Professional Documents
Culture Documents
Tribune Examiner Summary
Tribune Examiner Summary
In re: : Chapter 11
(VOLUME ONE)
1
The Debtors in these chapter 11 cases, along with the last four digits of each Debtor's federal tax identification number, are:
Tribune Company (0355); 435 Production Company (8655); 5800 Sunset Productions Inc. (5510); Baltimore Newspaper
Networks, Inc. (8258); California Community News Corporation (5306); Candle Holdings Corporation (5626); Channel 20,
Inc. (7399); Channel 39, Inc. (5256); Channel 40, Inc. (3844); Chicago Avenue Construction Company (8634); Chicago
National League Ball Club n/k/a Tribune CNLBC, LLC (0347); Chicago River Production Company (5434); Chicago
Tribune Company (3437); Chicago Tribune Newspapers, Inc. (0439); Chicago Tribune Press Service, Inc. (3167);
ChicagoLand Microwave Licensee, Inc. (1579); Chicagoland Publishing Company (3237); Chicagoland Television News,
Inc. (1352); Courant Specialty Products, Inc. (9221); Direct Mail Associates, Inc. (6121); Distribution Systems of America,
Inc. (3811); Eagle New Media Investments, LLC (6661); Eagle Publishing Investments, LLC (6327); forsalebyowner.com
corp. (0219); ForSaleByOwner.com Referral Services, LLC (9205); Fortify Holdings Corporation (5628); Forum Publishing
Group, Inc. (2940); Gold Coast Publications, Inc. (5505); GreenCo., Inc. (7416); Heart & Crown Advertising, Inc. (9808);
Homeowners Realty, Inc. (1507); Homestead Publishing Co. (4903); Hoy, LLC (8033); Hoy Publications, LLC (2352);
InsertCo, Inc. (2663); Internet Foreclosure Service, Inc. (6550); JuliusAir Company, LLC (9479); JuliusAir Company II,
LLC; KIAH, Inc. (4014); KPLR, Inc. (7943); KSWB Inc. (7035); KTLA Inc. (3404); KWGN Inc. (5347); Los Angeles
Times Communications LLC (1324); Los Angeles Times International, Ltd. (6079); Los Angeles Times Newspapers, Inc.
(0416); Magic T Music Publishing Company (6522); NBBF, LLC (0893); Neocomm, Inc. (7208); New Mass. Media, Inc.
(9553); New River Center Maintenance Association, Inc. (5621); Newscom Services, Inc. (4817); Newspaper Readers
Agency, Inc. (7335); North Michigan Production Company (5466); North Orange Avenue Properties, Inc. (4056); Oak
Brook Productions, Inc. (2598); Orlando Sentinel Communications Company (3775); Patuxnet Publishing Company (4223);
Publishers Forest Brook Productions, Inc. (2598); Sentinel Communications News Ventures, Inc. (2027); Shepard's Inc.
(7931); Signs of Distinction, Inc. (3603); Southern Connecticut Newspapers, Inc. (1455); Star Community Publishing
Group, Inc. (5612); Stemweb, Inc. (4276); Sun-Sentinel Company (2684); The Baltimore Sun Company (6880); The Daily
Press, Inc. (9368); The Hartford Courant Company (3490); The Morning Call, Inc. (7560); The Other Company LLC
(5337); Times Mirror Land and Timber Company (7088); Times Mirror Payroll Processing Company, Inc. (4227); Times
Mirror Services Company, Inc. (1326); TMLH 2, Inc. (0720); TMLS I, Inc. (0719); TMS Entertainment Guides, Inc. (6325);
Tower Distribution Company (9066); Towering T Music Publishing Company (2470); Tribune Broadcast Holdings, Inc.
(4438); Tribune Broadcasting Company (2569); Tribune Broadcasting Holdco, LLC (2534); Tribune Broadcasting News
Network, Inc. (1088); Tribune California Properties, Inc. (1629); Tribune Direct Marketing, Inc. (1479); Tribune
Entertainment Company (6232); Tribune Entertainment Production Company (5393); Tribune Finance, LLC (2537);
Tribune Finance Service Center, Inc. (7844); Tribune License, Inc. (1035); Tribune Los Angeles, Inc. (4522); Tribune
Manhattan Newspaper Holdings, Inc. (7279); Tribune Media Net, Inc. (7847); Tribune Media Services, Inc. (1080); Tribune
Network Holdings Company (9936); Tribune New York Newspaper Holdings, LLC (7278); Tribune NM, Inc. (9939);
Tribune Publishing Company (9720); Tribune Television Company (1634); Tribune Television Holdings, Inc. (1630);
Tribune Television New Orleans, Inc. (4055); Tribune Television Northwest, Inc. (2975); ValuMail, Inc. (9512); Virginia
Community Shoppers, LLC (4025); Virginia Gazette Companies, LLC (9587); WATL, LLC (7384); WCWN LLC (5982);
WDCW Broadcasting, Inc. (8300); WGN Continental Broadcasting Company (9530); WLVI Inc. (8074); WPIX, Inc.
(0191); and WTXX Inc. (1268). The Debtors' corporate headquarters and the mailing address for each Debtor is 435 North
Michigan Avenue, Chicago, Illinois 60611.
KLEE, TUCHIN, BOGDANOFF & STERN LLP SAUL EWING LLP
1999 Avenue of the Stars, 39th Floor 2222 Delaware Avenue, Suite 1200
Los Angeles, CA 90067 P.O. Box 1266
Telephone: (310) 407-4000 Wilmington, DE 19899
Facsimile: (310) 407-9090 Telephone: (302) 421-6800
Facsimile: (302) 421-6813
Lee R. Bogdanoff
Martin R. Barash Mark Minuti
David A. Fidler Charles O. Monk, II
Ronn S. Davids Nicholas J. Nastasi
Jennifer L. Dinkelman Cathleen M. Devlin
LECG, LLC
201 South Main, Suite 450
Salt Lake City, UT 84111
Telephone: (801) 364-6233
Facsimile: (801) 364-6230
F. Wayne Elggren
2. Question Two............................................................................................ 25
3. Question Three.......................................................................................... 27
A. Meet and Confer Process and Establishment of the Examiner Work Plan........... 28
i
a. Publishing Segment. ..................................................................... 44
b. Management of Tribune................................................................ 47
(1) MLPFS.............................................................................. 49
1. Senior Notes.............................................................................................. 58
2. PHONES Notes......................................................................................... 63
ii
c. 2006 Bridge Credit Agreement..................................................... 71
iii
d. Termination Fees. ....................................................................... 142
9. The Step One and Step Two Commitment Letters. ................................ 159
iv
b. Terms of the Step One Financing. .............................................. 171
c. Solvency...................................................................................... 179
15. Pre-Closing of the Step One Financing and Tender Offer...................... 196
16. Closing of the Step One Financing and Expiration and Funding of
the Tender Offer...................................................................................... 205
E. Knowledge and Actions of Key Participants in the Step One Transactions....... 210
v
a. Parties Approached for the Step One Solvency Opinion............ 221
vi
b. Merrill Entities. ........................................................................... 268
d. BofA............................................................................................ 314
vii
(2) The McCormick Foundation........................................... 367
viii
d. Observations Regarding Market Awareness and Reactions. ...... 419
e. Recipients.................................................................................... 435
c. Solvency...................................................................................... 450
ix
e. The Credit Agreement Subrogation Subordination
Agreement................................................................................... 456
H. Knowledge and Actions of Key Participants in the Step Two Transactions. ..... 465
x
(i) Comparable Companies. ..................................... 496
(1) VRC's November 30, 2007 Cash Flow Analysis. ........... 560
xi
(5) December 2, 2007 E-Mail Exchange Between Mr.
Bigelow and Mr. Whayne, and Morgan Stanley's
Precedent Transactions. .................................................. 573
xii
(3) Merrill's Due Diligence................................................... 626
xiii
I. Events Leading Up to the Bankruptcy Filings.................................................... 670
xiv
TABLE OF AUTHORITIES
Page(s)
CASES
Liquidation Trust of Hechinger Inv. Co. v. Fleet Retail Fin. Group (In re Hechinger Inv.
Co.),
327 B.R. 537 (D. Del. 2005), aff'd, 278 F. App'x 125 (3d Cir. 2008) .......................... 10
Ashcroft v. Iqbal,
129 S. Ct. 1937 (2009)................................................................................................ .. 39
FEDERAL STATUTES
STATE STATUTES
FEDERAL REGULATIONS
xv
OTHER SECONDARY MATERIALS
STEPHEN LABATON, The Reckoning: Agency’s ’04 Rule Let Banks Pile up New Debt,
N.Y. TIMES, October 8, 2008, http://www.nytimes.com/2008/10/03/business/-
03sec.htmlpagewanted=all; JOINT CENTER FOR HOUSING STUDIES OF HARVARD
UNIVERSITY, THE STATE OF THE NATION’S HOUSING 2008 (2008); Ben S.
Bernanke, Chairman, Fed. Reserve, Speech at the Fed. Reserve Bank of Chicago’s
43rd Annual Conference on Bank Structure & Competition, (May 17, 2007)............. 38
xvi
I.
On December 8, 2008, the Debtors commenced the Chapter 11 Cases by filing voluntary
petitions for relief under chapter 11 of the Bankruptcy Code. On December 10, 2008, the
Bankruptcy Court entered an order providing for the joint administration of the Chapter 11
Cases.
