Tribune Co. bankruptcy case haunting former shareholders
Creditors poised to go after even the smallest investors to claw back billions
It was written to the judge by an angry and bewildered Colorado investor named Mark Lies, who had owned stock in Tribune Co. when it was public and then cashed out like thousands of other shareholders when the media conglomerate went private in 2007.
The lawsuits, 44 of them, target everyone who owned shares in the company when the deal closed, most of whom, it's safe to say, never considered the possibility that Tribune Co.'s descent into Chapter 11 less than a year after the buyout could come back to haunt them.
"What seems grossly unfair," Lies wrote to U.S. Bankruptcy Judge Kevin J. Carey, "is there doesn't seem to be any adult supervision looking out for the average investor like myself. … (Y)ou have unemotional, ruthlessly efficient and litigious investors attempting to extract whatever they can from whomever they can."
Lies and his fellow shareholders are caught in a legal battle that may be the most perplexing yet in a Tribune Co. bankruptcy case that has groaned on for nearly three years, producing a seemingly endless flood of expensive litigation.
The junior creditors, led by Aurelius Capital Management, a New York hedge fund, claim that the complex, debt-laden deal orchestrated by Chicago billionaire Sam Zell was a fraudulent conveyance, meaning the transaction left the company insolvent from the start.
If proven, the creditors argue, investors shouldn't have benefited, which means the money they received for their stock at the time the deal closed should be made available to satisfy the more than $2.5 billion creditors claim they are owed.
In all, an estimated 33,000 to 35,000 investors are potentially on the hook for money they received in 2007, when the company went private at $34 a share. It's a list that stretches from large institutional investors to mom and pop shareholders. Defendants include thousands of current and former employees of Tribune Co., which owns the Chicago Tribune, Los Angeles Times and other media assets. But many others are people around the country who, like Lies, had nothing to do with the company; they simply bought the stock on the open market.
It is far from clear that the creditors' maneuver will work, legal experts say. But defendants warn that if Aurelius and its allies prevail, markets that depend on the sanctity of a settled transaction could be disrupted by making it difficult for investors to assess the risk inherent in participating in an LBO. It also would call into question a traditional assumption of Chapter 11 reorganization: that bankruptcy court is a place where all constituents of an insolvent company come together to resolve their differences in a single courtroom.
With the exception of a similar case involving Lyondell Chemical Co., which is pending in bankruptcy court in New York, legal experts were hard-pressed to cite another case in which creditors sought to go after all shareholders of a large public company in this way. And for independent shareholders like Lies, who wouldn't comment beyond his letter, it is taking its toll in defense costs and heartache.
"I've heard from investors whose entire life savings was dependent on Tribune stock," said Gary Lawson, a Texas attorney representing the Employees Retirement Fund of the City of Dallas. "But they can't afford to defend themselves. It's outrageous."
Fraudulent conveyance laws have been on the books for decades to protect a company and its creditors from transactions that harm the enterprise by extracting value without giving anything in return. A leveraged buyout gone bad is a common example because lenders, management and shareholders often benefit mightily, while the massive debt used to finance the deal renders the company insolvent, wiping out prior creditors.
Anyone who benefited from the transaction can be found liable for the fraudulent transfer in suits filed on behalf of the debtor's estate. But typically, legal experts say, the company or the pre-buyout creditors sue for recovery from banks and other parties with the deepest pockets, not rank-and-file investors such as Lies. And because fraudulent conveyance claims are difficult and expensive to litigate, the creditors and banks most often agree to settle the case early on.
The U.S. Bankruptcy Code also specifically discourages lawsuits targeting shareholders of bankrupt companies in some circumstances. A number of years ago, Congress tweaked the code with a provision called 546(e), which has been broadly interpreted to insulate investors who sold stock into a busted leveraged buyout like the Zell deal.
But lawyers and other sources familiar with Tribune Co.'s situation say that twists and turns in the case have opened the door for Aurelius to find a way past the provision: by suing shareholders for constructive fraudulent conveyance under state law in 44 courts around the country, where they contend 546(e) doesn't apply.
"They came up with a workaround," said Kenneth Klee, the court-appointed independent examiner in the Tribune Co. case and one of the authors of the Bankruptcy Code. "They said, 'Let's abandon bankruptcy court and go into state law (using) old case law.'"
The situation facing Lies and other shareholders was nearly resolved before it started. Tribune Co.'s pre-buyout creditors and those that held the bank debt almost settled their differences in April 2010 with a deal that would have released all parties in the case from liability. But one large holdout, Los Angeles hedge fund Oaktree Capital Management, wouldn't buy into the settlement struck between junior creditors, the company and senior creditors led by JPMorgan Chase and Angelo, Gordon & Co.
That opportunity missed, the fraudulent conveyance claims gained a new head of steam later in 2010 when Klee and his team of examiners found that it was "highly likely" that the second step in the two-step Zell deal to take the company private left the company insolvent. That hardened positions among creditors on both sides of the charges and pushed the case toward its second anniversary with little hope of a consensual settlement.