By Tom Hals
WILMINGTON, Del (Reuters) - A U.S. Appeals Court has ruled that creditors of the Tribune Co cannot claw back the $8 billion paid to the multimedia company's public shareholders nearly a decade ago in a buyout that was blamed for its bankruptcy.
The ruling stems from the sprawl of litigation sparked by the 2007 buyout led by real estate mogul Sam Zell. A little over a year later, the publisher of the Chicago Tribune and Los Angeles Times filed for bankruptcy.
Tribune emerged from bankruptcy in 2012 and junior creditors were repaid about a third of what they were owed. However, in a bid to recover more, they have spent years battling through the courts, using sometimes novel legal theories.
In 2007, Tribune borrowed $11 billion and then used the money to buy its publicly traded stock and take the company private.
Under the creditors' view, borrowing the money rendered Tribune insolvent and public shareholders received more than reasonable value for their stock; therefore, some of that money could be potentially clawed back as a fraudulent conveyance.
The U.S. Appeals Court for the Second Circuit in New York, however, found the buyout was protected by the Bankruptcy Code's so-called "safe harbor."
The provision seeks to prevent turmoil in financial markets by ensuring securities transactions cannot be unwound except where there is intentional fraud.
To allow the creditors to claw back funds paid so long ago "would seriously undermine, a substantial understatement, markets in which certainty, speed, finality and stability are necessary to attract capital," said the court.
The 53-page opinion by Judges Christopher Droney, Ralph Winter and Alvin Hellerstein said if the creditors' theory were upheld, it would expose any investor who sold in a buyout to potential liability if the firm later went bankrupt.
Roy Englert, an attorney with Robbins, Russell, Englert, Orseck, Untereiner & Sauber who represented the creditors, did not immediately respond to a request for comment.
Philip Anker of Wilmer Cutler Pickering Hale and Dorr, who represented financial institutions in the case, declined to comment. He was one of many attorneys defending against the creditors' lawsuit.
A separate case on behalf of Tribune creditors, pursuing similar claims under federal law, is still pending.
The Tribune ruling could make it harder for creditors to pursue a similar ongoing case involving the 2007 buyout of the Lyondell Chemical Co, which ended up in bankruptcy in 2009.