Tribune creditors allowed to sue Zell, shareholders

Creditors of Tribune Co. can sue real-estate billionaire Sam Zell, who took the newspaper publisher private in 2007 for more than $8 billion, and shareholders who benefited from the deal, a judge ruled.

U.S. Bankruptcy Judge Kevin Carey in Wilmington, Delaware, said today he will let the official committee of unsecured creditors use a lawsuit to recover some of the more than $12 billion Tribune owes all creditors.

The creditors have claimed that the Tribune buyout was a so-called fraudulent transfer that loaded the media company with too much debt and benefited only the shareholders, Zell and the banks that helped arrange the sale. A court-appointed bankruptcy examiner found in July that creditors may be able to recover billions of dollars through litigation.

“There are claims here based in part on what the examiner reports,” Carey said. “I think they should be pursued.”

Typically, such suits are brought by the bankruptcy estate. Because the defendants in this instance may include Zell, who is Tribune's chairman, as well as other company advisers, the committee sought legal authority to sue.

Under the proposal Carey said he will approve, the committee will sue as many entities involved in the buyout as possible, including Zell, shareholders such as the non-profit McCormick Foundation, and the banks that arranged the financing, including JPMorgan Chase & Co. Carey said he will sign an order authorizing the suits once the creditors work out the final wording.

Lower-ranking bondholders owed at least $1.2 billion have long supported a lawsuit to strip senior lenders of their status as the creditors to be paid first.

Carey said it was important to give creditors the ability to sue before the second anniversary of the buyout in December, the deadline for filing lawsuits.

A court-ordered report released in July found that shareholders who profited from the second stage of the two-part deal may be sued succesfully. The McCormick Foundation, a philanthropy started by former Chicago Tribune publisher Robert R. McCormick, took in $422 million when it sold almost 12 million Tribune shares in the second stage, according to court documents.

Disputes about a potential lawsuit intensified among Tribune creditors after July 27 when a bankruptcy examiner, Kenneth N. Klee, released a report that bolstered the position of lower-ranking creditors.

Klee found in his report that former stockholders such as the McCormick Foundation collected $3.92 billion in December 2007 when the buyout's second stage was completed. A successful lawsuit might recover about one-third of that, or $1.29 billion, Klee estimated.

This month, the seven-member committee voted 5-2 to support Tribune's plan to exit bankruptcy in part by settling potential lawsuits against some shareholders and banks. Suits may be filed in federal court and pursued after Carey holds a hearing to decide whether to approve the bankruptcy-exit plan, said Graeme W. Bush, an attorney for the committee.

Carey won't approve the exit plan until after the two-year deadline to file the lawsuits has already passed, Bush said.