Friday, December 17, 2010

$180 Million Is Not Chump Change If You've Got to Give It Back

Posted By on 12.17.10 at 08:30 AM

In the past few days I've twice been forwarded a document that my Tribune sources find pretty astonishing. It's a list of 209 Tribune Company managers and former managers who came into quite a bit of money when Sam Zell took the company private back in December of 2007. Most of the checks were written because these managers had, over the years, been rewarded with Tribune Company stock that they could finally cash in. Other moneys were "deferred bonuses" from the company's management incentive program — bonuses those managers had earned but chose to leave with the company for the time being in order to put off having to pay taxes on them.

Then there were the "success bonuses," paid to executives whose role in taking the company private had gone above and beyond their regular duties. And some executives would get what was called "phantom equity," that is, stock in the new private company that they could cash in when they left it, as many did. And some payments were labeled "executive transition," a fancy way of saying a type of severance. A few were "excise tax Gross Ups," which is described here as compensation for the taxes high-flying execs sometimes have to pay on their golden parachutes.

All told, the Tribune Company payments came to about $180 million. That's a serious piece of change — especially to someone who worked there for years and didn't share in a penny of it; and most definitely to someone whose humble role in the privatization process was to get laid off.

Here's the PDF I was forwarded — it shows what everyone got. A few high-fliers, as the expression goes, made out like bandits. For instance David Hiller, CEO of the Los Angeles Times before he left the company in July of 2008, got $3,972,558 in a deferred bonus, $2,328,067 for his stock, $2,083,333 in phantom equity, a total of $3,050,523 in excise tax gross ups, and $3,960,000 in executive transition. That comes to nearly $15.4 million. Then again, it's a trifle compared to what Dennis FitzSimons, CEO of the entire company, walked away with — $28.7 million.

Only if you are afflicted with schadenfreude — that is, if you yield to the temptation to take pleasure in the troubles of others — will you be pleased to know that every penny of that $180 million is now in jeopardy. The Tribune Company has been mired in bankruptcy court since December 2008, and earlier this month a faction calling itself the Official Committee of Unsecured Creditors filed a series of individual complaints against all 209 managers who shared in that pot. They need to give the money back, the complaints argue: it belongs in the pot of corporate assets that will be divided among the creditors.

The creditors are making a case that many of the Trib 209 did not see coming. As the Tribune's Ameet Sachdev observed in his excellent recent coverage of this development, many of the 209 "had nothing to do with [Zell's] leveraged buyout" and did not get rich, or richer, from it, and may have been paid out as little as $10,000. And it's money that in many cases was long since spent — on tuitions, cars, enclosed side porches, on whatever one gets in exchange for tidy but very finite sums.

Sachdev reports that the 209 suits could be a tactical maneuver to force the bankruptcy litigation to a settlement. But the reason why it's a serious tactic is that the case for recovering the money is a strong one. Someone experienced in bankruptcy law put the Trib 209's chances of prevailing this way: "I would think it is an uphill battle but not wholly Sisyphean."

Here's why:

Bankruptcy law assumes that even before corporations file for bankruptcy, it's clear to some people where they're headed. Corporate insiders certainly know, and alert creditors might too. To keep either creditors or insiders from getting their money out while the getting's good — at the likely expense of everyone else — the U.S. Bankruptcy Code allows a trustee overseeing a bankrupt company to recover payments made even before the corporation files for bankruptcy.

The Code says the trustee can act if the payment was made "on or within 90 days before the date of the filing of the [bankruptcy] petition." However, that window expands from 90 days to an entire year "if such creditor at the time of such transfer [of funds] was an insider."

An insider, under the Code, is, among many other things, "an officer of the debtor" corporation.

The Trib 209 are all being sued as insiders.

And here's what really rubs it in. Zell's buyout of the Tribune Company closed on December 20, 2007. Of that $180 million in payouts, about $120 million was distributed in checks cut that December 27.

The Tribune Company filed for bankruptcy on December 8, 2008.

Obviously the top executives were preoccupied at the time with the $13 billion in debt the company could no longer service. But did they even notice that if they could put off the filing for just three more weeks, they'd be guaranteeing 209 past and present employees their $120 million?

The Tribune article cited above quotes the current publisher of the Los Angeles Times, Eddy Hartenstein, as saying the Trib 209 "are people who did absolutely nothing wrong." But that has always been beside the point in the travesty of the Zell buyout. I have posted long lists of former employees who did nothing wrong, and were even told by Zell they were his "partners" in forging the company's bright new future, and soon found themselves out on the street.

Those creditors who claim the buyout was a "fraudulent conveyance" — that is, could not possibly have succeeded — are supported by the logic of the Bankruptcy Code. As I've explained, in the eyes of the Code everything that corporate insiders do in the year that immediately precedes bankruptcy is considered suspect Any payout to an insider might be recovered, under the theory that even a full year earlier insiders presumably knew where the company was headed.

If the law presumes that, the law must presume that insiders knew the Tribune Company was headed for bankruptcy even before Sam Zell took it over.

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