On January 13, 2010, Wilmington Trust filed its Motion for Appointment of an Examiner
Pursuant to Section 1104(c) of the Bankruptcy Code [Docket No. 3062]. On April 20, 2010, the
Bankruptcy Court entered the Examiner Order, directing the United States Trustee to appoint an
On April 30, 2010, the United States Trustee filed her Notice of Appointment of Examiner
[Docket No. 4212] appointing Kenneth N. Klee, Esq. as the Examiner, subject to Bankruptcy
Court approval. Contemporaneously therewith, the United States Trustee filed the Application of
the United States Trustee for Order Approving Appointment of Examiner [Docket No. 4213].
On May 7, 2010, the Examiner filed the Examiner Work Plan in connection with this
On May 11, 2010, the Bankruptcy Court entered the Examiner Approval Order [Docket
No. 4320], approving the appointment of Professor Klee as the Examiner. The Bankruptcy
Court also entered the Supplemental Order [Docket No. 4312], approving the Examiner Work
2
Unless otherwise indicated, the capitalized terms used in the Report are intended to have the meanings set forth
in Volume Four of the Report, which comprises the Glossary of Defined Terms.
122816.16
On May 19, 2010, the Bankruptcy Court entered orders granting the Examiner's
applications to employ Klee, Tuchin, Bogdanoff & Stern LLP and Saul Ewing LLP as his
counsel and LECG, LLC as his financial advisor nunc pro tunc to April 30, 2010 [Docket
Nos. 4498, 4499, 4500].3 The Bankruptcy Court also entered an order, on May 20, 2010,
authorizing the Examiner to issue subpoenas for oral examinations and production of documents
Pursuant to the Examiner Order, as modified by the Supplemental Order, the Examiner
was directed to conduct the Investigation, responding to each of the following Questions:4
3
The Examiner is grateful to his professional advisors for their tireless efforts in conducting this massive
Investigation and helping to craft the Report.
4
Ex. 1 at ¶ 2 (Examiner Order).
2
In addition, the Examiner Order specified that the Examiner would "otherwise perform
the duties of an Examiner set forth in 11 U.S.C. § 1106(a)(3) and (4) (as limited by this Order)."5
The Examiner Order directed the Examiner to prepare and file a report in respect of the
Investigation on or before July 12, 2010, unless such time shall be extended by order of the
On June 16, 2010, the Examiner filed the Supplement Re: Examiner's Work and Expense
Plan of Court-Appointed Examiner, Kenneth N. Klee, Esq. [Docket No. 4797], apprising the
Bankruptcy Court of the progress of the Investigation and advising the Bankruptcy Court that the
scope and breadth of the work required to complete the Investigation was substantially greater
than anticipated when the Examiner's Work Plan was filed, prior to the commencement of the
Investigation.
On June 23, 2010, the Examiner filed the Motion of Court-Appointed Examiner,
Kenneth N. Klee, Esq. for Extension of Report Deadline [Docket No. 4858]. Pursuant to a duly-
entered order shortening time, the Bankruptcy Court held a telephonic hearing on the motion on
July 1, 2010. By order of the Bankruptcy Court entered on July 1, 2010, the Bankruptcy Court
extended the deadline for the Examiner to file the Report through and including July 26, 2010 at
The Report comprises four Volumes (including annexes and tables) and an Appendix.
Volume One comprises Sections I, II and III. Section I of the Report summarizes the Examiner's
principal findings. Section II discusses the manner in which the Investigation was conducted.
5
Id.
3
Although the Statement of Facts generally is organized chronologically, the Leveraged
ESOP Transactions involved activities by dozens of participants who often were engaged in
activities simultaneously that touched different aspects of the transactions. The Statement of
Facts contains specific sections focusing on the activities of the key players in the Leveraged
ESOP Transactions at different times. By necessity, some of these discussions span a multi-
month period, followed by a discussion covering the same time period but focusing on a different
participant in the transactions. Thus, although the Statement of Facts generally progresses
chronologically from the period preceding Step One to the Step Two Financing Closing Date in
December 2007, certain sections of the Statement of Facts cover overlapping time periods.
Although, as noted, the Statement of Facts contains a narrative discussion of the relevant
participants, events, and documents, it also specifically addresses, and sets forth the Examiner's
findings regarding, a host of e-mails and documents cited by the Parties in support of their
respective contentions.
Volume Two comprises Section IV. Section IV contains the Examiner's analyses and
conclusions concerning the issues raised in Question One. The Examiner has organized this
portion of the Report (as well as Volume Three) to enable the reader to obtain, in a relatively
quick fashion, the Examiner's "bottom line" regarding the issues presented. To accomplish this
objective, the Report sets forth the Examiner's conclusions regarding the principal issues
addressed in each subsection at the outset of that subsection, followed immediately by the
Examiner's factual and legal analysis. Although Section IV contains citations to relevant
documents and facts adduced in the Statement of Facts, these citations are not intended to
represent all of the facts and documents supporting the Examiner's legal conclusions. Readers
are encouraged to review the legal issues addressed in Section IV in tandem with the
4
corresponding factual discussion set forth in Section III. Volume Two is accompanied by
Annex A (DCF Valuation Analysis), Annex B (Recovery Scenarios), and Annex C (Tribune
Volume Three comprises Sections V and VI. Section V contains the Examiner's analysis
and conclusions regarding Question Two. Section VI contains the Examiner's analysis and
Volume Four contains all of the defined terms that are used in the Report.
Finally, the Appendix to the Report (which will be filed subsequent to the Report itself
following leave of the Bankruptcy Court) will contain the exhibits cited in the Report.
The four Volumes comprising the Report contain dozens of discrete factual and legal
findings. Summarizing each and every one of them here would take many pages and would not
read very much like a summary. Some of the issues discussed in the Report, moreover, are
difficult, nuanced, and not conducive to summary treatment. Nevertheless, the Examiner
recognizes that not everyone has the time or the inclination to read the entire Report. The
summary below, therefore, is intended to serve as a brief overview of the Examiner's principal
conclusions and give readers the big picture. Even with that limited purpose, regrettably, the
summary below is lengthy. Readers are encouraged to review this Section I with the Glossary of
Defined Terms, contained in Volume Four of the Report, which defines the capitalized terms
used in the Report. The summary does not, in every instance, correspond to the chronological
The Examiner did not reach definitive conclusions regarding certain of the issues
considered in the Report, because, as noted, certain issues presented are difficult and nuanced.
As a result, by necessity, the Examiner established a full range of potential conclusions from
5
highly likely to highly unlikely, with steps in between. Specifically, the Examiner determined to
frame his conclusions in the Report in a uniform fashion utilizing the following continuum:
(1) highly likely, (2) reasonably likely, (3) somewhat likely, (4) equipoise, (5) somewhat
unlikely, (6) reasonably unlikely, and (7) highly unlikely. This summary uses these terms, as
The Examiner emphasizes that the conclusions summarized below (indeed, all of the
conclusions reached in the Report) are based on the evidence adduced in the Investigation
through July 25, 2010. As summarized in the next section of the Report, the Examiner and his
team worked nearly around the clock from the time of his appointment to the issuance of the
Report to understand and, ultimately, evaluate what happened in the Leveraged ESOP
Transactions. Although the Examiner and his advisors considered and developed a massive
amount of information, by Bankruptcy Court order the Examiner had an extremely limited period
of time to conduct the Investigation. Had the Examiner had more time, he would have
interviewed (and probably re-interviewed) several more witnesses and certainly would have
conducted further discovery. When appropriate, the Report notes specific areas meriting further
investigation.
Finally, as discussed in the next section of the Report, as a result of what the Examiner
believes are largely unjustified assertions of confidentiality by certain Parties, the Examiner was
left with no choice but to redact from the version of the Report filed with the Bankruptcy Court
essentially everything but this summary, the portions of Volume Two containing discussions of
legal principles, Volume Three (discussing Questions Two and Three), and the Glossary of
Defined Terms contained in Volume Four. During the Investigation, the Examiner repeatedly
encouraged the Parties and other entities that previously produced documents and furnished
6
information on a confidential basis to refrain from needlessly continuing to assert confidentiality,
which in turn could unjustifiably shield highly relevant information from the public. Despite
repeated efforts, certain Parties persisted in asserting confidentiality. The Examiner has taken
these assertions up with the Bankruptcy Court and is hopeful that the vast majority, if not the
entirety, of the Report (and exhibits) will be made available to the public. The Examiner notes
that certain Parties (including the Debtors, who facilitated the Investigation and were responsive
to the Examiner's many requests for documents and information) acted responsibly in their
assertions of confidentiality.
1. Question One.
action, and defenses asserted by the Parties with respect to the Leveraged ESOP Transactions.
