WILMINGTON, Del. (CN) – More than a dozen institutional investors in Tribune Company debt have sued the banks that helped Sam Zell finance the leveraged buyout of the company. The investors claim that JPMorgan Chase, Bank of America, Merrill Lynch and Citicorp induced Tribune to take on an additional $3.7 billion in debt, knowing Tribune could not be expected to repay the loans and that bankruptcy would ensue.
Tribune, owner of the Chicago Tribune, Los Angeles Times and many other media outlets, filed for bankruptcy less than a year after Zell’s leveraged buyout. Zell financed his purchase by piling debt onto Tribune, which rapidly descended into bankruptcy and turmoil, highlighted most recently by the departure of the cronies Zell appointed to lead the Chicago Tribune, men whose obscenities, sexism and embarrassing behavior infuriated a Tribune staff that had suffered layoffs and repeated blows to morale.
The plaintiffs in the new case in New York County Court invested in loans tied to the first step of the merger, which also was financed by the defendant banks, the so-called “Lead Banks.”
These banks “did not actually bear the risk of default on these loans, because they successfully ‘syndicated’ this debt, meaning that all or portions of the loans were sold to investors,” such as plaintiffs, according to the complaint.
JPMorgan Chase and the other banks collected more than $120 million in fees from the leveraged recapitalization, or Step One, that allowed Tribune to repurchase 52 percent of its stock and retire $2.6 billion in previously issued debt.
The going-private part of the merger, called Step Two in the complaint, was contingent upon Tribune’s being solvent after closing, and the company’s not suffering a “Material Adverse Effect.”
The investor plaintiffs say that defendants were “improperly motivated by tens of millions of dollars worth of fees and the desire to curry favor with the billionaire Zell,” and so “ignored their own internal valuation analyses, accepted Tribune’s representations of solvency that they knew were false, and financed Step Two despite their knowledge that doing so would render Tribune insolvent.”
To bolster their claims, the plaintiffs cite a report issued by independent examiner Kenneth Klee, who was appointed by Delaware Bankruptcy Court Judge Kevin J. Carey to investigate the leveraged buyout. Klee’s report found that the second part of the merger might have been an “intentional fraudulent transfer” because it benefited no one but the shareholders, Sam Zell and the Lead Banks.
Also on Friday, three groups of creditors filed competing reorganization plans for Tribune to exit bankruptcy.
Among the creditors that submitted plans: Bondholder Aurelius Capital Management leads a group of low-ranking creditors; hedge fund manager King Street Capital filed another plan; and a dissident group of senior lenders filed a third plan.
These three proposals will vie with a proposal filed by Tribune and its leading senior lenders, including JPMorgan Chase and Oaktree Capital Management.
All plans pave a path for Tribune to exit bankruptcy while allowing lawsuits to proceed against architects of the leveraged buyout.
Plaintiffs in the institutional investors’ complaint include Alden Distressed Global Opportunities Fund, Arrowgrass Distressed Opportunities Fund, Bennett Offshore Restructuring Fund, Greywolf Capital Overseas Master Fund, Scoggin Worldwide Fund, and Wexford Spectrum Investors. They are represented by Howard Kaplan with Arkin, Kaplan & Rice.