Tribune investors sue banks that arranged financing

CHICAGO Sat Oct 30, 2010 12:38pm EDT

CHICAGO Oct 30 (Reuters) - A group of investors in bankrupt Tribune Co (TRBCQ.PK) sued JPMorgan, Merrill Lynch, Citicorp and Bank of America, claiming the banks arranged $3.7 billion in loans in 2007 they knew the company could never repay.

"The Lead Banks knew that this financing was barred by the terms of the Credit Agreement and it was tainted with fraud and other misconduct," said the lawsuit, which was filed late on Friday.

Tribune, owner of the Los Angeles Times, the Chicago Tribune and 23 television stations, filed for bankruptcy in 2008, just a year after real estate developer Sam Zell bought the company with billions of dollars in debt.

Representatives for the JPMorgan, Bank of America and Merill Lynch were not immediately available to comment on the lawsuit. Citicorp declined to comment.

The lawsuit, which claimed that the banks had no exposure to the loans and collected more than $120 million in fees, was filed in the New York Supreme Court in Manhattan.

The plaintiffs, including Alden Global Distressed Opportunities Fund and Arrowgrass Distressed Opportunities Fund, claim that the loans arranged by the defendants prevented Tribune from paying back earlier debt obligations.

Separately, New York hedge fund operator Aurelius Capital Management proposed a competing plan late on Friday for the reorganization of Tribune that would take an aggressive stance in pursuing lawsuits stemming from the buyout of the troubled publisher.

The filing in a Delaware court set the stage for a showdown with those who back the company's plan for getting out of bankruptcy. That plan has the support of other creditors including some big hedge funds and JPMorgan Chase & Co (JPM.N).

An examiner's report earlier this year said part of the buyout deal engineered by Zell might be "an intentional fraudulent conveyance." That opens the door to legal challenges to banker fees, creditor claims and billions in payments to shareholders.

AGGRESSIVE TACTICS

Aurelius, a Tribune creditor, is known for its aggressive tactics in bankruptcy. A steady stream of litigators from law firm Akin Gump Strauss Hauer Feld LLP filed requests with Delaware's bankruptcy court to appear on the hedge fund's behalf as it prepared for a showdown.

Under Aurelius Capital Management's plan, a reserve would be created for holders of the company's bonds.

Aurelius would then aggressively pursue lawsuits against Zell, the lenders who supported his leveraged buyout in 2007, advisers and company executives among others.

As part of the company-backed reorganization plan, JPMorgan, Merrill Lynch, Merrill's parent Bank of America Corp (BAC.N) and Citigroup Inc (C.N) agreed to pay $120 million to settle claims over the fees paid to leveraged-buyout bankers.

Tribune has been stuck in bankruptcy court for nearly two years. Its attempts to exit Chapter 11 have been overshadowed by a management upheaval.

The company last week replaced Chief Executive Randy Michaels, who became a target of critics following a New York Times story that quoted numerous employees who were upset at pervasive sexual banter and profanity among top managers.

The company has backed a plan along with JPMorgan, Oaktree Capital Management LP and Angelo Gordon & Co LP in which those three would end up with most of the company's equity in return for their senior loan claims. The board transferred his duties to a four-member committee.

The case is In Re Tribune Co, U.S. Bankruptcy Court, District of Delaware, No. 08-13141. (Reporting by Tom Hals and Mark Weinraub; editing by Mohammad Zargham)

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