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Tribune Creditors' Request for Investigation

Tribune Creditors' Request for Investigation

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Published by DealBook
From DealBook: Filing by Tribune bondholders requesting permission to investigate the publisher's 2007 leveraged buyout.
From DealBook: Filing by Tribune bondholders requesting permission to investigate the publisher's 2007 leveraged buyout.

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Published by: DealBook on Aug 27, 2009
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09/25/2012

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1
IN THE UNITED STATES BANKRUPTCY COURTFOR THE DISTRICT OF DELAWARE
---------------------------------------------x
In re: : Chapter 11 Cases: Case No. 08-13141 (KJC)TRIBUNE COMPANY, et al., : (Jointly Administered):Debtors. :
Hearing Date: September 4, 2009 at 10:00 a.m. (ET)
---------------------------------------------x
Objections Deadline: September ____, 2009 at 4:00 p.m. (ET)
MOTION OF LAW DEBENTURE TRUST COMPANY OF NEW YORKFOR LEAVE TO CONDUCT DISCOVERY PURSUANT TO RULE 2004 OFTHE FEDERAL RULES OF BANKRUPTCY PROCEDURE OF TRIBUNECOMPANY, ITS AFFILIATES, AND CERTAIN THIRD PARTIES,OR ALTERNATIVELY, FOR THE APPOINTMENT OF AN EXAMINER
Law Debenture Trust Company of New York (“Law Debenture”), successor trustee underthat certain Indenture, dated March 19, 1996, between Tribune Company (“Tribune” and with itssubsidiaries, the “Debtors”
1
)(successor to The Times Mirror Company) and Citibank, N.A., forthe 6.61% Debentures due 2027 and the 7 1/4 % Debentures due 2096 (as amended, the“Indenture”), as fiduciary for the interests of more than 18% of the Debtors’ bondholders,pursuant to sections 105(a), 343, 1109(b), title 11, United States Code (the “Bankruptcy Code”)and Fed. R. Bankr. Proc. 2004 (“Rule 2004”), moves this Court for the entry of an orderauthorizing and directing creditor discovery relating to Tribune’s leveraged buyout transactionconsummated in 2007 (the “LBO”), or, alternatively, the appointment of an examiner.
2
Insupport of its motion, Law Debenture respectfully represents as follows:
1
For ease of reference Law Debenture uses the term “Debtors” to include Tribune’s debtor and nondebtorguarantor affiliates.
2
Law Debenture has supplied alternative forms of orders as Exhibits 1 (Bankruptcy Rule 2004) and 1A(examiner appointment).
 
2
PRELIMINARY STATEMENT
The LBO
3
-- and the unsustainable debt burden it imposed on a business already in asecular decline -- undoubtedly caused the Debtors’ demise. The architects of the LBO nowconcede that the transaction was a “mistake” based on assessments of the Debtors’ business thatwere “too optimistic.”
4
Tribune commenced these chapter 11 cases within a year of the LBO,leaving billions of dollars of pre-LBO debt unpaid. The LBO did not provide the Debtors withreasonably equivalent value in exchange for the $11.2 billion in secured debt they incurred: themajority of the LBO debt served only to cash out former shareholders for no consideration at all.Accordingly, the LBO and the obligations incurred in connection therewith are
prima facie
fraudulent transfers within the meaning of sections 544 and 548 of the Bankruptcy Code,applicable state law, and Third Circuit precedent.Bankruptcy Rule 2004 was designed specifically for purposes of examining the acts,conduct, property (
i.e.
valuable claims), liabilities, and financial condition (
i.e.
insolvency) of debtors or any matter affecting the administration of a debtors’ estates and any other matterrelevant to chapter 11 cases. Moreover, Rule 2004 and section 343 of the Bankruptcy Code
3
Capitalized terms in this Preliminary Statement have the meanings ascribed to them
infra
.
See Zell Calls Tribune Co. Buy A ‘Mistake’
, Boston Globe, April 16, 2009, http://www.boston.com/ ae/media/articles/2009/04/16/zell_calls_tribune_co_buy_a_mistake.
See also
Andrew Ross Sorkin,
Workers Pay for  Debacle at Tribune
, New York Times, Dec. 8, 2009, http://www.nytimes.com/2008/12/09/business/media/ 09sorkin.html?scp=1&sq=workers%20pay%20for%20debacle%20at%20tribune&st=cse (“Mr. Zell literallymortgaged the future of Tribune’s employees to pursue what one analyst .. . . called ‘a childhood fantasy.’”);EmilyThornton, Michael Arndt, and Ronald Grover,
Sam Zell’s Deal from Hell
, Business Week, July 30, 2008,http://www.businessweek.com/magazine/content/08_32/b4095000408330.htm (quoting Zell discussing Tribune’smany operating subsidiaries: “When we first undertook this project, we viewed Tribune as 60 ways to get lucky . . ..” and subsequently recognizing “the reality of [Tribune’s] significant debt levels”);
Is Tribune’s Leveraged ESOPWorth The Risk?
, New York Times, April 3, 2007, http://dealbook.blogs.nytimes.com/2007/04/03/is-tribunes-leveraged-esop-worth-the risk/?scp=1&sq=Is%20Tribune%E2%80%99s%20Leveraged%20ESOP%20Worth%20The%20Risk&st=cse (noting transaction “comes with some big risks ….Tribune will be taking on an especially heavy debt load …. A Fitch analyst suggested the proposed deal would leavethe company with ‘little room to withstand a significant economic downturn’”). A copy of these articles is attachedto the Declaration of David S. Rosner, dated August 26, 2009 (the “Rosner Decl.”) as Exhibit A.
 
3permit
any creditor 
to conduct discovery concerning any matter involving property of the estate.For these reasons alone, Law Debenture, as fiduciary for one of the biggest creditorconstituencies in these cases, and the constituency most harmed by the LBO, is entitled to therequested discovery. But it is especially true given the significant conflicts and process flaws inthese cases.Neither the Debtors nor the Official Committee of Unsecured Creditors (the“Committee”) has conducted a complete factual investigation into the circumstances surroundingthe LBO, including, without limitation, the knowledge and intent of the bank lending groupbefore the funding and consummation of the transaction. Despite the normal expectation that theCommittee would immediately probe deeply into the facts and circumstances surrounding theleveraged buyout, after nine months, nothing of substance addressing recoveries has transpiredand no claims have been brought.The LBO -- and its potential avoidance -- should be the principal focus of these cases. Itshould be of particular concern to the Committee, which, as fiduciary, is charged with protectingthe interests of 
all
unsecured creditors. Surprisingly, however, the potential litigation has notreceived any real and substantive attention in Court in these cases. To the contrary, at theinception of these cases, the Committee (which includes two of the LBO-banks) retained counselunable to prosecute LBO claims. Only recently, at the urging of Law Debenture nine monthsafter these cases were commenced, did the Committee attempt to rectify this problem, by votingto retain special counsel -- on the same day the Debtors and the banks were negotiating plandistributions without the Committee, apparently addressing the LBO claims, if at all, with a“sliver of equity” (
see infra
n.6). Committee counsel believes that it can “negotiate” on behalf of the Committee and represent the Committee’s interests zealously, fully, and without bias,

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