(CN) - Tribune creditors left holding the bag after Sam Zell's failed leveraged buyout cannot claw back $8.3 billion from shareholders, the Second Circuit ruled Thursday.
To refinance its debt and cash out its shareholders at a premium price, the Tribune Company borrowed more than $11 billion secured by its assets in a 2007 leveraged buyout, plus $315 million from billionaire investor Zell.
Shareholders received approximately $8.3 billion of this money, but the company's debt exceeded its assets by more than $3 billion a year later, forcing Tribune into Chapter 11 bankruptcy.
A committee of unsecured creditors sued in court alleging that the leveraged buyout payments to Tribune shareholders constituted intentional fraudulent conveyances, given the company's fragile financial condition.
Creditors, mainly former Tribune employees with claims for unpaid requirement benefits, and note holders sought to claw back the $8.3 billion paid to shareholders.
But the Second Circuit held Thursday that the bankruptcy code does not allow such recovery.
"On its very face, the idea of preventing a trustee from unwinding the specified transactions while allowing creditors to do so, but only later, is a policy in a fruitless search of a logical rationale," Judge Ralph Winter said, writing for the three-judge panel in Manhattan.
The appeals court focused on Congress' clear intent to minimize the shock to securities markets in the aftermath of a major bankruptcy.
That purpose is served by "limiting the circumstances to cases of intentional fraud under which securities transactions could be unwound," Winter said.
"The broad language used in Section 546(e) protects transactions rather than firms, reflecting a purpose of enhancing the efficiency of securities markets in order to reduce the cost of capital to the American economy," the judge continued.
Accepting plaintiffs' reading of the bankruptcy code would expose investors to claims seeking to unwind deals made whenever they were followed by an economic downturn, according to the judgment.
"If appellants' theory was adopted, individual investors following a conservative buy-and-hold strategy with a diversified portfolio designed to reduce risk might well decide that such a strategy would actually increase the risk of crushing liabilities," Winter said. "The need to set aside reserves to meet the costs of litigation not to mention costs of losing would suck money from capital markets."
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