Tribune Creditors Lose Bid to Unwind Buyout

The court ruled that allowing them to claw back funds from shareholders would set a damaging precedent for the securities markets.
Matthew HellerMarch 24, 2016

A federal appeals court on Thursday rejected a bid by Tribune Co. creditors to claw back the $8 billion paid to shareholders in a leveraged buyout that preceded the media company’s 2008 bankruptcy, according to a Reuters account.

In 2007, Tribune borrowed $11 billion, in part to finance the buyout. The creditors argued that the payout to shareholders was a “fraudulent conveyance” since borrowing the money made Tribune insolvent and shareholders received more than reasonable value for their stock.

Under a “safe harbor” provision of the U.S. Bankruptcy Code, transfers of funds by a debtor may not be voided by a bankruptcy trustee and others “except through an intentional fraudulent conveyance claim.”

But the U.S. Court of Appeals for the Second Circuit said the Tribune creditors’ claim was for a “constructive” fraudulent conveyance and allowing them to claw back from shareholders would set a damaging precedent for the securities markets.

A constructive fraudulent conveyance is a transfer of funds for less than reasonably equivalent value that was made when the debtor was insolvent or was made so by the transfer.

“The effect of [the creditors’] legal theory would be akin to the effect of eliminating the limited liability of investors for the debts of a corporation: a reduction of capital available to American securities markets,” the Second Circuit said in a unanimous opinion, adding that “all investors in public companies would face new and substantial risks.”

The case is part of the legal fallout from the controversial buyout of Tribune led by real estate mogul Sam Zell. A little over a year later, the publisher of the Chicago Tribune and Los Angeles Times filed Chapter 11.

Tribune emerged from bankruptcy in 2012 and junior creditors were repaid about a third of what they were owed. To recover more, they filed constructive fraudulent conveyance claims in various federal and state courts.

In affirming a lower court judge who denied the claims, the Second Circuit warned that “Unwinding settled securities transactions by claims such as [the Tribune creditors’] would seriously undermine — a substantial understatement — markets in which certainty, speed, finality, and stability are necessary to attract capital.”