Motion of the Law Debenture Trust Company May Lead to Additional Recovery for Hedge Funds that Hold Various Categories of Unsecured Tribune Company Debt

The Law Debenture Trust Company (LDTC), representing several groups of prepetition unsecured bondholders in media corporation Tribune Company (Tribune), has filed a motion in federal bankruptcy court seeking additional discovery to investigate the company’s 2007 sale to billionaire investor Samuel Zell, which the creditors claim led to Tribune’s bankruptcy filing in December 2008.  According to the motion, at this point in time, nine months after the bankruptcy filing, there still has not yet been an investigation of the fraudulent conveyance claims nor have any actions been brought.  The delay has made some creditors suspicious and the motion makes several claims of conflicts of interest among the creditors’ committee members and lenders and other parties involved in the buyout.  Legal experts who spoke with the Hedge Fund Law Report noted that because of the rapid collapse of Tribune it is likely that the LBO and related lending transactions will be challenged as fraudulent conveyances.  If such claims are successful, the liens that the LBO banks have would be voided and unsecured creditors would stand to receive a significantly greater recovery in the reorganization than they are currently poised to recover.  In this article, we provide background on the Tribune LBO and subsequent bankruptcy, and detail LDTC’s motion for additional discovery; what fraudulent conveyance claims are generally and what they are in this case; potential subordination of secured creditors; goals of fraudulent conveyance or transfer claims; additional forms of relief that may be available to Tribune’s unsecured creditors; the likelihood of success of LDTC’s claims; the potential impact of LDTC’s action on various categories of unsecured creditors, including hedge funds that purchased Tribune debt subsequent to the Chapter 11 filing; and the impact on recovery by unsecured creditors of the suit by employees of the Los Angeles Times.

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