February 12, 2010 / 4:38 PM / in 9 years

Tribune's creditors warn of "world war" legal fight

WILMINGTON, Del., Feb 12 (Reuters) - Tribune Co’s senior creditors warned that allowing bondholders to sue over the legitimacy of $10 billion of the bankrupt company’s debt would touch off “World War III” and upend settlement talks, according to court documents.

A group of hedge funds that holds $4.6 billion in senior secured claims on the bankrupt media company also said in court papers that if claims about the legitimacy of the debt exist, they should be pursued by Tribune and not unsecured creditors.

“The committee seeks authorization to initiate the bankruptcy equivalent of World War III — with the apparent objective of avoiding upwards of $10 billion of debt — without a single statement about why commencement of litigation at this critical junction in the reorganization is necessary or appropriate,” said the group in a court document.

The dispute stems from a request by the official committee of unsecured creditors to begin pursuing claims relating to the debt that financed the 2007 leveraged buyout of Tribune.

Real estate developer Sam Zell took control of Tribune in 2007 through the leveraged buyout and the company, which owns the Chicago Tribune and Los Angeles Times, filed for bankruptcy in 2008.

The committee said there is evidence that $10 billion of LBO debt was fraudulently incurred and therefore holders of the debt should have their claims disallowed or subordinated below the claims of bondholders. The committee also wants to recover fees and interest paid on the debt.

The dispute over the leveraged buyout debt is the final major roadblock to the company’s emergence from bankruptcy. For the unsecured creditors, subordinating senior debt may be their best avenue for a recovery.

Creditors often begin investigations of fraudulently incurred debt and arrive at a settlement that may improve the recovery for unsecured claimants, as was recently the case in the bankruptcy of Magna Entertainment Corp.

The group of senior secured creditors in the Tribune case have countered the push to pursue fraudulent debt claims with a proposal to bring Tribune’s newspapers and television stations out of bankruptcy, largely under their control.

They proposed leaving the parent in Chapter 11 until the dispute over the leveraged buyout is settled. The judge rejected that proposal.

JPMorgan Chase & Co (JPM.N), which holds senior claims against Tribune, requested the court deny the committee’s request to begin litigating its claims regarding the leveraged buyout debt.

The bank said negotiations should be given more time “rather than allowing the process to be overtaken by a rash of competing motions by various parties jockeying for position.”

A hearing on the unsecured creditors’ request to begin litigating the status of the leveraged buyout debt is scheduled for Feb. 18.

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

Reporting by Tom Hals; Editing by Phil Berlowitz

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