Turning first to the cluster of bankruptcy and nonbankruptcy claims, causes of action, and
defenses raised by the Parties involving the broad category of alleged wrongful acts by various
persons and entities in connection with the Leveraged ESOP Transactions, the Examiner finds
that a court is reasonably likely to conclude that the Step One Transactions did not constitute an
intentional fraudulent transfer. Application of the traditional "badges of fraud" to the record
adduced and the circumstances giving rise to the Step One Transactions weigh against the
conclusion that the Step One Transactions were entered into to hinder, delay, or defraud
creditors. Although Step One was a highly-leveraged transaction, which, after giving effect to
the Step Two Transactions consummated half a year later, turned out very badly for creditors, the
Examiner did not find credible evidence that the Tribune Entities entered into the Step One
7
The Examiner reaches a different conclusion regarding the Step Two Transactions and
finds that it is somewhat likely that a court would conclude that the Step Two Transactions
constituted intentional fraudulent transfers and fraudulently incurred obligations. The Tribune
Entities did not incur the approximately $3.6 billion in additional Step Two Debt until Step Two
closed on December 20, 2007. It is the incurrence of this indebtedness, the approximately
$4 billion in payments made to stockholders, and the substantial amounts in fees paid to the
lenders and investment bankers at Step Two,6 that are the object of the Step Two intentional
fraudulent transfer inquiry. Although, as noted, this section of the Report is just a summary, the
Examiner believes that it is appropriate to furnish, consistent with the above-noted restrictions
imposed by confidentiality, some measure of detail here regarding his findings on this question,
as the underlying factual predicates bear on other conclusions reached in the Report.
The story of how Tribune ended up effectuating a transaction that the Examiner believes
a court would be somewhat likely to find was an intentional fraudulent transfer has its genesis in
what transpired at Step One, and what the participants in the Step One Transactions expected at
that time would happen at Step Two. In connection with the Step One Transactions
consummated in June 2007, three highly-qualified outside advisors were actively engaged:
MLPFS and CGMI on behalf of Tribune, and Morgan Stanley on behalf of the Special
Committee (which was formed in the fall of 2006 to oversee Tribune's consideration of a
possible strategic transaction). In the period leading up to the closing of Step One, these advisors
evaluated management's projections as well as the solvency work performed by the entity
retained to issue a solvency opinion required for Step One to close, Valuation Research
Corporation (VRC). With the input of the outside advisors, the Tribune Board approved the
6
As a result of certain Parties' assertions of confidentiality, the Examiner believes that he is not at liberty to
disclose the amount of fees paid.
8
Leveraged ESOP Transactions on April 1, 2007 and the Tribune Entities proceeded with the
closing of the Step One Financing on June 4, 2007, having succeeded in obtaining commitments
from the Lead Banks to advance the funds necessary to complete the Leveraged ESOP
Transactions.
The record shows that, at the time of Step One, the Tribune Board, the Special
Committee, and the Financial Advisors all were aware that the Tribune Entities would be
incurring substantial additional indebtedness if Step Two closed. The underlying transaction
documents, therefore, conditioned Tribune's effectuation of the Merger that would complete the
Leveraged ESOP Transactions at Step Two, and the incurrence of the Step Two Debt necessary
to complete those transactions, on Tribune's solvency (as specially defined in certain of these
documents) after giving effect to the Step Two Transactions, and, specifically, on Tribune
obtaining a third-party solvency opinion and furnishing to the LBO Lenders solvency certificates
and representations concerning solvency. In other words—and this is critical for purposes of
analyzing the intentional fraudulent transfer issues at Step Two—by design, a direct causal nexus
existed between, on the one hand, the obligations incurred and transfers made at Step Two and,
on the other hand, the procurement and issuance of the solvency opinion and solvency
certificates and the making of solvency representations. The former could not occur without the
latter.
As summarized below, the Examiner concludes 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. Thus, unfortunately, what was
supposed to never happen ended up happening. Although insolvency and gross disparity in the
value given and received are most commonly associated with constructive fraudulent transfer
9
analysis, they also are "badges of fraud" for purposes of intentional fraudulent transfer analysis.
But, standing alone, they are not sufficient to render a transaction intentionally fraudulent. In the
course of the Investigation, the Examiner found that these two factors do not stand alone. In
particular, the Examiner focused his Investigation on three instances involving dishonesty by
Tribune in the period leading up to, and resulting in, the Step Two Closing. It should be noted
that direct evidence that a transferor set about to hinder, delay, or defraud creditors rarely is
found, and that is why "courts usually rely on circumstantial evidence, including the
First, the Examiner found evidence indicating that Tribune did not act forthrightly in
procuring the solvency opinion issued by VRC at Step Two. Based on the record adduced, the
procurement of the solvency opinion was marred by dishonesty and lack of candor about the role
played by Morgan Stanley in connection with VRC's solvency opinion and on the question of
Tribune's solvency generally. Second, the Examiner found evidence indicating that Tribune's
senior financial management failed to apprise the Tribune Board and Special Committee of
relevant information underlying management's October 2007 projections on which VRC relied in
giving its Step Two solvency opinion. Although the Examiner found no direct evidence that this
information was purposely withheld from the Tribune Board or Special Committee in December
2007, the Examiner finds it implausible that the failure to apprise the Tribune Board and Special
Committee of this information relating to the Step Two solvency valuation, and to a
representation given by Tribune to VRC, was unintentional. Third, the Examiner found evidence
that one important component of those projections went beyond the optimism that sometimes
characterizes management projections. Although the Examiner found no direct evidence that
7
See Liquidation Trust of Hechinger Inv. Co. v. Fleet Retail Fin. Group (In re Hechinger Inv. Co.), 327 B.R.
537, 550 (D. Del. 2005), aff'd, 278 F. App'x 125 (3d Cir. 2008) (citing authorities).
10
Tribune's management was deceitful in the preparation and issuance of this aspect of the October
2007 forecast, this component of the projections bears the earmarks of a conscious effort to
counterbalance the decline in Tribune's 2007 financial performance and other negative trends in
conclusion. The Examiner found that other aspects of management's projections, while
aggressive, do not support the conclusion that the senior financial management at Tribune
Although not fitting neatly into one of the recognized "badges of fraud," the record also
shows that fiduciaries charged with the responsibility for overseeing management's actions and
determining whether the Step Two Transactions would render Tribune insolvent did not
adequately discharge their duties. After Step One closed, Tribune's financial performance
deteriorated. This circumstance, combined with the decline in the price of Tribune Common
Stock, the amount of indebtedness Tribune would incur if Step Two closed, and broader market
indicia, raised red flags signaling Tribune's insolvency if Step Two went forward. Indeed, had
anyone performed a relatively simple mathematical calculation before Step Two closed, it would
have been readily apparent that VRC's proposed Step Two solvency opinion translated into an
implied pre-Step Two 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 far superior market
conditions) and the trading value of Tribune's stock in the late fall of 2007. VRC's opinion was
highly suspect.
In contrast to the active involvement by MLPFS, CGMI, and Morgan Stanley in the
period preceding Step One, by the late fall of 2007 MLPFS and CGMI had ceased advising
Tribune because of conflicts arising from the lending activities of their respective affiliates,
11
MLCC and Citicorp. Unlike at Step One, neither of those advisors evaluated for the Tribune
Board the reasonableness of management's projections or VRC's work. Although the Special
Committee's Financial Advisor, Morgan Stanley, reviewed VRC's presentation materials and
made brief oral remarks to the Special Committee which convened on December 18, 2007 to
consider VRC's Step Two solvency opinion, no minutes of that Special Committee meeting ever
were duly approved and adopted. Testimony provided in the course of the Investigation
contradicted what is stated in portions of the draft minutes of that meeting attributed to Morgan
Stanley, including that VRC's ultimate solvency opinion was conservative and was something on
which directors could reasonably rely. In the course of the Investigation, the Examiner found a
pattern beginning in early December 2007 in which Tribune used Morgan Stanley's imprimatur
to bolster VRC's solvency opinion and push Step Two over the goal line, without authorization
The record shows, moreover, that both the Special Committee and the Tribune Board
approved VRC's solvency opinion, despite the fact that no third-party advisor ever evaluated the
reasonableness of that opinion or the projections on which VRC relied. This is true even though
VRC's engagement letter required that VRC use a definition of "fair market value" and "fair
saleable value" that was contrary to well-established principles of sound valuation, as discussed
extensively in the Report. In effect, VRC was required to add to the value derived from its
analysis the value conferred on the Tribune Entities from the S-Corporation/ESOP structure as a
result of the Merger, even though inclusion of this value in the determination of "fair market
value" and "fair saleable value" was improper. Even leaving this flaw aside, the solvency
opinion was implausible. Other facts and circumstances, discussed in the Report, strongly
12
suggest that the Tribune Board and the Special Committee failed appropriately to discharge their
Based on the record adduced and applying the "natural consequences" formulation
adopted by the Third Circuit Court of Appeals8 to test whether an intentional fraudulent transfer
occurred, the Examiner finds that a court is somewhat likely to conclude that the Tribune Entities
incurred the obligations and made the transfers in Step Two with actual intent to hinder, delay, or
defraud creditors. When a debtor resorts to what appears to be dishonesty to close a transaction,
opinion necessary for that transaction to close, when the transaction under consideration renders
the debtor insolvent based on facts and circumstances known or reasonably ascertainable at the
time, and when that transaction results in the debtor receiving far less than reasonably equivalent
value, the natural consequence is that creditors will be hindered, delayed, or defrauded.
