WILMINGTON, Del. (CN) – A federal bankruptcy judge has given Tribune creditors the go-ahead to sue Chairman of the Board Sam Zell and the shareholders who benefited from Zell’s leveraged buyout of the company. U.S. Bankruptcy Judge Kevin Carey gave the Committee of Unsecured Creditors until early December to sue, based on claims that Zell’s leveraged buyout was a fraudulent transfer that left the media giant swamped in debt and destined for bankruptcy.
Judge Carey said in a Friday hearing that “there are claims here based in part on what the examiner reports, and I think they should be pursued.”
Kenneth Klee, the examiner, found evidence of fraud, bad faith and dishonesty in the second phase of the deal. Klee released his report in late July, as Tribune was about to exit bankruptcy proceedings and hand the company over to the banks that helped finance the buyout.
After the 2007 buyout, Zell installed a controversial management team led by Randy Michaels, a former radio shock jock and ally of Zell.
Michaels’ tenure as CEO of Tribune ended on Friday with his forced resignation; he was replaced with an “executive council.”
Tribune, owner of the Chicago Tribune, Los Angeles Times and other major media outlets, struggled under Michaels’ management. His leadership style was profiled two weeks ago in a front-page evisceration in The New York Times, which described Michaels as encouraging a fraternity party atmosphere.
The Times reported last week that Michaels resisted the Tribune board’s request for his resignation, and gave in only at Zell’s personal request.
Michaels’ resignation came shortly after the departure of Chief Innovation Officer Lee Abrams, who was dismissed after sending an offensive email to company employees.
The Christian Science Monitor reported that Michaels’ resignation was “cheered by newsroom staffers who said his outlandish behavior and questionable journalism credentials diminished the credibility of the Chicago Tribune and was emblematic of company leadership that proved rudderless in helping steer it back from bankruptcy.”
Creditors have until Tuesday to work out the wording of an order for Judge Carey to sign, authorizing lawsuits against Zell, the banks, benefiting shareholders and other entities involved in the buyout.
Carey must grant legal authority for creditors to sue, as such lawsuits are normally brought by the bankruptcy estate.
Tribune shareholder McCormick Foundation is said to have reaped $3.9 billion when the second stage of the leveraged buyout was completed. Klee estimated that a successful lawsuit could get back one-third of that amount.
The McCormick Foundation is named for Robert McCormick, known as Col. McCormick, the Tribune’s longtime editor known for his sometimes bizarre and often xenophobic beliefs, which for years were reflected in the Tribune’s reporting. Under McCormick’s leadership the Tribune published its famous “DEWEY DEFEATS TRUMAN” headline the day after the 1948 presidential election. McCormick died in 1955.