations and would waste Tribune resources.

"Despite the (Wilmington Trust) motion's overwrought tone, the issue presented for judicial determination is straightforward: should the Court appoint an examiner to conduct a disruptive, expensive and wholly-duplicative investigation of potential causes of action already being investigated and pursued by the committee," attorneys for the official committee of unsecured creditors wrote.

The PHONES holders, who bought notes issued in 1999 when Tribune was prosperous, are simply angry that their debt is "deeply subordinated" by contract, the committee argues. The fraudulent conveyance allegations are just a way to get negotiating leverage,

"Any suggestion that the committee has been sluggish in pursuing those claims is belied by the committee's clear and decisive step towards putting its months of preparation and planning into action," its filing said. "The real problem here is not that the Committee's makeup has compromised or impaired its ability to investigate and pursue potential claims arising from the LBO, but rather that Wilmington Trust, as the indenture trustee for a deeply subordinated constituency at the very bottom of the Debtors' debt structure, has been unable to direct the committee course of action to its own parochial satisfaction."

Large parts of the Wilmington Trust filing is blacked out under a court seal.