The 2nd U.S. Circuit Court of Appeals in Manhattan said a trustee representing Tribune creditors failed to show that large investors who sold back their stock in the media company's Dec. 2007 LBO were unjustly enriched.
Writing for a two-judge panel, Circuit Judge Denny Chin also said that while it was a "close call," the trustee could try to show that Citigroup Inc and Bank of America Corp's Merrill Lynch unit did not deserve $12.5 million "success fees."
Marc Kirschner, the trustee, had accused shareholders of pushing for the buyout despite knowing Tribune would be insolvent, portending its December 2008 bankruptcy.
He also said the banks knew Tribune's financial forecasts had been too rosy and the company would become insolvent by more than $1 billion, yet failed to act.
The panel rejected claims that the banks intended to defraud creditors or committed professional malpractice.
It also rejected all claims against another Tribune adviser, Morgan Stanley, but revived a claim against a valuation research firm that had projected Tribune would remain solvent.
Tribune, which then owned the Chicago Tribune, Los Angeles Times, Baltimore Sun and WGN superstation, sought Chapter 11 protection as ad revenue plummeted and more readers went online for news.
The LBO left Tribune with about $13 billion of debt.
Sam Zell, the real estate billionaire who led the LBO and became Tribune's chief executive, has called the buyout the "deal from hell."
Lawyers for the trustee and Bank of America did not immediately respond to requests for comment. Citigroup said it was pleased with the decision.
In July 2019, a Delaware bankruptcy judge approved a $200 million settlement of the trustee's fraud claims against about 50 defendants, including Zell. None admitted wrongdoing.
The case is In re Tribune Company Fraudulent Conveyance Litigation, 2nd U.S. Circuit Court of Appeals, Nos. 19-449 and 19-3049.
(Reporting by Jonathan Stempel in New York; Editing by Dan Grebler)
By Jonathan Stempel
