Sam Zell settles lawsuit over Tribune leveraged-buyout ‘deal from hell’

More than a decade after Tribune Co. went private in a leveraged buyout that saddled the Los Angeles Times’ then-owner with $13 billion in debt and led to its bankruptcy, Sam Zell and dozens of former executives have agreed to pay $200 million to settle a lawsuit brought by unsecured creditors.

The settlement agreement, awaiting approval in Bankruptcy Court in Delaware, would close the book for the corporate directors and officers behind what Zell called the “deal from hell” — an ill-fated transaction that, the plaintiffs alleged, doomed the company to insolvency from the outset.

But thousands of ordinary shareholders may still be forced to give back some of the proceeds from the 2007 buyout — if the litigation trust representing the unsecured creditors prevails in still-unsettled actions.

During court-ordered mediation in March, more than 50 former Tribune directors and senior executives agreed to settle with the litigation trust for $200 million, according to a motion filed May 31. The deadline for objections to the agreement is Monday, with a court approval hearing scheduled for July 11.

In addition to Zell, a number of Chicago business powerhouses are among the settling defendants. They include former Tribune Co. Chief Executive Dennis FitzSimons; Crane Kenney, a former Tribune executive who is now president of business operations for the Chicago Cubs; Miles White, chairman and CEO of Abbott and a former Tribune board member; and Tim Knight, CEO of Tribune Publishing Co. and a former Tribune Co. executive.

The $200 million is “significantly in excess” of available liability insurance, according to the settlement agreement. That means the settlement defendants will have to make up the difference.

Reached through a spokeswoman Thursday, Zell declined to comment. FitzSimons, who received $50 million through stock sales and incentives in the buyout, according to court documents, also declined to comment on the settlement agreement.

Tribune Co. — the predecessor company to Tribune Media — filed for bankruptcy in December 2008, one year after Chicago billionaire Zell took the company private in a heavily leveraged $8.2-billion deal. At the time, Zell blamed a “perfect storm” of industry and economic forces — the Great Recession — but the bankruptcy case turned on charges leveled by junior creditors that the debt burden was unsustainable.

When the company emerged from Chapter 11 bankruptcy in December 2012, it was under the control of senior creditors Oaktree Capital Management; Angelo, Gordon & Co.; and JPMorgan Chase & Co. The Tribune Litigation Trust, which represents the unsecured creditors, filed a fraudulent conveyance lawsuit to recover losses, alleging that the leveraged buyout was a breach of fiduciary duties by “virtually every participant” in the transaction.

The litigation trust is to distribute the $200 million to unsecured creditors based on a formula approved in the Tribune Co. reorganization plan. The settlement is not an admission of “any liability or wrongdoing” by the defendants, according to the agreement.

Although the $200-million payment — due 20 days after approval from the Bankruptcy Court — will free Zell and the other settlement defendants from future claims related to the leveraged buyout, the litigation trust is still pursuing a number of parties to the deal, including Tribune Co.’s financial advisors and thousands of ordinary shareholders.

In January 2017, a judge in the U.S. District Court for the Southern District of New York dismissed the litigation trust’s claims against all former shareholders who sold at least $50,000 worth of the company’s stock during the 2007 leveraged buyout. That group includes more than 5,200 individuals who cashed out at $34 a share when the company went private.

A federal judge dismissed a motion to amend the complaint in April, but the litigation trust specifically excluded those former shareholders in the settlement agreement and plans to appeal the 2017 dismissal, sources said.

The settlement agreement also excludes financial advisors to the leveraged buyout such as Citibank, Merrill Lynch and Morgan Stanley, with the litigation trust appealing an earlier dismissal against those defendants.

Those appeals could take years to resolve.

Tribune Media spun off the Los Angeles Times, Chicago Tribune and other newspapers into Tribune Publishing in 2014, retaining broadcast, real estate and other assets. The Times has since been purchased by billionaire Dr. Patrick Soon-Shiong. In December, Nexstar Media Group agreed to buy Tribune Media for about $4.1 billion, pending approval from shareholders and federal regulators.

Channick writes for the Chicago Tribune.