(CN) – A federal judge refused to cap liability for the trustee of the Chicago Tribune’s Employee Stock Ownership Plan, which approved Sam Zell’s $250 million leveraged buyout that led to the newspaper’s bankruptcy. U.S. District Judge Rebecca Pallmeyer, in Chicago, denied GreatBanc Trust’s request for a partial summary judgment limiting an award against it to $15.3 million – the amount of principal and interest paid on the loan.
“The Tribune Company’s transition from a publicly held to an employee-owned corporation is the product of a complex set of transactions in which the Tribune Company borrowed approximately $12 billion in order to buy back and retire its publicly held shares and merge with a subsidiary of its newly created ESOP [Employee Stock Ownership Plan],” the ruling states.
In April 2007, the ESOP bought more than 8 million shares of unregistered Tribune common stock at an allegedly inflated $28 per share, with $250 million that it borrowed from the company, according to court documents.
Several Los Angeles Times journalists, including lead plaintiffs Dan Neil and Eric Bailey, brought a class action against Tribune Company and GreatBanc in September 2008.
The L.A. Times is part of the Tribune empire.
That case was transferred from Los Angeles to Chicago, where Judge Pallmeyer is presiding over the litigation.
Board members accused of accepting millions of dollars to facilitate Zell’s deal were dropped as defendants this year, and claims against them have been folded into the bankruptcy proceedings, according to press reports.
The court already has determined that GreatBanc breached its fiduciary duties by approving the purchase of $250 million in company stock – which is now “worthless” – and that the bank violated the Employee Retirement Security Income Act “because the stock did not meet the Tax Code’s definition of ‘qualifying employer security’ as required by ERISA,” according to Judge Pallmeyer’s 24-page Opinion and Order.
“GreatBanc argues that because the ESOP has paid only $15.3 million on the $250 million note, defendant’s maximum possible liability is that amount, or, alternatively, the $2.8 million of that amount that was paid as principal,” the ruling states.
“In GreatBanc’s view, plaintiffs’ ‘recovery cannot exceed the difference between what the ESOP actually paid for Tribune shares it acquired and the fair market value of Tribune stock on the date that it was acquired by GreatBanc.’ [Citation to ‘Damages Br(ief)’ omitted.] Plaintiffs respond that ‘[t]he fact that the shares were bought with a promissory note is irrelevant. Contrary to GreatBanc’s assertion, the ESOP did not promise to “eventually” pay $250 million for the shares it bought – it paid $250 million using a loan from Tribune, and promised to pay that amount back to
Tribune.'” (Response Br. at 4.)
Pallmeyer denied Zell’s and GreatBanc’s request for summary judgment: “This case is clearly distinguishable – plaintiffs allege that they, and other plan participants, would have the benefit of an ESOP with $250 million worth of assets had defendant abided by ERISA’s requirements, while today, due to Defendant’s breach, that ESOP has nothing. Plaintiffs have alleged an injury-in-fact and have standing to pursue their claim.
“CONCLUSION: Defendant’s motion for partial summary judgment as to damages … is denied.”
The case is Dan Neil and Eric Bailey et al. v. Sam Zell, GreatBanc Trust Co. and EDI-TRB.