UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
IN RE
TRIBUNE COMPANY FRAUDULENT TRANSFER LITIGATION ______________________________________
MARC S. KIRSCHNER, AS LITIGATION TRUSTEE FOR THE TRIBUNE LITIGATION TRUST,
Plaintiff,
-against-
DENNIS J. FITZSIMONS, et al.,
Defendants.
) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )
Case No.: 1:11-md-2296-RJS Case No.: 12-cv-02652-RJS
REPLY MEMORANDUM IN FURTHER SUPPORT OF MOTION OF EXHIBIT A SHAREHOLDER DEFENDANTS EXECUTIVE
COMMITTEE TO DISMISS COUNT ONE OF THE COMPLAINT
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TABLE OF CONTENTS
Page
I. ONLY THE INTENT OF THE SPECIAL COMMITTEE IS RELEVANT TO THE TRUSTEES INTENTIONAL FRAUDULENT TRANSFER CLAIM ............................. 2 A. The Trustee Fails to Identify Any Case Where a Companys Intent for a Tender or
Merger Was Established by Officer, Rather than Board, Intent ............................. 2 B. Although an Officers Intent Is Relevant to Assessing His Own Actions, Officer
Intent Cannot Determine the Actual Intent of a Board Action ............................... 4 II. SECTION 548 REQUIRES ACTUAL INTENT FOR INTENTIONAL
FRAUDULENT TRANSFER CLAIMS; NO LESSER STANDARD SUFFICES ........... 5 A. Section 548 Cannot Be Construed to Eliminate the Statutory Element of Actual
Intent ....................................................................................................................... 5 B. None of the Trustees Proposed Lesser Standards for Establishing Intent Can
Satisfy Section 548s Actual Intent Standard ......................................................... 7 C. Badges of Fraud Cannot Establish the Requisite Actual Intent of the Board in
This Case ............................................................................................................... 10 III. THE COMPLAINTS MEAGER FACTUAL ALLEGATIONS ABOUT THE INTENT
OF THE SPECIAL COMMITTEE DO NOT SUPPORT THE REQUISITE STRONG INFERENCE OF ACTUAL INTENT TO HINDER, DELAY, OR DEFRAUD CREDITORS .................................................................................................................... 11 A. The Special Committees View of the Appropriate Legal Standard for Valuing an
ESOP LBO Transaction Cannot Create a Strong Inference of Actual Intent to Hinder, Delay, or Defraud Creditors ..................................................................... 11
B. Allegations that the Special Committee Performed Insufficient Downside Analysis Cannot Support a Strong Inference of Actual Intent ............................. 13
C. Pre-Merger Tribune Creditors Cannot Assert Intentional Fraudulent Transfer Claims Seeking Recovery of Subsidiary Guarantees Because They Were Never Pre-Merger Creditors of the Subsidiary Guarantors ............................................. 13
D. Second-Guessing the Special Committees Analysis, Based on the Guidance of Expert Advisors, Cannot Create a Strong Inference of Actual Intent................... 14
E. The Tender Offer Correctly Identified Potential for Decline in Tribunes Value as a Factor Weighing in Favor of the Offer and also Noted Potential for Increase in Tribunes Value as a Factor Weighing Against the Offer .................................... 15
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TABLE OF AUTHORITIES
Page(s) CASES
ASARCO LLC v. Ams. Mining Corp., 396 B.R. 278 (S.D. Tex. 2008) ..............................................................................................6, 7
Coder v. Arts, 213 U.S. 223 (1909) ...................................................................................................................5
Chorost v. Grand Rapids Factory Show Rooms, Inc., 172 F.2d 327 (3d Cir. 1949).......................................................................................................8
In re Anchorage Marina, Inc., 93 B.R. 686 (Bankr. D.N.D. 1988) ............................................................................................2
In re Blazo Corp., No. 93-6087, 1994 WL 92405 (N.D. Ohio Feb. 25, 1994) ........................................................2
In re Healthco Intl, Inc., 208 B.R. 288 (Bankr. D. Mass. 1997) ...............................................................................14, 15
In re James River Coal Co., 360 B.R. 139 (Bankr. E.D. Va. 2007) ........................................................................................2
In re Lear Corp. Sholder Litig., 967 A.2d 640 (Del. Ch. 2008)..................................................................................................15
In re Lyondell Chemical Co., 503 B.R. 348 (Bankr. S.D.N.Y. 2014) ...............................................................................2, 3, 9
In re Natl Audit Def. Network, 367 B.R. 207 (Bankr. D. Nev. 2007) .........................................................................................3
In re Musicland Holding Corp., 398 B.R. 761 (Bankr. S.D.N.Y. 2008) .....................................................................................11
In re Roco Corp., 701 F. 2d 978 (1st Cir. 1983) .................................................................................................2, 3
In re Sentinel Mgmt. Grp., Inc., 728 F.3d 660 (7th Cir. 2013) ...................................................................................................10
In re Tronox Inc., 503 B.R. 239 (Bankr. S.D.N.Y. 2013) ............................................................................. passim
MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Servs. Co., 910 F. Supp. 913 (S.D.N.Y. 1995) ............................................................................................9
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Shapiro v. Wilgus, 287 U.S. 348 (1932) ...................................................................................................................6
United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810 (Del. Ch. 2007)....................................................................................................4
United States v. Tabor Court Realty Corp., 803 F.2d 1288 (3d Cir. 1986)...................................................................................................10
STATUTES
11 U.S.C. 546(e) .....................................................................................................................7, 10
11 U.S.C. 548 ...................................................................................................................... passim
OTHER AUTHORITIES
1 Oxford English Dictionary (1st ed. 1933) .....................................................................................6
Blacks Law Dictionary (10th ed. 2014)..........................................................................................6
Tribune Company, Tender Offer (Form SC TO-I, Exhibit 99(a)(1)(A)) (Apr. 25, 2007) .......12, 15
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The Litigation Trustees (the Trustee) Opposition to the Motion Of Exhibit A
Shareholder Defendants Executive Committee To Dismiss Count One Of The Complaint [ECF
No. 6136] (the Opposition) rests on two flawed legal premises: (1) that, contrary to the
statutory text, a claim for intentional fraudulent transfer need not establish the actual intent of
the transferor; and (2) that the relevant intent can be determined based on individuals who
were not the relevant corporate decision-makers.1 Neither premise withstands scrutiny.
