UPDATE 2-Tribune given till March 31 to file bankruptcy plan

* Tribune has till end of March to file reorganization

* Threat of legal battle over 2007 LBO postponed

* Bondholders say not involved in talks

(Adds comments by bondholders about talks)

By Tom Hals

WILMINGTON, Del., Feb 18 (Reuters) - Tribune Co was granted until the end of March to file a plan of reorganization and avoided the immediate threat of starting a “litigation nightmare” over its 2007 leveraged buyout.

At the start of Thursday’s hearing, the owner of the Los Angeles Times and Chicago Tribune said it would reduce the requested extension of exclusivity to the end of March from its original request to extend it into June.

Judge Kevin Carey approved the request to extend exclusivity, saying it may be Tribune’s “last best chance” to resolve seemingly entrenched disputes.

The company now has until the end of next month to resolve the main issue of its bankruptcy, the role of its 2007 $8.2 billion leveraged buyout that was led by Sam Zell, a real estate developer.

The official committee of unsecured creditors have blamed banks that financed the deal for the company’s bankruptcy, saying they knew the buyout debt would leave it insolvent.

The committee has requested permission to begin litigating against holders of secured claims for their role in the leveraged buyout, arguing the company has not been willing to do so.

If proven, the litigation, which one group of secured claim holders called the “World War III” of bankruptcy, could subordinate or disallow billions of dollars of secured claims.

Bondholders have said this litigation is their only chance of a recovery in the bankruptcy.

In approving the extension of exclusivity, Carey also postponed the unsecured creditors’ request to pursue the litigation until April.

“The question in the judge’s mind is: If I do things, whether it has to do with exclusivity, does it make the administration of this case better, or does it make it harder? Does it open up the door for the litigation nightmare that others in their submissions have discussed, or does it push things toward a resolution?”

Carey said he was not yet convinced the company could not pursue that litigation against secured claim holders.

The company’s plan of reorganization could touch off a new round of legal fights as it seeks to confirm it.

Bondholders made clear at the hearing they were not brought into the negotiations.

“No one is talking to us,” said Robert Stark, an attorney for Brown Rudnick. The firm is working for Wilmington Trust, which represents a group of bondholders.

“We asked to be a part of settlement negotiations,” said Stark. “We asked for subsequent meetings and they said ‘No thanks’.”

He said he fears the plan will provide little recovery for bondholders while providing releases from potential litigation for executives and holders of secured claims.

Carey postponed Wilmington Trust’s request to appoint an examiner to investigate the leveraged buyout.

Wilmington Trust Corp said such an investigation could not be left to the official creditors committee, noting that JPMorgan Chase & Co JPM.N, one of the main leveraged buyout banks and a likely target of any investigation, is co-chair of the committee.

Wilmington Trust’s request was joined by the U.S. Trustee, which oversees bankruptcy cases, and which appointed the committee.

The case is In re Tribune Co, U.S. Bankruptcy Court, District of Delaware, No. 08-13141.