Tribune's creditors make final bankruptcy pitch

By Tom Hals

WILMINGTON, Delaware (Reuters) - Two years after real-estate mogul Sam Zell's brief control of Tribune Co ended in bankruptcy, warring creditors made their final pitches on Monday for the best way to get the owner of the Los Angeles Times out of Chapter 11.

Essentially, the bankruptcy judge is being asked to decide whether it would be better to settle disputes over who is at fault for the bankruptcy that wiped out billions of dollars of investments, or whether it would be better to sue to try to get those billions back.

The owner of the Chicago Tribune and numerous television stations has been stuck in bankruptcy since December 2008, one of the longest and most contentious cases of recent years, because it cannot reach a deal to end its Chapter 11.

The company collapsed less than a year after Zell took control through a leveraged buyout that left the company with $13 billion in debt, which he has since described as the "deal from hell."

The company, the lenders who funded Zell's deal and the committee of unsecured creditors used closing arguments to ask the judge to impose a settlement on noteholders that could cost those investors more than $1 billion in losses.

"A consensual resolution would be optimal," said James Conlan, who represents Tribune. Absent that, the company's proposal "is the next best choice to provide a path to exit bankruptcy, and a fair one."

Tribune and its allies propose providing at least $480 million for noteholders, who had their $2 billion investment wiped out by the Chapter 11. In return, noteholders would lose the right to sue the lenders and company.

The lenders, led by JPMorgan Chase & Co and hedge funds including Angelo Gordon & Co that now hold the buyout loans, would end up controlling Tribune. They estimate they would be getting a company worth 70 percent of the $8.7 billion they are owed.

Backers of Tribune's plan hammered away at the reasonableness of the proposed settlement, which they said was supported by a report by a court-appointed examiner who investigated legal claims stemming from the bankruptcy.

The examiner found the second part of Zell's two-step buyout was likely to have been a fraudulent transfer, meaning some of the lenders might not be able to collect what Tribune owed them because the loans led to the bankruptcy.

However, the examiner said the first part of the Zell deal was less vulnerable to legal attack.

After running through a list of defenses against the potential lawsuits noteholders might bring, Tribune lawyer James Bendernagel summed up the chances of the noteholders knocking out all the buyout loans.

"I submit those are pretty long odds," he said.


Noteholders led by the Aurelius Capital Management LP hedge fund have rejected the proposed settlement because it undervalues their legal claims. They want Delaware bankruptcy judge Kevin Carey to approve their plan to pursue lenders in the courts, which they said could lead to a full recovery for noteholders, with interest.

The noteholders estimate they could get up to $3 billion by litigating against the lenders who funded the leveraged buyout. Under that scenario, lenders would get less than 40 percent of what they are owed.

"The settlement is very very small in relation to the fruits of pursuing litigation," said David Zensky, who represents the noteholders.

Noteholders used their closing arguments to revisit what they called "fraudulently inflated" projections on which the buyout was based. The noteholder's attorney zeroed in on the rapid decline of Tribune's publishing business just as the Zell deal was coming together.

"What the evidence does show your honor," said noteholder attorney Abid Qureshi, "is that the LBO was doomed from the outset."

Carey has not said when he plans to rule.

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

(Reporting by Tom Hals, editing by Gerald E. McCormick)