Moreover, the Trustees lengthy recitation of the Complaints allegations is focused on
the wrong actors and is therefore largely irrelevant. As our Motion explained, Tribunes directors
who actually provided the necessary votes controlled Tribunes decision to conduct the tender
and merger, and as a result, only their intent is relevant to the Trustees Count One claim. The
Opposition cites no case in which the purported intent of officers or minority directors
established the corporations intent in transferring property that, as a matter of its governing
corporate law, could be transferred only upon a board resolution. This case involves such
transfers.
The Trustee does not even contend that his allegations would establish that Tribunes
actual intent was to hinder, delay, or defraud its creditors, as Bankruptcy Code section
548(a)(1)(A) expressly requires. Rather than attempt to show Tribunes actual intent through
badges of fraudthe typical methodthe Trustee attempts to water down the standard to one of
deemed or presumed intent, recklessness, or motive and opportunity, none of which meets
section 548s actual intent requirement.
1 The undersigned counsel submitting this Reply represent only their own clients in this matter. Capitalized terms not defined herein shall have the meanings used in the Motion of Exhibit A Shareholder Defendants Executive Committee to Dismiss Count One of the Complaint [ECF No. 5949] (the Motion). This Reply addresses only the Motion and no other bases for dismissal. Other bases will be addressed, if necessary, as per the Courts prior Order.
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I. ONLY THE INTENT OF THE SPECIAL COMMITTEE IS RELEVANT TO THE TRUSTEES INTENTIONAL FRAUDULENT TRANSFER CLAIM
A. The Trustee Fails to Identify Any Case Where a Companys Intent for a Tender or Merger Was Established by Officer, Rather than Board, Intent
The Opposition cites irrelevant cases, none of which holds that a corporations intent can
be established on the basis of officers who did not control the challenged transfer. It is
undisputed that an officers conduct may be imputed to a corporation in the context of
intentional fraudulent conveyance law, Opp. 20 (emphasis added), but the question is when
should it be imputed to the company. In In re James River Coal Co., relied upon by the Trustee,
the court expressly refused to impute the intent of the defendant officers to the corporation where
the board of directorsand not the officersapproved a series of equity redemptions and
payoffs to the controlling shareholders and other insiders while the company was insolvent. 360
B.R. 139, 165 n.19 (Bankr. E.D. Va. 2007) (holding, that [t]he intent of the [officer] Defendants
Varney and Tellmann, who were not directors, cannot be imputed to the Debtors).
The Trustee here expressly tries to reargue (Opp. 20-21) the same line as plaintiff in In re
Lyondell Chemical Co., and as Judge Gerber explained, that analysis is too simplistic. 503
B.R. 348, 387 (Bankr. S.D.N.Y. 2014). None of the cases either plaintiff cites addresse[d] any
necessary distinctions between officers and directors in instances where the distinctions matter.
Id. at 387. Their factual contexts made it unnecessary to focus on any applicable distinctions
between officers, on the one hand, and directors, on the other. Id. 2 Here, by contrast, the
2 In two of those cases, the same individuals served as both officers and directors, making any distinction impossible. See In re Roco Corp., 701 F. 2d 978, 984 (1st Cir. 1983) (companys president was also director and sole shareholder); In re Anchorage Marina, Inc., 93 B.R. 686, 688 (Bankr. D.N.D. 1988) (holding that two of the three shareholders of small, privately held company, who were also its officers and directors, together control the majority of the voting rights of Anchorage and, [t]hus, their intent was Anchorages intent). The Oppositions other two supporting cases involved disputed transfers made by officers within the scope of their own authority. See In re Blazo Corp., No. 93-6087, 1994 WL 92405, at *4 (N.D. Ohio Feb. 25, 1994)
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distinction is criticalonly the Tribunes public-company-structured board could authorize the
transaction; Tribunes officers could not.
