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WILMINGTON, Delaware (Reuters) - Tribune Co creditors filed sprawling lawsuits on Monday that take aim at Sam Zell, his banks and advisers for the disastrous leveraged buyout that plunged the publisher into bankruptcy two years ago.
The lawsuit accuses billionaire Zell and the Tribune board of defrauding Tribune's creditors by pursuing the buyout of the owner of the Los Angeles Times and Chicago Tribune knowing it would lead to bankruptcy.
"This LBO Transaction is among the worst in American corporate history," the complaint said. "The LBO was designed to cash out the large shareholders of Tribune and to line the pockets of defendant Samuel Zell and Tribune's directors and officers."
Tribune filed for Chapter 11 protection less than a year after Zell, a real estate tycoon, completed the $8.2 billion leveraged buyout.
The "deal from hell," as Zell has described it, has become a bonanza of competing legal claims over who is to blame for the bankruptcy that left billions of dollars of unpaid debts.
The complaint said Zell was "at a minimum" blind to the consequences of his leveraged buyout and "acted grossly negligently" in advocating for the deal.
The official committee of unsecured creditors, in their two lawsuits filed in U.S. Bankruptcy Court in Delaware, are seeking potentially billions of dollars in recovered payments and voided claims related to the buyout.
Their two complaints, which run hundreds of pages, take aim at the shareholders who sold to Zell, bankers fees and payments to advisers. The complaints name as defendants banks, scores of hedge funds that hold loan claims against Tribune, as well as the Tribune board and senior management at the time of the buyout.
The creditors' committee accuses the defendants of breach of fiduciary duty, unjust enrichment and other claims. Morgan Stanley, which acted as an adviser during the buyout negotiations, was accused of professional malpractice and insider trading.
Morgan Stanley, Tribune and a Zell spokeswoman did not immediately return a request for comment.
The creditors' committee has said it plans to try to settle the claims rather than pursue them through litigation.
The complaints were filed to beat a statute of limitations deadline, and the creditors' committee has already agreed to settle some of the claims in the lawsuit.
The lawsuit follows a chaotic 10 days for the company. On October 22, Chief Executive Randy Michaels resigned over claims he tolerated a sexist workplace. The company also recently filed its proposal to exit its nearly two years in bankruptcy and creditors countered with three competing plans.
Having four simultaneous plans, which differ in their approach to legal claims stemming from the bankruptcy, left many bankruptcy professionals struggling for a comparison.
"I've never heard of four competing plans at the same time in the same case before," said David Skeel, a professor at the University of Pennsylvania Law School and author on bankruptcy.
The legal upheaval follows a July report by a court-appointed examiner, who determined that the $3.6 billion second step of Zell's two-part buyout of Tribune was likely to have been an "intentional fraudulent transfer."
That legal standard opened the door for the broad range of targets in the lawsuits by the creditors' committee.
The company's plan, which has the backing of the unsecured creditors' committee, proposes settling those claims against bankers, which has outraged other creditors.
The unsecured creditors' committee consists of a representatives of bondholders, unions and in an usual twist, banks including JPMorgan Chase & Co.
The company essentially plans to turn over the ownership to lenders in return for their claims, a deal backed by JPMorgan and hedge funds Oaktree Capital Management and Angelo, Gordon & Co, who will end up controlling the company.
The three were named as defendants by the creditors' committee.
Potentially, all four reorganizations could go to a confirmation hearing for a judge to pick a winner.
"We're looking at a confirmation hearing free-for-all because we're not backing down," said Evan D. Flaschen of the Bracewell & Giuliani law firm.
He represents a group of hedge funds that hold loans tied to the first part of Zell's buyout and which filed the lawsuit and a competing plan on Friday.
The case is In Re Tribune Co, U.S. Bankruptcy Court, District of Delaware, No. 08-13141.
Additional reporting by Phil Wahba in New York; Editing by Muralikumar Anantharaman