As discussed in the Report, the Examiner considered three principal potential mitigating
factors that weigh against a conclusion that the Tribune Entities perpetrated an intentional
fraudulent transfer at Step Two. First, although Tribune charged senior financial management
with the responsibility for preparing projections and procuring the VRC solvency opinion and,
therefore, any acts by management are ascribed to Tribune as a matter of law, nothing in the
record suggests that the Tribune Board or the members of the Special Committee knowingly or
intentionally committed any fraud or acts of dishonesty. Second, by all appearances, through
and including the closing of the Step Two Transactions, the Zell Group remained eager to close
Step Two. That the Zell Group still wanted to proceed with the transaction furnished some
indicia to the Tribune Board and Special Committee that this significant and highly sophisticated
8
United States v. Tabor Court Realty Corp., 803 F.2d 1288, 1305 (3d Cir. 1986).
13
participant in the Leveraged ESOP Transactions had not concluded that Tribune was about to be
rendered insolvent if the Merger were consummated. Third, despite posing questions to Tribune
and making it known to Tribune that they had retained a third-party solvency expert, the LBO
Lenders ultimately funded the Step Two Debt. That the LBO Lenders were prepared to advance
another $3.6 billion to the Tribune Entities (albeit heavily influenced by their preexisting
contractual obligations made at Step One) supplied additional indicia that yet another
sophisticated party was unwilling to stand in the way of the Step Two Closing.
The honesty of Tribune's outside directors, however, does not erase what appears to be
the dishonesty found in the course of the Investigation. Likewise, the Zell Group's eagerness to
take control of Tribune and willingness to invest approximately $56 million on a net basis at Step
Two (representing about 1.5% of the aggregate debt and equity funded to make Step Two
happen), and the unwillingness of the LBO Lenders to force a showdown with Tribune over
funding Step Two, do not excuse Tribune's directors from failing to perform their responsibilities
and do not erase the other evidence supporting the conclusion that an intentional fraudulent
transfer occurred at Step Two. In sum, the Examiner does not believe that a court will likely find
that the mitigating factors outweigh the contrary evidence. Nevertheless, in light of the
mitigating factors, the Examiner concludes that it is only somewhat likely that a court would find
Continuing the broad category of alleged wrongful acts by various persons and entities,
with respect to claims for breach of fiduciary duty, the Examiner concludes that although, for the
reasons summarized above, Tribune's directors did not exercise reasonable care in evaluating
whether the solvency condition to the Step Two Closing was satisfied, Delaware law governing
breach of fiduciary duty probably would not support imposition of liability against them. The
14
Examiner reaches this conclusion in view of the exculpatory provisions contained in Tribune's
corporate charter and the relatively low threshold required under Delaware law to satisfy the
requirement of good faith. As a result, although the Examiner acknowledges that the question is
relatively close, based on the record adduced, the Examiner concludes it is somewhat unlikely
that a court would impose liability against them. The Examiner, however, finds it reasonably
likely that a court would conclude that one or more of Tribune's officers breached their fiduciary
duties in connection with the Step Two Transactions. The Examiner did not find any credible
evidence to support the conclusion that various third parties (the Large Stockholders, the Lead
Banks, the Financial Advisors, and the Zell Group) aided and abetted any breach of fiduciary
duty in connection with the Leveraged ESOP Transactions (although the Examiner leaves in
equipoise the question whether VRC aided and abetted a breach of fiduciary duty or committed
professional malpractice).
Based on the Investigation conducted to date, the Examiner finds that it is somewhat
unlikely that a court would equitably subordinate or equitably disallow all or any portion of the
LBO Lender Debt. Although the Examiner did find evidence suggesting that the Lead Banks
suspected, and some may have even believed, that the Step Two Transactions would render
Tribune insolvent or close to insolvent, the record adduced does not support a finding that the
Lead Banks engaged in the type of egregious behavior required to support imposition of these
remedies. The Examiner finds that the actions of the Lead Banks in the fall of 2007 largely were
driven by the contractual obligations they made in the spring of 2007 at Step One. These
contractual predicates help explain the actions of the Lead Banks between the closing of Step
One and the closing of Step Two, and, the Examiner believes, serve as mitigating factors against
15
in the Report, however, the information adduced in the Investigation regarding certain actions by
the Lead Banks in the fall of 2007 suggests that further investigation is warranted, among other
things, on the question whether deliberations by the Lead Banks in the months preceding the
Step Two Closing are protected from disclosure based on assertions of attorney-client privilege.
The Examiner concludes that it is reasonably unlikely a court would conclude that any unjust
enrichment claims are meritorious. Finally, the Examiner concludes that a court is reasonably
unlikely to find that a claim for illegal corporate distributions pursuant to the relevant provisions
of the DGCL could be sustained against Tribune's directors, based on the Step One Transactions,
and is somewhat unlikely to find that such a claim could be sustained against Tribune's directors
Turning to the questions presented by the Parties arising under the general topic of
constructive fraudulent transfer claims, the Examiner considered two threshold questions under
what is colloquially referred to as the "collapse principle." First, the Examiner concludes that it
is highly likely that a court would collapse all of the transactions within each of Step One and
Step Two for purposes of evaluating the equivalence of the consideration given and received by
the estates. Second, although the question is relatively close, the Examiner concludes that a
court is somewhat unlikely to collapse Step One and Step Two together and thereby include the
Step Two Debt for purposes of assessing solvency at Step One. On the latter question, applying
the standards governing when collapse is warranted, the Examiner cannot reasonably conclude
that satisfaction of all of the conditions to the Step Two Closing were a mere formality or that the
Step Two Closing was assured from beginning to end. Thus, the Examiner finds that it is
somewhat unlikely that a court would collapse Step One and Step Two together for solvency
purposes. The Examiner also concludes that the Step Two Debt did not constitute a liability of
16
the Tribune Entities at Step One. However—and this is an important distinction—the Examiner
concludes that in measuring capital adequacy at the time of Step One and in considering whether
the Tribune Entities intended to incur debts beyond their ability to repay, a court is highly likely
to consider all obligations that were reasonably foreseeable at the time of Step One, including
those caused by Step Two, as and when they were scheduled to require payment of interest or
principal. Stated succinctly, whereas the Step Two Debt is not added to the balance sheet for
Step One solvency purposes, this prospective indebtedness must be taken into account for
purposes of measuring the Tribune Entities' capital adequacy and intention to incur debts beyond
their reasonable ability to pay. Arguments presented by certain Parties to the contrary are not
supported by the law governing the measurement of capital adequacy and the plain language of
the Bankruptcy Code governing a debtor's intention to incur debts beyond its reasonable ability
to pay.
Turning to questions of solvency and capital adequacy, the Examiner reaches a series of
conclusions concerning the effect of the joint and several liability of all of Tribune and the
Guarantor Subsidiaries on the LBO Lender Debt and the intercompany claims among the various
Tribune Entities, on those questions. In broad outline, the Examiner finds that although a court
would consider the solvency of each Tribune Entity separately, a court is reasonably likely, in
the first instance, to value those entities collectively for solvency purposes after giving effect to
intercompany claims and offsets and in consideration of the Tribune Entities' joint and several
Regarding solvency and capital adequacy at Step One, the Examiner concludes that it is
highly unlikely that the Tribune Entities were rendered insolvent at Step One if only the Step
9
This area of inquiry is dense and highly technical, and it is unlikely that anyone other than the Parties and their
professionals will make their way through those sections of the Report. They were as difficult to write as they
undoubtedly will be to read.
17
One Debt is considered. Among other things, market indicia and the Tribune auction process
leading to the Tribune Board's approval of the Leveraged ESOP Transactions on April 1, 2007
support this conclusion. The Examiner further concludes that if, contrary to the conclusion the
Examiner reached, a court were to collapse Step One and Step Two together or treat the Step
Two Debt as a liability for solvency purposes at Step One, it is somewhat unlikely (although an
exceedingly close call) that a court would conclude that the Tribune Entities were rendered
insolvent in that scenario. The Examiner further concludes that a court is reasonably unlikely to
find that the Step One Transactions left the Tribune Entities without adequate capital, even
taking into account the effect of the Step Two Debt contemplated at the time of Step One. One
developed in February 2007 (as thereafter revised, and ultimately relied on by VRC in its Step
One solvency opinion) should be used for purposes of testing capital adequacy at Step One. For
the reasons discussed in the Report, based on what was known and reasonably ascertainable at
the time of the Step One Financing Closing Date, the Examiner finds that the variances in
Tribune's financial performance through the Step One Financing Closing Date were not
sufficient to justify adjusting those projections for purposes of testing capital adequacy. Finally,
the Examiner finds that it is reasonably unlikely that a court would conclude that the Tribune
Entities entered into the Step One Transactions intending to incur debts beyond their reasonable
ability to pay.
Regarding solvency and capital adequacy at Step Two, the Examiner finds that (i) it is
highly likely that a court would conclude that Tribune was rendered insolvent and left without
adequate capital after giving effect to the Step Two Transactions, and (ii) it is reasonably likely
that a court would conclude that the Guarantor Subsidiaries were left without adequate capital
18
after giving effect to the Step Two Transactions. These are not particularly close questions. The
Examiner finds that, applying a subjective test, a court is somewhat likely to find that the
Tribune Entities intended to incur or believed they would incur debts beyond their ability to pay
as such debts matured. If a court were to apply an objective test on this question, the answer to
this question and the question of capital adequacy at Step Two would be the same.
