Business

Not so fast, Sam

As Tribune Co. exits a costly 4-year reorganization, one dogged creditor is poised to try and prove that Sam Zell, whose $8.2 billion buyout is blamed by many for the Chicago media giant’s financial woes, knowingly pushed Tribune into bankruptcy.

The creditor, New York hedge fund Aurelius Capital Management, claims Zell, known as a “grave dancer,” and other Trib directors acted recklessly and in breach of fiduciary duty, sources said.

Billionaire Zell, a 71-year-old Windy City native, could be on the hook for several hundred million dollars, a source close to the situation said. And Zell will be forced over the next couple of years to defend his reputation.

A litigation trust this week took over the Zell case, which was basically on hold until Tribune 2.0 set sail, with 23 TV stations, including WPIX Channel 11 in New York and valuable newspaper properties such as the Chicago Tribune and Los Angeles Times.

“There is no doubt Aurelius was looking forward to the day it could directly control the claims, and that starts now,” a source said.

Zell, for his part, believes he did nothing wrong. He claims a perfect storm of industry and economic forces pushed Tribune into reorganization. One source close to Zell said the pugnacious investor is unlikely to settle.

At the heart of Aurelius’ case is the allegation that Zell in 2007, when buying Tribune in two steps, knew that completing the last part would bankrupt the business.

In May 2007, he put $250 million down and Tribune borrowed $4.3 billion to fund a leveraged buyout of most of the company. Six months later, Tribune’s profits were falling. Still, Zell completed the deal, putting down $65 million and having Tribune borrow an additional $4 billion to buy out the last shareholders.

Tribune filed for bankruptcy in December 2008.

Bankruptcy Court-appointed independent examiner Kenneth Klee in August 2010 found that a court would “somewhat likely” rule that the second loan “constituted intentional fraudulent transfers and fraudulently incurred obligations.”

Klee, though, also said he “did not find any credible evidence to support the conclusion that Zell “aided and abetted any breach of fiduciary duty.”

Zell was a Tribune board member at the time of the second part of the leveraged buyout and abstained from voting, the source said.

Zell’s argument is simple: he put $315 million down and lost that money, the source said, so he had no incentive to drive the business into bankruptcy.

“I don’t know how you can say there was intentional fraud and say Zell did not breach his obligations to the company,” the source said.

Plaintiffs will say, “He should have known the risks and did nothing to stop it,” the source said.

Aurelius and Zell spokespersons declined comment.