Tribune bondholders sues bank lenders who financed 2007 leveraged buyout

Tribune bondholders sue over 2007 buyout

DOVER, Del. — Bondholders in the Tribune Co.’s Chapter 11 bankruptcy case are suing the banks that financed the media company’s 2007 leveraged buyout, claiming they knew that the resulting debt load would leave Tribune insolvent.

The lawsuit was filed in U.S. Bankruptcy Court in Wilmington by Wilmington Trust Co., agent for holders of $1.2 billion in bonds sold by the company before real estate mogul Sam Zell led Tribune’s $8.2 billion buyout.

The bondholders argue that the deal was fraudulent because it loaded up the company with too much new debt that was used to cash out Tribune stockholders. They want a bankruptcy judge overseeing Tribune’s Chapter 11 case to reject the banks’ secured claims, or at least have them paid only after the bondholders’ unsecured claims are satisfied. Typically, secured claims get higher priority.

Defendants in the lawsuit include JPMorgan Chase, Citigroup, Bank of America and its Merrill Lynch subsidiary, the lead banks involved in the leveraged buyout, or LBO. Representatives of Tribune and the banks declined to comment Friday.

Tribune, which owns the Los Angeles Times, Chicago Tribune, The (Baltimore) Sun and other dailies, along with 23 TV stations, filed for bankruptcy protection in December 2008. It cited dwindling advertising revenues and a debt load of $13 billion, much of which was amassed when Zell took the Chicago-based company private.

The 2007 buyout also led to a separate federal lawsuit in Illinois. Former Tribune employees claim that Zell, other Tribune officials and the trustee of an employee stock ownership plan that was the vehicle for the buyout breached their fiduciary duties. The plaintiffs are seeking to recover losses to the ESOP stemming from the buyout.

Wilmington Trust’s lawsuit, filed late Thursday, came six months after the bondholders asked Judge Kevin Carey for authorization to investigate the buyout, which they said pushed Tribune into insolvency without giving it “equivalent value” in return for taking on the debt.

“Neither Tribune, its creditors nor the guarantors benefited from incurring the LBO debt,” the bondholders said in their 56-page lawsuit, which was submitted under seal and heavily redacted.

The lawsuit claims that in addition to more than $8 billion in loans used to buy out Tribune shareholders, an additional $2.8 billion in loans was used to refinance Tribune’s existing bank debt at a higher interest rate. Much of that existing debt was held by JPMorgan and the other LBO lenders, the lawsuit said, and an additional $200 million in LBO loans was used to pay fees to the banks and other firms involved in the buyout.

“Motives of self-interest and greed led the lead banks to press ahead with the LBO notwithstanding that their own analysis led the lead banks to conclude that there was a significant risk of Tribune not being able to shoulder the debts incurred in the LBO and therefore not being able to avoid bankruptcy,” the lawsuit alleges.

In addition to trying to disallow the claims of the lenders, the bondholders allege that Citibank, which was trustee under the bond indenture, breached its fiduciary duty, aided and abetted by the banks and other financial firms.

The bondholders claim Citibank knew that Citigroup Global Markets, its affiliate, was acting as financial adviser to Tribune in a buyout that risked harm to the bondholders, but that Citibank did not adequately advise the bondholders of its conflicts and did not resign as trustee until after the deal was completed.

“By remaining as trustee, Citibank did nothing to interfere with the windfall that Citigroup would receive,” the lawsuit claims.

Earlier this year, the bondholders asked Carey to appoint an independent examiner to investigate the buyout and related claims that might be brought against Tribune or other parties. At a hearing last month, Carey postponed consideration of the bondholders’ request for an examiner, as well as a request from Tribune’s committee of unsecured creditors for permission to pursue claims against the banks.

Tribune attorneys argued that appointing an examiner or allowing the creditors committee to challenge the LBO lenders’ priority claims would upset efforts to negotiate a comprehensive settlement with all parties that would allow the company to emerge from bankruptcy protection.

But Robert Stark, an attorney for Wilmington Trust, complained at the hearing that the bondholders, who could receive little or nothing in Tribune’s reorganization plan, were being shut out of the settlement talks.

“No one is talking to us … We need to be heard, and we need to be part of the process,” said Stark, who warned that Tribune’s reorganization plan likely will be challenged.

Last month, Tribune was granted an extension until March 31 of its exclusive right to file a reorganization plan, and was given until May 31 to solicit support in advance of a hearing to confirm the plan.

“We’re going to have a trial at confirmation time, and it’s going to be long and difficult,” Stark said.