Regarding the question whether the Tribune Entities received reasonably equivalent value
in exchange for the obligations incurred and transfers made in the Leveraged ESOP Transactions
if the other prerequisites to avoidance are met, as an overall matter the Examiner concludes that
the Tribune Entities did not receive reasonably equivalent value in exchange for the obligations
incurred on the LBO Lender Debt. The Examiner reached a series of conclusions regarding
whether certain of the LBO Lenders conferred direct or indirect value to one or more of the
Tribune Entities in connection with the advances made in the Step One Transactions and the Step
Two Transactions. With respect to the Parties' contentions concerning value allegedly conferred
by the LBO Lenders from specific components of the advances made by those creditors at Step
One and Step Two, the Examiner finds that it is highly likely a court would conclude that none
of the LBO Lenders conferred reasonably equivalent value on any Tribune Entity (i) for the
payments made at Step One and Step Two to Selling Stockholders, (ii) for the satisfaction of the
LATI Notes at Step One, and (iii) for Tribune's alleged "private company status" following the
Step Two Transactions. The Examiner finds that it is highly likely that a court would find that
the lenders under the Credit Agreement conferred reasonably equivalent value on Tribune
resulting from the repayment of the 2006 Bank Debt. Finally, the Examiner finds that it is
reasonably likely that certain of the LBO Lenders conferred, in varying degrees, reasonably
equivalent value on certain of the Tribune Entities resulting from (i) at Step One and Step Two,
19
obligations incurred to pay portions of the LBO Fees, (ii) at Step One, the provision of the
Revolving Credit Facility and the Delayed Draw Facility, and (iii) at Step Two, various tax and
annual 401(k) savings. The Examiner concludes that a court is highly likely to find that the
Financial Advisors conferred some value on the Tribune Entities on account of their services
rendered, but the Examiner is unable to conclude how much value a court would ascribe to those
services.
The Examiner concludes that, to the extent obligations incurred in the Leveraged ESOP
Transactions lacked reasonably equivalent value, then interest and principal payments made after
those transactions but before the Petition Date on account of those obligations likewise were for
less than reasonably equivalent value. Based on the applicable case law (which is less than
clear), however, the Examiner leaves in equipoise the question whether the Credit Agreement
Agent and the Bridge Credit Agreement Agent are the initial transferees of the payments on
Turning to the various defenses asserted by certain Parties, the Examiner finds that a
court is highly likely to find that Bankruptcy Code section 546(e)10 protects payments to the
Selling Stockholders on account of their equity interests in Tribune in connection with the
Leveraged ESOP Transactions, except to the extent the transfers constitute intentional fraudulent
transfer at Step One, section 546(e) should provide a defense to avoidance or recovery of
payments made to the Selling Stockholders in the Step One Transactions. The converse is true
with respect to the payments made to those parties (and obligations incurred to the LBO
Lenders) in the Step Two Transactions. The Examiner further finds that a court is reasonably
10
11 U.S.C. § 546(e) (2006).
20
likely to find that section 546(e) does not protect against avoidance of the obligations incurred on
account of the LBO Lender Debt or the Stock Pledge, guarantees, or promissory notes given in
connection therewith. For the reasons discussed extensively in the Report, the Examiner
disagrees with the contention advanced by certain Parties that this conclusion would render
certain amendments to section 546(e) adopted in 2006 superfluous. The Report explains why
With respect to the various "good faith" defenses asserted by certain Parties as partial
defenses to avoidance, the Examiner finds that a court is highly likely to find that any lack of
good faith by the Credit Agreement Agent or the Bridge Credit Agreement Agent at the time the
respective obligations under these facilities were incurred will apply to all claims against the
Tribune Entities issued under such facilities, whether those claims are in the hands of original
holders or their successors. The Examiner finds that a court is highly likely to apply an
"objective test" for determining good faith in evaluating defenses to avoidance. Applying this
standard and considering the actions of the Parties that asserted this defense, the Examiner finds
(1) A court is reasonably likely to conclude that JPMCB acted in good faith in
connection with the obligations incurred and advances made in the Step One Transactions, but
(2) The Examiner finds no basis to vary the conclusions reached above concerning
JPMCB's actions as Credit Agreement Agent from the actions of the JPM Entities as recipients
of LBO Fees at both steps. As a result, the Examiner finds that it is reasonably likely that the
JPM Entities acted in good faith in Step One, but not at Step Two.
21
(3) For reasons similar to the Examiner's rationale for his conclusion concerning
JPMCB as Credit Agreement Agent, the Examiner finds that it is reasonably likely that a court
would conclude that MLCC did not act in good faith as Bridge Credit Agreement Agent in
connection with the obligations incurred and advances made in the Step Two Transactions.
(4) Regarding the LBO Fees paid to the Merrill Entities at Step One, for reasons
similar to the Examiner's conclusions concerning the good faith of JPMCB and MLCC as agents
at Step One, the Examiner finds that it is reasonably likely that a court would find that the
Merrill Entities acted in good faith in their capacity as transferee of LBO Fees at Step One, but
(5) Regarding the LBO Fees paid to the Citigroup Entities at Step One, for reasons
similar to the Examiner's conclusions generally regarding lender good faith at Step One, the
Examiner finds that it is reasonably likely that a court would conclude that the Citigroup Entities
acted in good faith in their capacity as transferee of LBO Fees at Step One, but not at Step Two.
(6) Regarding the LBO Fees paid to the BofA Entities at Step One, for reasons
similar to the Examiner's conclusions generally regarding other lender good faith at Step One,
the Examiner finds that it is reasonably likely that a court would conclude that the BofA Entities
acted in good faith in their capacity as transferee of LBO Fees at Step One, but not at Step Two.
(7) The Examiner finds that a court is somewhat likely to conclude that both MLPFS
and CGMI acted in good faith in connection with the payments made to them for Advisor Fees
for financial advisory services in connection with the Leveraged ESOP Transactions, although
the question is closer respecting payments made to CGMI shortly after the Step Two Closing.
The Examiner finds that it is unclear whether satisfaction of the Exchangeable EGI-TRB
Note in connection with the Step Two Transactions constitutes a preferential transfer. Even if,
22
however, satisfaction of the Exchangeable EGI-TRB Note qualifies as a preferential transfer, the
Examiner finds that it is reasonably likely that a court would find that the transaction is subject to
an ordinary course of business defense. It is unclear, however, whether a court would find that
The Examiner further finds that to the extent that payments to the LBO Lenders on
account of the Credit Agreement Debt and the Bridge Debt qualified as preferential transfers, it
is reasonably likely that a court would find that the payments would be subject to an ordinary
course of business defense, except to the extent that the underlying Credit Agreement Debt and
The Examiner did not have a sufficient opportunity to evaluate potential preference
claims and defenses relating to bonuses, deferred compensation, retention, severance, and change
in control payments made to directors and officers of the Tribune Entities, and to payments on
intercompany claims, during the one-year period prior to the Petition Date. These issues were
only briefly mentioned and insufficiently developed by the Parties, and a thorough analysis
would require, in the case of the first category, scrutiny of multiple payments to more than two
hundred individuals and, in the case of the second category, many thousands of transactions
The Examiner next considered two issues under the general category of "standing." First,
the Examiner concludes that it is highly likely that a court would find that each Guarantor
Subsidiary that is a Debtor in the Chapter 11 Cases has standing to seek avoidance of the
obligations incurred to the LBO Lenders. Second, the Examiner concludes that a court is
reasonably likely to find that if the estate representatives for Tribune and the Guarantor
23
Subsidiaries were to successfully avoid the obligations incurred on account of the LBO Lender
Debt, then the value available from avoidance at the Guarantor Subsidiary estates would not be
limited solely to the satisfaction of the Non-LBO Debt at the Guarantor Subsidiary levels. Based
on the Examiner's conclusions concerning both intentional and constructive fraudulent transfer
claims at Step One, however, the Examiner believes that the above finding would not likely
The Examiner also made a series of findings concerning the effect of avoidance on
First, the Examiner concludes that to the extent a transferee of an avoided transfer pays
the amount or turns over such property, the transferee will be entitled to assert a claim against the
estate to which the funds are paid or returned equal to the non-constructively fraudulent claim.
The Examiner finds, however, that to the extent an obligee's claim is avoided, a court is
reasonably likely only to permit any participation of such a claim in distributions from the estate
to the extent the claim is supported by reasonably equivalent value or if Non-LBO Creditor
claims are paid in full with interest. It is reasonably likely that if the Step Two Debt, but not the
Step One Debt, is avoided, absent an otherwise applicable basis to subordinate or disallow the
Step One Debt or assert rights of unjust enrichment, the Step One Debt would participate in
distributions from the estates in accordance with applicable non-bankruptcy priorities, but the
Examiner leaves in equipoise the question whether the Step One Debt would participate in
Second, the Examiner concludes that to the extent the LBO Lender Debt is not avoided
(or if avoided, to the extent enforced under Bankruptcy Code section 548(c)),11 the LBO Lenders
11
11 U.S.C. § 548(c) (2006).
24
will be entitled to recover value at the Guarantor Subsidiary levels as well as enforce their rights
under the PHONES Subordination at the Tribune level with respect to distributions from the
Tribune estate. The Examiner, however, concludes that a court is reasonably likely to hold that
the PHONES Subordination would not extend to LBO Lender Debt avoided at the Tribune level.
