10 F.4th 147
2d Cir.2021Background
- In 2007 Tribune Co. executed a two-step leveraged buyout (LBO) proposed by Sam Zell; Step One closed June 4, 2007 (≈$7B borrowed, repurchase of ~half the shares); Step Two closed December 20, 2007 (≈$3.7B more borrowed), leaving Tribune with ~$13B of debt.
- The Board delegated approval authority to a Special Committee of Independent Directors; the Special Committee retained Morgan Stanley as its advisor; Citigroup and Merrill Lynch were retained earlier by the Board and stood to receive $12.5M "success fees" upon a Strategic Transaction.
- Tribune obtained a March/April 2007 ‘‘viability’’ opinion from Duff & Phelps and retained VRC to provide solvency opinions; VRC issued Step One and Step Two solvency opinions that the Trustee later alleges were based on stale/overly optimistic projections.
- Tribune filed Chapter 11 in December 2008. Claims were consolidated and transferred to a litigation trust; the Trustee sued shareholders and financial advisors for fraudulent conveyance, breach of fiduciary duty, aiding-and-abetting, and malpractice.
- The district court dismissed many claims under Rule 12(b)(6); the Trustee appealed. This Court affirmed in part, vacated in part, and remanded: (a) affirmed dismissal of intentional fraudulent conveyance claims against shareholders, (b) affirmed dismissal of fiduciary duty/aiding claims against large shareholders, (c) affirmed dismissal of aiding-and-abetting and malpractice claims against financial advisors but vacated dismissal of certain fraud claims as to VRC, Citigroup, and Merrill Lynch, and remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether officers' fraudulent intent can be imputed to the independent Special Committee for an intentional fraudulent-conveyance claim under 11 U.S.C. § 548(a)(1)(A) | Officer/management intent should be imputed because they controlled the transaction and produced misleading projections | Imputation requires actual control over the transferor; Special Committee was independent and employed Morgan Stanley, so officers lacked control | Use the "control" test; imputation denied—Trustee failed to plausibly allege management controlled the Special Committee; dismissal affirmed |
| Whether the two-step LBO should be collapsed into a single transaction so fiduciary duties and insolvency are assessed across both steps | Steps should be collapsed because Step Two was part of a prearranged plan that rendered Tribune insolvent at the time the Board approved the deal | The two steps were independent; Step One could stand alone and Step Two required additional approvals and conditions | Steps not collapsed under Sabine/step-transaction tests; insolvency must be analyzed separately; dismissal of shareholder fiduciary claims affirmed |
| Whether financial advisors (Citigroup, Merrill Lynch, Morgan Stanley, VRC) can be liable for aiding-and-abetting fiduciary breaches or professional malpractice given in pari delicto defenses | Advisors knowingly participated in breaches and created informational gaps; exceptions to in pari delicto apply (adverse interest or fiduciary/insider) | Trustee's claims are barred by in pari delicto; advisors were contractual financial advisors (not gatekeepers), and the adverse-interest exception doesn't apply because the LBO gave Tribune some benefit | In pari delicto bars aiding-and-abetting and malpractice claims; Trustee failed to show a gatekeeper role or total abandonment of corporate interest; dismissal affirmed |
| Whether fees/payments to advisors and VRC are avoidable actual or constructive fraudulent transfers under § 548 | Success fees and certain advisory/solvency payments were made when Tribune was insolvent and conferred less than reasonably equivalent value; VRC especially provided sham solvency work | Advisors say fees were either antecedent debts, paid in ordinary course, or for services provided; Morgan Stanley's fees unrelated to insolvency; some payments occurred before insolvency | Actual fraudulent-transfer claims: dismissed as to Morgan Stanley, Citigroup, Merrill Lynch but sufficiently alleged as to VRC (vacated dismissal). Constructive-transfer claims: vacated dismissal as to Citigroup and Merrill Lynch (fact issue whether value was reasonably equivalent); affirmed dismissal as to Morgan Stanley and VRC |
Key Cases Cited
- In re Tribune Co. Fraudulent Conv. Litig., 946 F.3d 66 (2d Cir. 2019) (panel decision addressing §546(e) safe harbor and prior dismissal issues)
- In re Sharp Int'l Corp., 403 F.3d 43 (2d Cir. 2005) (Rule 9(b) pleading standards for fraudulent-transfer claims)
- Intel Corp. Inv. Pol'y Comm. v. Sulyma, 140 S. Ct. 768 (U.S. 2020) ("actual" intent requires intent existing in fact)
- Burks v. Lasker, 441 U.S. 471 (U.S. 1979) (corporate acts are performed through officers and directors; state law defines authority)
- In re Roco Corp., 701 F.2d 978 (1st Cir. 1983) (control test for imputing fraudulent intent)
- In re Kaiser, 722 F.2d 1574 (2d Cir. 1983) (list of "badges of fraud" for inferring intent)
- Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (directors' duty to obtain highest value for shareholders)
- RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816 (Del. 2015) (elements of aiding-and-abetting fiduciary breach and limits on gatekeeper theories)
- Pereira v. Farace, 413 F.3d 330 (2d Cir. 2005) ("inability to pay debts when due" test is backward-looking, not forward-looking)
- In re NextWave Pers. Commc'ns, Inc., 200 F.3d 43 (2d Cir. 1999) (reasonably equivalent value measured at time of conveyance)