Tribune creditors sue ex-shareholders for billions

By Tom Hals

WILMINGTON, Delaware (Reuters) - Tribune Co noteholders and retirees sued the company's former shareholders for billions of dollars, alleging the 2007 buyout of the owner of the Chicago Tribune and Los Angeles Times forced it to file for bankruptcy.

"One of the industry's most highly leveraged buy-outs -- lined the pockets of Tribune's former shareholders with $8.5 billion in cash at the expense of Tribune's creditors and precipitated Tribune's careen into bankruptcy," said Deutsche Bank Trust Company Americas, one of the plaintiffs.

The unit of Deutsche Bank AG <DBKGn.DE> filed lawsuits in several courts on Thursday in its capacity as trustee for senior notes.

The plaintiffs want to recover money paid to the shareholders of Tribune, arguing the deal amounted to a "fraudulent transfer" that put the publisher on its path to its December 2008 bankruptcy.

While the cashed-out shareholders received the principal benefit in the buyout, the target company received no benefit to offset the greater risk of running a highly-leveraged firm, Deutsche Bank said in the court filing.

The bankruptcy wiped out noteholders, who are owed more than $2 billion.

Tribune Co filed for bankruptcy in 2008, a year after billionaire real estate developer Sam Zell led a leveraged buyout. The deal loaded the company with about $8 billion in additional debt in a transaction financed in part by company contributions to an employee stock option plan.

Creditors have had success bringing fraudulent transfer claims against former shareholders of bankrupt companies, for example reaching a settlement in the case of Best Products Co in the 1990s.

In general, former shareholders can defend themselves by arguing they sold in good faith and without any knowledge that the sale would render the company insolvent, said Jonathan Lipson, a law professor at the University of Wisconsin Law School.

But that defense will not work as well for every former shareholder.

"Major shareholders almost certainly knew what was going on," said Lipson. "Large shareholders involved in developing the transaction are extremely vulnerable."

Trusts affiliated with the Chandler family, The Robert R. McCormick Tribune Foundation and the Cantigny Foundation were among the largest Tribune shareholders, and their campaign for the company's sale led to the Zell buyout, according to court documents.

The trusts were established to benefit the descendants of Los Angeles Times publisher Harry Chandler. The foundations are charities set up by Chicago Tribune publisher Robert McCormick.

Retirees of Times Mirror Co and Tribune sued for more than $109 million in retirement benefits that they lost when the company went bankrupt. Tribune bought Times Mirror Co, which owned Los Angeles Times and the Baltimore Sun, for $8 billion in 2000.

Carey is currently considering two competing bankruptcy plans that differ in their approach to resolving legal claims stemming from the company's failure.

One plan is backed by the company, lenders that financed the 2007 leveraged buyout and the unsecured creditors committee. The plan would settle many of the biggest legal claims from the bankruptcy and provide about $500 million to noteholders.

A group of noteholders, led by hedge fund Aurelius Capital Management, have proposed their own plan that would resolve claims through litigation, which they argue would generate bigger recoveries.

The bankruptcy case is In Re Tribune Co, U.S. Bankruptcy Court, District of Delaware, No. 08-13141.

(Additional reporting by Rachel Chitra and Renju Jose in Bangalore, editing by Gerald E. McCormick)