Third, the Examiner concludes that, to the extent the Credit Agreement Debt and Bridge
Debt are not avoided (or if avoided, to the extent enforced under Bankruptcy Code
section 548(c)) at the Guarantor Subsidiary levels, the subordination provisions of the
Subordinated Bridge Subsidiary Guarantee will remain in effect and govern distributions from
the Guarantor Subsidiary estates. It is reasonably likely that to the extent those obligations are
avoided and are not enforced under section 548(c) at the Guarantor Subsidiary levels and the
Stock Pledge is avoided and thereby rendered inoperative, however, such avoidance in turn
would invalidate the subordination provisions of the Subordinated Bridge Subsidiary Guarantee,
such that any value distributed by Tribune (including amounts available to Tribune as a result of
the remittance of value from the Guarantor Subsidiaries to Tribune resulting from avoidance of
the LBO Lender Debt) would be ratably distributed between the Credit Agreement Debt and the
Bridge Debt. The Examiner finds, however, that in connection with fashioning remedies
resulting from avoidance, once all Non-LBO Creditors are paid in full plus post-petition interest,
2. Question Two.
Question Two presents a relatively discrete inquiry regarding whether Wilmington Trust
violated the automatic stay imposed under Bankruptcy Code section 36212 when it filed the
Complaint against the Lead Banks and certain other defendants. On this matter, the Examiner
12
11 U.S.C. § 362 (2006).
25
concludes that a court is reasonably likely to find that Wilmington Trust did not violate the
Although the Complaint includes certain factual allegations that could underlie a
fraudulent transfer claim, the Complaint does not actually allege a fraudulent transfer claim as a
substantive cause of action, nor does it seek to recover property that may have been fraudulently
transferred by the Debtors before the Chapter 11 Cases were commenced. The claims for relief
alleged in the Complaint are limited to equitable subordination and disallowance of the
defendants' claims, breach of fiduciary duty by the predecessor indenture trustee to the holders of
the PHONES Notes and the defendants' aiding and abetting that breach of fiduciary duty, and the
imposition of a constructive trust on distributions that would be received by the defendants. The
use of factual allegations that may form the basis of an avoidance action does not convert these
Even if the claims for relief requesting equitable subordination and disallowance of the
reasonably unlikely that avoidance actions themselves are rightfully considered property of the
bankruptcy estate, the assertion of which could potentially violate the automatic stay. Property
of the estate includes causes of action that the debtor could have asserted under nonbankruptcy
law before the petition date. Before filing for bankruptcy, a debtor has no right under applicable
nonbankruptcy law to prosecute an action for the recovery of property it has fraudulently
transferred, and all such rights are vested exclusively in creditors. Because a debtor could not
pursue a fraudulent transfer claim under applicable nonbankruptcy law before the petition date, a
fraudulent transfer claim does not constitute property of the estate, although after a bankruptcy
petition is filed the trustee or debtor in possession holds the exclusive right to pursue such claims
26
as representative of the estate, absent further order of the court. For similar reasons, equitable
subordination claims and claim objections are not property of the estate, the assertion of which
Finally, a court is highly likely to find that the breach of fiduciary duty, aiding and
abetting breach of fiduciary duty, and constructive trust claims for relief alleged in the Complaint
do not violate the automatic stay. These claims are not property of the estate and do not seek to
obtain possession of property of the estate or exert control over any such property. The breach of
fiduciary duty and aiding and abetting breach of fiduciary duty claims are premised on unique
and specific fiduciary duties allegedly owed by the predecessor indenture trustee to the holders
of the PHONES Notes and could not be asserted by the Tribune Entities. The constructive trust
remedy also is limited to distributions from the estates that would otherwise be received by the
defendants, and does not seek to impose a constructive trust over property that is retained or held
3. Question Three.
Question Three requires the evaluation of assertions and defenses made by certain of the
Parties in connection with the motion filed by JPMCB for sanctions against Wilmington Trust
for alleged violations of the Depository Order. The Examiner concludes that 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 publicly filed the defectively redacted version of
the Complaint, but that this violation was not intentional or reckless. The Examiner further
concludes that a court is reasonably likely to require Wilmington Trust to pay the reasonable
attorneys' fees and expenses incurred by JPMCB as a result of the violation of the Depository
Order. Finally, the Examiner concludes it is reasonably unlikely that a court would find that
Wilmington Trust breached its fiduciary duties as a member of the UCC or violated the UCC's
27
bylaws. The Examiner notes in this summary and in Volume Three that Wilmington Trust's
counsel exhibited candor and contrition in their discussions with the Examiner regarding this
matter and cooperated completely, while responding firmly to contentions of the Parties to which
they disagreed and advancing the interests of their client in this matter.
II.
A. Meet and Confer Process and Establishment of the Examiner Work Plan.
Pursuant to the Examiner Order, prior to commencing the Investigation, the Examiner
was required to meet and confer with the Parties and, no later than seven days after the filing of
the notice of appointment of Examiner, file a work and expenses plan, including a "good faith
estimate of the fees and expenses of the Examiner and the Examiner's proposed professionals for
Beginning promptly after the Examiner's appointment by the United States Trustee, on
April 30, 2010, the Examiner and his proposed counsel held telephonic conferences with counsel
to the United States Trustee and the Parties to begin discussing the Investigation and arrange for
an in-person meet and confer of the Parties. These telephonic conferences continued throughout
the weekend. During this period, the Examiner and his proposed counsel began reviewing
various pleadings in these cases relating to the subject matter of the Investigation, as well as
pleadings relating to the examinations ordered in other large bankruptcy cases in recent years.
The Examiner determined to proceed immediately to convene all of the Parties to meet and
confer as rapidly as possible. The Debtors and the other Parties agreed that a prompt meeting
13
Ex. 1 at ¶ 4 (Examiner Order).
28
For two full days, beginning on Tuesday, May 4, 2010, the Examiner conducted in-
person meetings with the Parties in New York City, to discuss with them his preliminary
views—and in turn solicit the Parties' views—regarding the work plan for conducting the
Investigation, the manner in which the Parties would cooperate and assist with the Investigation,
the Examiner's preliminary cost estimates for the Investigation, the manner in which issues of
confidentiality and privilege should be addressed, and the need for certain clarifications or
modifications to the Examiner Order. The Examiner also invited the Parties to share their views
in writing on the preceding issues, as well as the merits of the factual and legal issues raised by
the Investigation. These meetings began with a plenary session of all Parties, during which the
Examiner formally discharged his meet and confer obligations under the Examiner Order,
followed by a series of meetings between the Examiner and particular Parties (or, in some cases,
groups of Parties).
After these consultations and his review of publicly available pleadings, it became readily
apparent to the Examiner that the tasks he was assigned were quite substantial, and the timeframe
in which he had to perform those tasks was exceedingly limited. The Investigation relates to a
series of transactions involving billions of dollars, potential claims against numerous parties,
intricate financial analyses and other factual matters as to which the Parties had substantial
disagreements, and a lengthy list of wide-ranging legal claims, defenses, and issues under state
and federal law. The record adduced as of the time the Investigation commenced included over
3 million pages of documents that were collected in a document "depository," but were not
topically indexed.14 Examinations of this magnitude have taken examiners appointed in other
14
The "Document Depository" created by the Parties is not a single, electronic database containing the documents
produced to date, but rather a collection of over 150 compact discs containing documents produced by various
29
Faced with the preceding circumstances, the Examiner crafted an approach to the
Investigation that was tailored to the circumstances presented and aimed at maximizing the
possibility that the Examiner would timely generate a work product that would aid the
Bankruptcy Court. It became clear to the Examiner that the Parties had devoted substantial time,
analysis, and research to the financial and legal issues presented by the Investigation. The
Examiner determined that the most sensible way to approach the Investigation in the limited time
given was to capitalize on the work performed by the Parties, and, at least in the first instance, to
look to the Parties in the adversarial process to flesh out the issues and facts in dispute and the
relative strengths and weaknesses of the positions of the Parties. These contributions were
intended to supplement, rather than replace, the Examiner's independent Investigation. The
Examiner prepared and filed the Examiner Work Plan, which set forth this approach. In the
Examiner Work Plan, the Examiner readily conceded that he was unaware of any other
examination that had proceeded in this fashion, but submitted that his approach was appropriate
under the circumstances. The Bankruptcy Court approved the Examiner Work Plan on May 10,
B. The Investigation.
Immediately following the Bankruptcy Court's approval of the Examiner Work Plan, the
Examiner dispatched a letter dated May 10, 2010 to the Parties, in which the Examiner
established a comprehensive procedure for the Parties to present an agreed-upon (or substantially
agreed-upon) statement of basic facts and to furnish comprehensive legal, financial, and factual
analyses of the matters that were the subject of the Investigation. 15 The Examiner also set
parties in connection with the Chapter 11 Cases, in a variety of electronic formats. Unfortunately, it took the
Examiner considerable time and expense to create a useable electronic database compiling these documents.
15
See Ex. 3 (Letter to Parties, dated May 10, 2010).
