July 27, 2010 12:46 PM

Hot Bankruptcy Round-Up: WaMu, Trib Reaching the End

Posted by Zach Lowe

Two of the most contentious bankruptcy cases of the financial crisis took major steps forward yesterday, the highlight being the release of a heavily redacted version of the examiner's report investigating the collapse of the Tribune Company. As we detailed here in late June, various parties who oppose Tribune's reorganization plan had pushed for an examiner's report, hoping it would turn up evidence of fraud that could in turn reduce the amount of money owed to various creditors. 

What's the verdict? The early returns are mixed. The examiner, Kenneth Klee of the Los Angeles-based boutique Klee, Tuchin, Bogdanoff & Stern, found that part of the disastrous $12 billion leveraged buyout that took Tribune private in 2007 might indeed have constituted a fraudulent conveyance. Various midlevel creditors, including one group represented by Brown Rudnick, have been hoping Klee would conclude that the banks that financed the LBO knew or should have known it would make Tribune insolvent. That group of banks, which includes JPMorgan Chase, Merrill Lynch, and others, became Tribune's senior creditors after providing those loans. They are slated to take control of the company in its proposed reorganization plan. Any finding that they committed fraud would imperil their claims and free up money (or, possibly, equity in Tribune) for other creditors. 

Klee found evidence that the banks may have suspected the LBO would render Tribune insolvent, but that finding alone does not necessarily provide enough evidence for claims of fraud against the banks, according to the report and these news reports in the Los Angeles Times and S&P's bankruptcy publication (the latter is subscription only). Klee also raised the possibility that the Tribune estate, represented by Sidley Austin, might be able to reclaim some of the cash paid to shareholders as part of the LBO, according to S&P's write-up. 

But what of Tribune's pre-LBO management and, of course, Sam Zell? Might the estate and its creditors have claims against them? That is also unclear, though Klee comes close to a definitive finding that Tribune's management team committed fraud by deceiving the company's board about how well the LBO might work, according to the LAT and court records. Zell himself is likely safe, since he "did not participate" in Tribune's decisions about the LBO and lost $300 million himself on the deal, S&P concludes. 

Clearly, there is much more work for the lawyers to do here. The first step, according to both the Trib estate and Klee, would be to release the unredacted report and the various records that support it. Both Klee (who is being advised by Saul Ewing) and the estate filed papers Monday pushing for the guts of the report, including transcripts of interviews Klee's team conducted with various bankers and executives, to be released to all parties in the case as soon as possible. Both also mentioned that the unredacted version should be made public eventually. 

The main holdout? Merrill Lynch. The bank, one of the group of banks that financed the LBO, is opposed to releasing transcripts of interviews between the examiner's team and Merrill executives, court records show. We called Madlyn Primoff of Kaye Scholer, Merrill's counsel during the Tribune case, to ask why the bank has such strong opinions about keeping the material confidential. We have not yet heard back. 

Likewise, we haven't heard back from Klee or the Brown Rudnick lawyers who have been pushing so hard for a declaration that Tribune's LBO was a fraud from the start. We'll let you know if and when we hear from some of these folks. 

Meanwhile, the Washington Mutual bankruptcy case, nearing its two-year anniversary, remains a step behind the Tribune case. The U.S. trustee overseeing the case of the failed bank nominated McKenna Long & Aldridge partner Joshua Hochberg to serve as the examiner in the WaMu case, according to Reuters. Hochberg served the same role in the Refco case and was a top lawyer at the Justice Department before joining McKenna Long in 2005, according to Reuters.

As we reported last week, a federal judge granted a shareholder group's request for an examiner in the WaMu case. The shareholders, represented by Susman Godfrey, want to investigate whether WaMu's estate (represented by Weil, Gotshal & Manges and Quinn Emanuel Urquhart & Sullivan) is undervaluing certain WaMu assets and potential claims against JPMorgan Chase, which bought WaMu out of a federal receivership. 

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