The Chicago Tribune became its own story to report. The 12 December 2010 Sunday edition of the Chicago Tribune newspaper dramatically reported that the Official Committee of Unsecured Creditors in the Tribune Company’s Chapter 11 bankruptcy case in Delaware now seeks to claw back from approximately 200 employees.   The claw back amounts to around $180 million in compensation paid to the emloyees.

As the term suggests, “claw back” means getting money returned that was previously paid out.  It can be based on statute or by contract.

The creditors seek to tag former Tribune Co. Chairman and CEO Dennis FitzSimons for $28.7 million.  Former Chicago Tribune and Los Angeles Times Publisher David Hiller has $15.4 million at risk.  Other former top and lower echelon Tribune Co. executives face similar risk of loss of fortune.

The Committee of Unsecured Creditors is pressing its case utilizing the bankruptcy legal principle of “insider preference” which disallows a transfer of property by a bankruptcy debtor to an insider more than 90 days prior but within one year after the filing of the petition for bankruptcy.  Executives, managers, and employees are “insiders.”  The idea is not to allow a debtor (in this case the Tribune Co.) to arbitrarily and unfairly give priority in payment to one creditor like an officer,  director, relative, general partner, managing agent, and so forth to the disadvantage of another unsecured creditor like a  trade creditor.   The U.S. Bankruptcy Code aims to ensure equitable treatment for all creditors.

The compensation payments in question resulted from the December 2007 leverage buyout that converted the Tribune Co.  into a private company.  The closing of that deal necessitated cash payments for accumulated restricted stock, deferred compensation, success bonuses, transition pay, phantom equity, and severance benefits.

This is not a pretty picture.  Many junior executives and lower ranking managers have been caught in this litigation net.  They were not involved in the deal making for the ill-fated leveraged buyout.  Their compensation was legitimately earned over the years, but the timing of their payouts was unfortunate.  Much of the money may have been spent.

How does an executive protect himself in this situation?  If he has any inkling that his company may go bankrupt, he should set aside the money  and consult a bankruptcy attorney as to how long his risk is for a claw back from creditors under the bankruptcy code then  in current effect.  The bankruptcy code does change from time to time, and so consultation with a bankruptcy attorney is a smart thing to do.

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