Sam Zell

Rejecting a request by Tribune Company attorneys to dismiss the suit against real estate magnate Zell and GreatBanc Trust Co., which helped structure the deal, U.S. District Judge Rebecca R. Pallmeyer said the plaintiffs “have stated a claim for knowing participation in a fiduciary breach.”

Pallmeyer dismissed claims in the suit against board members of the company that Zell created when he took over Tribune Company in a highly leveraged deal at the end of 2007.

Tribune’s team of lawyers had hoped to stop the case against Zell and GreatBanc by winning the motion to dismiss, something that could have ended the matter. Thursday’s ruling allows the case to proceed.

Referring to one claim by Tribune attorneys that the plaintiffs took “wild shots” at GreatBanc’s work, Pallmeyer said they “they are not so wild that the claim must be dismissed,” adding:

In particular, plaintiffs’ allegations raise serious questions regarding whether GreatBanc adequately considered the risk created by the great amount of debt Tribune would take on in the deal.

Real estate magnate Zell took control of Tribune company, publishers of 10 newspapers including the LA Times, Chicago Tribune, Baltimore Sun, Newsday, which he since has sold, and 25 television stations.

Zell created an employee stock ownership plan that was supposed to benefit workers. Within the first year, however, Tribune had declared bankruptcy, with debt in excess of $13 billion. Tribune company papers have laid off hundreds of employees.

A half-dozen current and former Los Angeles Times journalists sued alleging that Zell and others breached their fiduciary duty to employees in the deal, contending that $8.3 billion in debt incurred to buy the company was imprudent.

They also claim that Zell and others breached their fiduciary duty to protect employees’ interests under Employee Retirement and Income Security Act, ERISA.

Pallmeyer rejected the defense request that she dismiss the claim that Tribune overpaid for the stock when it $34 per share, a premium at a time when newspaper stock prices already were in decline.

“Whether the ESOP paid adequate consideration for the stock it bought from Tribune Company is a question of fact, not one for which Defendants are entitled to judgment as a matter of law,” the judge wrote in the 25-page decision. Dan Neil, Corie Brown, Henry Weinstein, Walter Roche, Jr., Myron Levin and Julie Makinen v Samuel Zell, No. 08 C 6833. A seventh plaintiff, former Los Angeles Times Washington bureau chief Jack Nelson, recently died.

UPDATE:  Editor & Publisher today places Pallmeyer’s ruling in the context of Tribune’s bankruptcy and underscores the significance of the decision first reported publicly by ProtectConsumerJustice.org:

Among the defense arguments was that the L.A. Times employees, who hope to represent the entire class of former and current Tribune workers, failed to state a claim by alleging sufficient facts to show a legal wrong was committed.

But in two key rulings — keeping Zell and the ESOP’s trustee, Greatbanc Trust Co., as defendants — Pallmeyer addresses the same claims being made in the bankruptcy case by junior creditors who allege the senior lenders who hold most of Tribune’s debt knew the deal was doomed from the start, but funded it anyway. If they are successful in this “fraudulent conveyance” argument, the junior creditors could replace the senior creditors in the line divvying up Tribune’s post-bankruptcy assets. …

In another place in her memo, Judge Pallmeyer concludes that the employees’ lawsuit also “states a claim” against Zell for “knowingly participating in a fiduciary breach.”

Attorneys representing the plaintiffs hailed the ruling.

“This decision reaffirms our complaint. Judge Pallmeyer found that plaintiffs’ first claim raises serious questions regarding whether GreatBanc adequately considered the risk created by the great amount of debt Tribune would take on in the deal,” said Oakland attorney of Dan Feinberg of Lewis, Feinberg, Lee, Renaker & Jackson.

Added Phil Gregory of Cotchett, Pitre & McCarthy in Burlingame:

In filing this lawsuit, one of our primary concerns was that Zell should not be able to use an ESOP to take over businesses like the Tribune Company and thereby control important elements of our society, particularly a free press. We feared that others would use Zell’s techniques, employing what the Court has determined to be clear breaches of fiduciary duties and knowing participation in an ERISA violation. We applaud Judge Pallmeyer for seeing through the charade and allowing this important lawsuit to proceed.

Chicago counsel Thomas Meites of Meites, Mulder, Mollica & Glink, said:  “Judge Pallmeyer ruled that our complaint properly alleges Zell, EGI-TRB and the Tribune Directors engaged in prohibited transactions when they caused Tribune to buy stock before December 2007.”

–J.G. Preston

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