Tribune examiner believes further discovery possible if time allowed

By Lisa Kerner

Charlotte, N.C., Aug. 4 - The report by Tribune Co.'s court-appointed examiner Kenneth N. Klee was made public and included in a court filing on Tuesday.

As previously reported, Klee was appointed to look at issues surrounding the company's 2007 going-private transaction.

In the 1,000+ page, four-volume report, Klee said if more time was available he would have interviewed and possibly re-interviewed several more witnesses and conducted further discovery.

Klee's investigation focused on the leveraged buyout and questions regarding violations by and sanctions for Wilmington Trust Co.

According to Klee's report, a court is reasonably likely to conclude that the step-one transactions did not constitute an intentional fraudulent transfer.

Klee concluded that it is "highly likely that Tribune, and reasonably likely that the guarantor subsidiaries, were rendered insolvent and without adequate capital as a result of the closing of the step two transactions."

As a result, "what was supposed to never happen ended up happening."

Klee said Tribune's financial performance deteriorated after the first step of the LBO transaction closed. That, coupled with a decline in the stock price and the amount of debt Tribune would incur if the second step closed raised red flags.

The proposed step-two solvency opinion translated into an implied mid-point per share value of about $39 per share, well above both the $34 tender offer price that had been locked in during the spring of 2007 under better market conditions and the trading value of Tribune's stock in the late fall of 2007.

Tribune's board and the special committee approved the solvency opinion, even though no third-party adviser ever evaluated it.

Wilmington Trust liability

Regarding whether Wilmington Trust violated the automatic stay imposed under Bankruptcy Code section 36212 when it filed the complaint against the lead banks and other defendants, Klee said in the report that it is reasonably likely a court will find that Wilmington Trust did not violate the automatic stay.

Klee also believes a court is reasonably likely to find that Wilmington Trust, through its counsel, failed to comply with the requirements of the depository order when it filed the defectively redacted version of the complaint. The violation, however, was not intentional or reckless, Klee determined.

However, Wilmington Trust is likely to be found liable for attorneys' fees and expenses incurred by JPMorgan Chase Bank, NA, according to Klee's report.

It is reasonably unlikely that a court would find that Wilmington Trust breached its fiduciary duties as a member of the Official Committee of Unsecured Creditors or violated the committee's bylaws, the report said.

As previously reported, the court extended the deadline for voting on Tribune's plan of reorganization to Aug. 20 from Aug. 4 and rescheduled the confirmation hearing to Oct. 4 from Aug. 30.

Tribune, a Chicago-based media company, filed for bankruptcy on Dec. 8, 2008 in the U.S. Bankruptcy Court for the District of Delaware. Its Chapter 11 case number is 08-13141.

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