That was a long shot; fraudulent conveyance was never easy to prove. But after researching the claims, Centerbridge bought $400 million of the junior bonds at a deep discount, reasoning that the case was strong enough to force Oaktree and the others to hand over a profitable settlement. Another fund called Aurelius Capital Management also saw the opportunity and bought a smaller stake in the junior bonds.
Tribune Co. and its advisers still believed a settlement was within reach, even if the senior creditors had to pay more. But they quickly learned that the Zell deal defied easy answers.
Though the transaction was by definition a failure open to challenge, the circumstances were unique: It closed in two steps, six months apart, a period straddling a historic collapse in the financial markets. It presented so many complex, untested legal issues that assigning blame was hardly clear-cut.
Early on, Kenneth Liang, the Oaktree executive in charge of the Tribune Co. investment, told Liebentritt that he had no intention of handing over a fat settlement to the junior bondholders, Liebentritt said. Based on its own research, Oaktree felt the fraudulent conveyance claims were baseless and preferred to file a plan that would give a token amount to the junior bondholders to settle claims against the banks and let the juniors litigate the rest.
Oaktree declined to comment, but documents show that Oaktree was loath to set a bad precedent for other cases by caving in to the junior bondholders. Liang and his bosses knew that the same players in bankruptcy court moved from case to case like a traveling roadshow. Raising expectations for the next negotiation and the one after that could encourage settlements that might erode Oaktree's returns.
As Oaktree Chairman Howard Marks put it later in an email to his partner, Bruce Karsh: "We need to show others that they can't come in, buy juniors where we're senior and get rich."
For Centerbridge, which declined to comment, and the other junior creditors, the seniors' stance only meant they had to fight harder to "educate" the judge and the other parties as to the strength of their case, Rosner said. Documents show they were demanding as much as $1 billion for their claims versus an offer from the seniors of closer to $75 million.
To build leverage, the junior creditors filed motion after tactical motion in bankruptcy court, aimed at showing Judge Carey how the senior creditors had co-opted everyone else in the case in an attempt to "cram-down" a plan the junior bondholders found unacceptable. Behind the scenes, Centerbridge waged a quieter campaign to win over Tribune Co. and push the official creditors committee to endorse a settlement based on the claims.
Much to the annoyance of Liang and the other senior debt holders, Liebentritt and his advisers responded to the Centerbridge incursion by continuing to push for a full settlement of the claims that would avoid costly litigation against anyone. Liebentritt said he believed this would be the cleanest solution for the company. But because that plan would include legal releases for Zell and company executives, fighting for it exposed Liebentritt to charges from all sides that he was trying to protect Zell, his longtime former boss.
In an interview, Liebentritt said, "I made no secret of my ties to Sam and acknowledged the criticism. But I truly believed (avoiding any litigation with a settlement) was the right thing for the company and all the other constituents."
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