Senior creditors in the Tribune Co’s Chapter 11 bankruptcy proceeding have warned the bankruptcy court against allowing bondholders to sue over the legitimacy of $10 billion of the bankrupt company’s debt. The bondholders claim that $10 billion in debt for a leveraged buyout of the Tribune in 2007 was fraudulently incurred and therefore holders of the debt should have their claims disallowed or subordinated below the claims of bondholders. The bondholders are also seeking to recover fees and interest paid on the debt. However, senior creditors in the Tribune’s Chapter 11 bankruptcy say that the bondholders have no evidence of fraud and should not be allowed to litigate their claims.

“The committee seeks authorization to initiate the bankruptcy equivalent of World War III — with the apparent objective of avoiding upwards of $10 billion of debt — without a single statement about why commencement of litigation at this critical junction in the reorganization is necessary or appropriate,” said the group in a court document.

Creditor disputes during Chapter 11 bankruptcy often happen especially in complex bankruptcy cases.  In the case of the Tribune bankruptcy, coming to an agreeable settlement in Chapter 11 bankruptcy may allow the claimants to recover more and expedite the Tribune’s exit from bankruptcy.  However, it is still not clear how much of a delay the creditors’ claims will cause in the Tribune’s bankruptcy exit.  When creditors proposed leaving the parent company in Chapter 11 bankruptcy until the leveraged buyout dispute was settled the bankruptcy judge swiftly dismissed the proposal.

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