30
deadlines concerning the submission of analyses in the form of opening and reply briefs served
on all Parties, and the Examiner identified a host of legal and factual issues to which he
requested the Parties devote attention.16 In addition, the Examiner encouraged the Parties to
furnish any documents or analyses that might bear meaningfully on the factual or legal subject
matter of the Investigation, and to identify the names and contact information of any individuals
that the Parties believed the Examiner should interview, and any discovery that they believed the
Examiner should conduct in conjunction with the Investigation. The Examiner's advisors often
posed follow-up questions and requested and obtained further analyses and documents from the
The Examiner received, reviewed, and considered hundreds of pages of briefing and tens
by no means exclusively, documents identified by the Parties to the Examiner as relevant to the
Investigation). In retrospect, the provisions of the Examiner Order limiting the Investigation to
contentions "raised by the Parties" encouraged the Parties to raise just about every conceivable
claim or defense that could be imagined, lest the Examiner not consider it. The Parties raised
dozens of claims and defenses, each with sub-issues and special complexities that required the
Examiner's careful evaluation. Moreover, although the Parties took advantage of the opportunity
to annotate their submissions with documents allegedly supporting their positions, on close
inspection the Examiner determined that many of the documents did not support the contentions
for which they were provided; in many instances the Examiner and his advisors had to search for
and evaluate other documents to help develop a more complete picture. The interviews
16
After sending the May 10, 2010 letter, the Examiner clarified that all Parties were invited to present briefs.
31
conducted by the Examiner and his advisors, discussed below, also raised issues that had not
Early on, the Examiner established his own electronic databases of documents and
information collected by his advisors. These databases provided the Examiner with the ability to
review documents in a more organized fashion. In conjunction with the submissions requested
under the above-noted May 10, 2010 letter, the Parties directly submitted evidence that they
contend supported their respective positions, which the Parties uploaded to a secure document
website established by the Examiner for that purpose. During the Investigation, certain Parties
The Examiner was surprised to learn at the outset of the investigation that—
notwithstanding the extensive legal and factual analyses prepared by the Parties and the wide-
fraudulent transfer, bad faith, breach of fiduciary duty, and aiding and abetting fiduciary duty
breaches—only seven Rule 2004 examinations relating to the Leveraged ESOP Transactions had
been conducted. The Examiner determined that it was necessary to identify and quickly arrange
and conduct interviews of key witnesses, not all of whom were physically located in the same
city. Because of the short amount of time available to conduct the Investigation, by necessity the
Examiner attempted to narrow the list of interviewees to those persons that the Examiner
believed could meaningfully clarify or augment the factual record. Had the Examiner had more
time to conduct the Investigation, he would have conducted more than the 38 interviews that he
held; and it is possible that someone who the Examiner did not interview would have provided
pertinent information. Nevertheless, as the process unfolded, and new information was adduced
in the interviews and during the Investigation, it became apparent that the Examiner would need
32
at least another two weeks to complete the interviews necessary to prepare the Report. Thus, the
Examiner requested and obtained an extension of time to file the Report. The last interview was
All told, the Examiner and his advisors conducted 38 interviews over 46 days in four
cities. Of these, the Examiner attended 33 in person (of which three were attended by video
conference). Of the five interviews not attended by the Examiner (principally because he was
conducting another interview at the same time or traveling to attend a scheduled interview), the
Examiner believes that he adequately apprised himself of what transpired. Participating in most
of the interviews enabled the Examiner to personally evaluate witness demeanor and credibility
and actively participate in questioning. All interviewees were represented by counsel. In some
instances, the Examiner did not record the interviews and did not request that witnesses take an
oath (although witnesses were admonished at the outset, and were asked to and did confirm at
the conclusion of the interview, that all answers were furnished with the same care as if the
interviewee had been under oath). In other instances, the Examiner determined that it was
instances, the Examiner re-interviewed a witness under oath. In connection with each
transcribed interview, each witness was advised that the interview was not a deposition and that
all objections to questions were preserved. Unlike a deposition (in which one party typically
asks questions at any given time), the Examiner, as well as his counsel, posed questions;
sometimes the witness' counsel posed clarifying questions and offered perspectives to the
The following are the persons interviewed, the dates of the interviews and the locations:
33
Date of
Interviewee Title & Company Location of Interview
Interview
Bromberg, Kate S. Current Senior Associate with 6/1/2010 Brown Rudnick LLP
Brown Rudnick LLP, Seven Times Square
representing Wilmington New York, NY 10036
Trust
Dolan, William M. Current Partner with Brown 6/2/2010 Brown Rudnick LLP
Rudnick LLP, representing Seven Times Square
Wilmington Trust New York, NY 10036
Hoover, Jennifer Current Associate with 6/2/2010 Brown Rudnick LLP
Benesch Friedlander Coplan Seven Times Square
& Aronoff LLP, local New York, NY 10036
Delaware counsel to
Wilmington Trust
Siegel, Martin Current Partner with Brown 6/2/2010 Brown Rudnick LLP
Rudnick LLP, lead litigator Seven Times Square
representing Wilmington New York, NY 10036
Trust
Stark, Robert J. Current Partner with Brown 6/2/2010 Brown Rudnick LLP
Rudnick LLP, representing Seven Times Square
Wilmington Trust New York, NY 10036
Sell, Jeffrey A. Former Head of Special 6/3/2010 Davis Polk
Credits Group in the Credit 450 Lexington Avenue
Risk Department of JPMCB New York, NY 10017
Costa, Michael R. Former Managing Director of 6/4/2010 Kaye Scholer
Mergers and Acquisitions - 425 Park Avenue
part of the investment New York, NY 10022
banking division of MLPFS
Whayne, Thomas Current Managing Director at 6/11/2010 Weil Gotshal & Manges
Morgan Stanley 767 Fifth Avenue
New York, NY 10153
Zell, Samuel Current Controlling 6/14/2010 Equity Group Investments
Shareholder of EGI, LLC/ 2 N. Riverside Plaza
Director, Chairman of the Chicago, IL 60606
Tribune Board
Hianik, Mark Former Tribune Vice 6/15/2010 Sidley Austin LLP
President, Assistant General One South Dearborn
Counsel and Assistant Chicago, Illinois 60603
Secretary
Larsen, Nils Current Executive Vice 6/15/2010 Sidley Austin LLP
President and CIO of Tribune One South Dearborn
Chicago, Illinois 60603
34
Date of
Interviewee Title & Company Location of Interview
Interview
Bartter, Brit Current Vice Chairman of 6/16/2010 JPMorgan Chase
JPMCB's Investment Banking Chase Tower
Group 10 South Dearborn Street
Chicago, IL, 60603
Bigelow, Chandler Current Tribune CFO/ 6/17/2010 Sidley Austin LLP
Former Tribune Treasurer/ One South Dearborn
VP, Treasurer of one or more Chicago, Illinois 60603
Guarantor Subsidiaries
Kazan, Daniel G. VP of Development prior to 6/17/2010 Sidley Austin LLP
the Leveraged ESOP One South Dearborn
Transactions/Current Sr. VP Chicago, Illinois 60603
Corporate Development at
Tribune
Williams, David D. President and CEO of 6/18/2010 Sidley Austin LLP
Tribune Media Services, Inc. One South Dearborn
Chicago, Illinois 60603
Landon, Timothy J. Former President of Tribune 6/22/2010 Sidley Austin LLP
Interactive, Inc. One South Dearborn
Chicago, Illinois 60603
Mulaney Jr., Charles W. Current Partners with 6/24/2010 Sidley Austin LLP
Skadden Arps, Counsel to the One South Dearborn
Tribune Special Committee Chicago, Illinois 60603
Osborn, William A. Chair of the Special 6/24/2010 Sidley Austin LLP
Committee of the Tribune One South Dearborn
Chicago, Illinois 60603
Dimon, Jamie Current CEO of JPM 6/25/2010 JPMorgan Chase
270 Park Avenue
New York, NY 10017
FitzSimons, Dennis J. Former Tribune CEO/ 6/25/2010 Sidley Austin LLP
Chairman of the Tribune One South Dearborn
Chicago, Illinois 60603
Grenesko, Donald C. Former Sr. VP of Finance & 6/25/2010 Sidley Austin LLP
Administration at Tribune One South Dearborn
Chicago, Illinois 60603
Kapadia, Rajesh Currently at JPMCB 6/25/2010 Davis Polk
450 Lexington Avenue
New York, NY 10017
Stinehart, Jr., William Former Director of Tribune/ 6/28/2010 Klee, Tuchin, Bogdanoff &
Trustee of the Chandler Stern LLP
Trusts 1999 Avenue of the Stars
39th Floor
Los Angeles, CA 90067
35
Date of
Interviewee Title & Company Location of Interview
Interview
Mohr, Christina Currently at Citigroup in the 6/29/2010 Paul, Weiss, Rifkind,
M&A Group Wharton & Garrison LLP
1285 Avenue of the Americas
New York, NY 10019
Browning, Bryan Current Senior Vice President 6/30/2010 Winston & Strawn
and Professional Services 200 Park Avenue
Manager with VRC New York, NY 10166
Rucker III, Mose (Chad) Current Managing Director 6/30/2010 Winston & Strawn
with VRC 200 Park Avenue
New York, NY 10166
Taubman, Paul Currently with Morgan 7/1/2010 Morgan Stanley
Stanley 1585 Broadway
New York, NY 10036
Amsden, Harry Former Vice President of 7/2/2010 LECG
Finance of Tribune 33 West Monroe Street
Publishing Chicago, IL 60603
Whayne, Thomas Current Managing Director at 7/2/2010 Weil Gotshal & Manges
(Follow-Up Interview) Morgan Stanley 767 Fifth Avenue
New York, NY 10153
Kurmaniak, Rosanne Current Director of Citigroup/ 7/7/2010 Paul, Weiss, Rifkind,
Former Vice President of Wharton & Garrison LLP
Citigroup 1285 Avenue of the Americas
New York, NY 10019
Larsen, Nils Current Executive Vice 7/7/2010 Jenner & Block
(Follow-Up Interview) President and CIO of Tribune 353 North Clark Street
Chicago, IL 60654
Grenesko, Donald C. Former Senior VP of Finance 7/8/2010 Sidley Austin LLP
(Follow-Up Interview) & Administration at Tribune One South Dearborn
Chicago, Illinois 60603
Kaplan, Todd Current Senior Banker with 7/8/2010 Kaye Scholer
Merrill 70 West Madison Street
Suite 4100
Chicago, IL 60602
Kenney, Crane Former General Counsel of 7/8/2010 Sidley Austin LLP
Tribune One South Dearborn
Chicago, Illinois 60603
Persily, Julie H. Formerly with the Citigroup 7/8/2010 Paul, Weiss, Rifkind,
Leveraged Finance Wharton & Garrison LLP
Department 1285 Avenue of the Americas
New York, NY 10019
36
Date of
Interviewee Title & Company Location of Interview
Interview
Petrik, Daniel Currently with Bank of 7/8/2010 LECG
America 33 West Monroe Street
Chicago, IL 60603
Kenny, Thomas J. Current Senior Vice President 7/9/2010 Saul Ewing
of Murray Devine 1500 Market Street, 38th Fl.
