Tribune Co. creditors seek special counsel to probe buyout, could sue to recover money

Tribune creditors asked the bankruptcy court for permission to hire special counsel to further investigate the $8.2B buyout of the Chicago-based media company engineered by real estate magnate Sam Zell. The inquiry is common practice when a bankruptcy follows closely on the heels of an LBO, said bankruptcy experts. Zell closed the transaction that took Tribune Co. private in Dec. 07. The new debt obligations were too big a burden in rapidly declining ad revenues, sending the company, parent of the Chicago Trib, into bankruptcy in Dec 08. Creditors haven't filed a lawsuit seeking to recover money against parties that were involved in the going-private transaction, which established an employee stock ownership plan to become majority owner of the company. But the court filing signaled that they are considering pursuing litigation, said Chicago-based restructuring expert Bill Brandt. With creditors likely to collect only a small percentage of the debts, it is an absolute certainty that creditors look to the realm of lawsuits to try & get more money out, he added. There's precedent for challenging LBOs in bankruptcy court on grounds of fraudulent conveyance. Such suits argue LBOs have left companies with too much debt to operate and benefited former execs, bankers, lawyers & financial advisers at the creditors' expense. There's usually not a question of fraud with the buyout, but rather the issue of whether the transaction was commercially reasonable. Creditors have a big burden of proof, said Doug Baird, professor at the University of Chicago Law School who specializes in bankruptcy issues. "You have to make sure you're not just a Mon morning quarterback," he said. The need for special counsel arose because Chadbourne, citing conflicts of interest, would not be able to investigate or bring lawsuits against certain parties in the LBO, it said. The committee selected the DC-based law firm of Zuckerman Spaeder as special counsel. Two members of the committee, affiliates of JPMorgan & Merrill Lynch, aren't participating in the review of the LBO because the companies helped finance the deal. Fraudulent-conveyance suits in bankruptcy can target a number of entities, including financiers, current & former execs & even public shareholders who made possible or profited from a leveraged buyout. In a statement Tribune said, "We have been fully cooperating with the review of our 2007 going-private transaction by the unsecured creditors' committee." The company won an extension this week to file a reorg plan with the court by Nov. 30. The committee isn't the only one looking into the complicated ESOP. A group of current and former employees of Tribune's LA Times alleged in a suit that Zell & Tribune Co. failed to uphold their fiduciary duty. The U.S. Labor Dept & the IRS also opened probes into the ESOP.