Citadel argues rights over Tribune claims
Lynne Marek
(Crain's) — Citadel LLC, the city's biggest hedge fund, disclosed this week that it owns Tribune Co. debt issued before the media company's bankruptcy filing in 2008 and it's concerned about how the notes are being handled in the Chapter 11 case and related litigation.
Citadel and Los Angeles-based investment adviser Camden Asset Management L.P. said jointly in an April 23 court filing that they together hold notes that had an initial principal value of $222 million, but that would be worth just $26 million because U.S. Bankruptcy Judge Kevin Carey ruled earlier this month that they had exchanged the notes before the bankruptcy filing.
While they may be willing to accept the lower $26 million value for purposes of the bankruptcy process (they're reserving the right to fight that later), they argue they should be seen as holding the higher $222 million value for purposes of related litigation.
The classification of the claims is important because it could be seen as affecting the creditors' standing in related litigation over the company's 2007 leveraged buyout.
The two asset managers, along with other creditors, are seeking to recover losses they allege resulted from the LBO a year before the bankruptcy filing. They say their $222 million claim in that litigation is based on their holding of the so-called PHONES notes at the time of the LBO.
The creditors say in the related litigation that top Tribune executives, led by then Chairman Sam Zell, and bankers should have known that the $8.3 billion LBO would saddle the Chicago company with so much debt that a bankruptcy filing would be inevitable.
If the $26 million valuation is forced on them in the bankruptcy process, the two asset managers argue that their claims should be recognized as general unsecured claims, not PHONES claims. The unsecured claims would hold a higher ranking than the PHONES claims in the bankruptcy pecking order for repayment to creditors.
"There is no legal basis or authority for concluding that the holders that exchanged their PHONES for a cash payment should, at the same time, receive a drastically reduced claim amount and also be 'lumped' together with the claims of holders that still retain their PHONES claims," Citadel and Camden said in the filing. "At the risk of putting it too simply, it must be one or the other — either the holders hold PHONES claims (with all of their characteristics, including full face amount) or they do not."
Citadel and Camden want Judge Carey to clarify his earlier ruling, and, depending on his response, reconsider his decision.
It's not clear exactly when the two asset managers acquired their notes. They say in the filing that they tried to exchange the notes for cash "immediately prior" to the company's December 2008 filing for Chapter 11 protection. The company acknowledged the exchange attempt but didn't make the cash payment prior to the bankruptcy filing. The court later said it would consider those attempts to exchange successful.
Previously, Citadel and Camden were represented by the trustee for the so-called PHONES notes, Wilmington Trust Co.
Spokespeople for Tribune and Citadel declined comment.