Philadelphia, PA 19102
Amsden, Harry Former Vice President of 7/16/2010 Telephone Conference
(Follow-Up Interview) Finance of Tribune
Publishing
The Examiner believes that, on balance, the interviews were extraordinarily helpful in
assisting the Examiner to understand key facts necessary to render his findings. The Examiner
recognizes, however, that formal depositions (and the cross-examination that accompanies an
adversarial process) might well produce information different from that which the Examiner was
able to adduce in these interviews. Also, the adversarial process allows rebuttal witnesses and
documents that may impeach or contradict other testimony or documents. Although the
Examiner strongly believes that the information adduced in the Investigation materially advances
Investigation nor the resulting Report are intended to serve as proxies for what an adjudicative
The Examiner and his counsel evaluated numerous legal and factual questions in
connection with the Investigation. In addition, the Examiner's counsel worked closely with the
analysis of the issues presented under the circumstances. Among other things, LECG analyzed
issues concerning solvency, unreasonable capital, the flow of funds, and matters pertaining to
intercompany claims. To a great extent, LECG utilized and built on analyses prepared by the
various financial advisors for the Parties, although, as the Report amply illustrates, LECG
37
conducted its own independent investigation of the financial matters at issue on behalf of the
Examiner.
The Examiner would be remiss if he did not at least take note that in the wake of the
financial collapse in the fall of 2008 and the resulting "Great Recession," considerable
commentary has suggested that the credit markets generally and underwriting practices in
particular in the period preceding these events were widely imprudent and reckless.17 The
Examiner shares some of the sentiments expressed in this regard. Although standards of
reasonableness and prudence may well transcend the temporary systemic lapses that sometimes
characterize standards of care at any particular time,18 as readers will observe, the Examiner
hewed closely in the Report to the applicable legal standards governing the Questions. As the
legal analyses that follow reveal, these standards do not give the Examiner license to evaluate the
Leveraged ESOP Transactions with the benefit of hindsight or the wisdom born from the hard
lessons of the past few years, nor could the Examiner simply assume that a financial catastrophe
of the magnitude our country has experienced since 2008 was reasonably foreseeable even a year
before that. Moreover, the Examiner was not charged with evaluating, and therefore mercifully
keeps to himself his own views regarding, whether the Leveraged ESOP Transactions
17
Stephen Labaton, The Reckoning: Agency’s ’04 Rule Let Banks Pile up New Debt, N.Y. TIMES, October 8,
2008, http://www.nytimes.com/2008/10/03/business/03sec.htmlpagewanted=all; JOINT CENTER FOR HOUSING
STUDIES OF HARVARD UNIVERSITY, THE STATE OF THE NATION’S HOUSING 2008 (2008); Ben S. Bernanke,
Chairman, Fed. Reserve, Speech at the Fed. Reserve Bank of Chicago’s 43rd Annual Conference on Bank
Structure & Competition, (May 17, 2007).
18
See generally The T.J. Hooper, 60 F.2d 737, 740 (2d Cir. 1932) (L. Hand, J.) ("Indeed in most cases reasonable
prudence is in fact common prudence; but strictly it is never its measure; a whole calling may have unduly
lagged in the adoption of new and available devices. It may never set its own tests, however persuasive be its
usages. Courts must in the end say what is required; there are precautions so imperative that even their
universal disregard will not excuse their omission.").
38
C. The Standard Adopted in the Report.
In connection with the Examiner Work Plan, the Examiner proposed, and the Bankruptcy
Court in its Supplemental Order agreed, that with respect to Question One, the Examiner should
engage in a meaningful process of weighing the relative positions of the Parties, including an
analysis of the potential remedies that may be available to the estate(s) if one or more transfers or
obligations are avoided, and the effect of such remedies on distributions on account of
prepetition claims.19 In addition, the Examiner understood that, when possible, he should
attempt to draw conclusions with respect to the issues in dispute based on the factual record
adduced and applicable law, rather than just determining whether a particular claim, cause of
action, or defense could be sustained if the Parties' allegations were ultimately proven with
opining whether a claim or defense could survive a motion to dismiss. This required the
Examiner to delve deeply into the factual record and conduct as thorough an investigation as
time and resources permitted. As noted in the previous section, the Examiner determined to
frame his conclusions in a uniform fashion utilizing the following continuum: (1) highly likely,
(2) reasonably likely, (3) somewhat likely, (4) equipoise, (5) somewhat unlikely, (6) reasonably
As mentioned at the outset of the Report, although the Examiner has endeavored to
present meaningful analyses and conclusions using the preceding framework, as previewed in the
19
By their terms, Questions Two and Three require that the Examiner "evaluate" the matters posed. In contrast, as
originally formulated, Question One reasonably could be read to charge the Examiner simply with determining
whether there are or are not potential claims, causes of action, and defenses that might be asserted. See
Examiner Work Plan at ¶ 21. The Supplemental Order clarified this ambiguity as discussed above.
20
To withstand a motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, to 'state
a claim to relief that is plausible on its face.'" Max v. Republican Comm., 587 F.3d 198, 200 (3d Cir. 2009)
(quoting Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009)).
39
Examiner Work Plan, given the short period of time that the Examiner was afforded to complete
the Investigation, the Report identifies certain matters on which a complete investigation and
analysis was not feasible and as to which further investigation may be necessary, if the
Bankruptcy Court so directs. In all instances, the conclusions contained in the Report are based
on the information reviewed and analyses conducted through July 25, 2010. Further analyses
and investigation might change the conclusions reached. When appropriate, the Report identifies
From the very first hours of the meet and confer process, the Examiner learned that
nearly every document produced in the Chapter 11 Cases was marked "confidential" or "highly
confidential" and its contents could not be publicly disclosed. The "confidential" or "highly
confidential" designations of some documents verged on the absurd, and included, among other
things, underlying credit agreements and even documents filed with the SEC. Unfortunately, to
the best of the Examiner's knowledge, no Party had challenged the designation of as much as a
expressly provided that the Examiner was subject to any applicable orders of the Bankruptcy
Court governing confidentiality.21 On the other hand, it also was clear from the Examiner
Order,22 and from the record of the Chapter 11 Cases, that the Bankruptcy Court expected the
In an effort to reconcile this apparent conflict, as discussed in the Examiner Work Plan,23
the Examiner required that following the formal exchange of briefs and documents described
21
See Ex. 1 at ¶¶ 6 & 11 (Examiner Order).
22
See Ex. 1 at ¶ 13 (Examiner Order).
23
See Ex. 2 at ¶¶ 25-26 (Examiner Work Plan).
40
above, each Party identify to the Examiner those particular documents accompanying the briefs
that the Party believed in good faith were entitled to protection from public disclosure under
applicable law and that the Examiner should not publicly disclose in the Report. The Examiner
made clear to the Parties, repeatedly, that the standard the Parties should apply to determine
whether to designate documents for continued nondisclosure should not be whether the
disclosure would be embarrassing to a particular Party, or even harmful to its position in existing
or potential litigation, but whether there was a bona fide legal basis to prevent its public
disclosure. The Examiner set June 14, 2010 as the deadline for Parties to identify any specific
document that they maintained should be preserved as confidential. After the June 14, 2010
deadline, in a series of communications, the Examiner identified to the Parties, and other entities
that had produced documents denominated as confidential, certain documents that were not
submitted with the briefs but which the Examiner might determine to quote from or refer to in
the Report. The Examiner set deadlines for each Party and other entities to identify which of
those accompanying documents the Party believed in good faith were entitled to protection from
public disclosure under applicable law and that the Examiner should not publicly disclose in the
Report. The process was laborious and taxing, and the wanton practice of designating essentially
certain documents that such Parties maintained should remain confidential. References to those
items were so numerous and, in many instances, wide-ranging that, regrettably, the Examiner
had no choice but to redact the entire factual narrative in this Volume One and the substantive
41
analysis contained in Volume Two from the version of the Report filed as matter of public
record. The Examiner has filed a motion with the Bankruptcy Court to address this matter.
42
III.
TABLE 1—1
Table 2
TABLE 2—1