Even the Trustees best cases are of no avail to him. Although the Opposition urges the
Court to adopt the settled approach taken by Judge Gropper in Tronox, Opp. 22, 24, the court
in Tronox never considered the distinction between officer and board intent because the case
involved a wholly owned subsidiary. Not surprisingly the parties never specifically raised the
officer/board distinction in their briefing. In re Tronox Inc., 503 B.R. 239, 280-81 (Bankr.
S.D.N.Y. 2013). And, although Judge Gerber in Lyondell held out the prospect that an officers
intent might be imputed to the company if the officer had had a material effect on causing the
transfer, 503 B.R. at 388, the court had in mind circumstances far different from Tribune. Judge
Gerber derived his novel material effect theory from a case in which the defendant was in a
position to control the disposition of [the companys] property, based on that individuals
position as the transferor companys director and sole shareholder, in addition to his position as
an officer. Id. at 388 n.198 (quoting Roco, 701 F.2d at 984). Notably, on the facts of Lyondell,
the court held that the factual allegations involving the CEO and chairman of the transferor
corporations board, in addition to other officers, were insufficient to demonstrate the companys
actual intent to defraud with respect to a board-approved transfer. Id. at 388-89.
Even assuming that in certain closely held corporations, the intent of a sole shareholder
who is also director and officer can be attributed to the corporation when that person caused the
corporation to make a transfer, that would have no application to a large, public company like
(chairman of board, president, and CEO was acting within the scope of his authority as the president in operating a Ponzi scheme); In re Natl Audit Def. Network, 367 B.R. 207, 221 (Bankr. D. Nev. 2007) (imputing officers intent to company where they personally authorized or executed the transaction (by signing the check; by authorizing the wire transfer), or authorized the transfer in the course of [the companys] scheme to bilk its customers and creditors for the benefit of [the companys] insiders).
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Tribune that maintained a clear demarcation between officer and director roles. Tribunes board
formed a Special Committee to ensure directors considering the tender and merger were non-
insiders. Compl. 136. The members of the Special Committee, as the Committee and then as
essentially all of the voting members of Tribunes board, made the decision to conduct the tender
and merger so the actual intent of the company must be discerned from the intent of these
directors who supplied the votes necessary to approve the act.
B. Although an Officers Intent Is Relevant to Assessing His Own Actions, Officer Intent Cannot Determine the Actual Intent of a Board Action
The unremarkable proposition that officer intent can be relied on to determine the
corporations intent for matters within the officers personal authority is wholly inapposite to this
case. The Opposition asserts that courts routinely consider the intent of officers or other agents
who are instrumental in implementing a board-approved transaction in order to discern
corporate intent. Opp. 21. But the sole case the Trustee cites for this principle, United Rentals,
Inc. v. RAM Holdings, Inc., 937 A.2d 810, 834 (Del. Ch. 2007), merely held that the intent of the
corporate agents who drafted and negotiated an agreement, within the scope of their authority,
was relevant to construing the meaning of ambiguous provisions in that agreement. Id. at 834,
836-44. That has no analogy here. Count One does not challenge some discrete act of an officer
implementing the Tribune boards tender and merger decision; it challenges the tender and
merger itself. Nor does the suit against shareholders turn on contractual interpretation of the
merger or tender documents. United Rentals is at best (for the Trustee) consistent with the cases
discussed above, see supra note 2, that illustrate that the intent of officers is relevant to
determine corporate intent for matters within the scope of the officers delegated authority. It is
axiomatic that the authority to approve a merger is nondelegable to officers. The authority to
approve the tender and merger belonged to Tribunes board, not Tribunes officers.
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II. SECTION 548 REQUIRES ACTUAL INTENT FOR INTENTIONAL FRAUDULENT TRANSFER CLAIMS; NO LESSER STANDARD SUFFICES
The Trustee incorrectly focuses on the acts and motivations of the wrong individuals, and
thus the Oppositions lengthy recitation of facts is largely irrelevant to the question before the
Court. Given the paucity of facts alleged with regard to the actual decision-makers, it is
unsurprising that the Trustee also tries to lessen his burden by diluting the actual intent
standard for showing an intentional fraudulent transfer to one of presumed or deemed intent.
No linguistic alchemy can transform the statutes requirement of actual intent to defraud into
one of mere constructive fraud, which the statute clearly distinguishes from actual intent.
A. Section 548 Cannot Be Construed to Eliminate the Statutory Element of Actual Intent
Section 548(a)(1)(A) plainly requires the Trustee to show actual intent to hinder, delay,
or defraud creditors. 11 U.S.C. 548(a)(1)(A) (emphasis added). The Opposition asks the Court
to ignore entirely the statutes use of word actual and to hold instead that actual intent can be
demonstrated with lesser showings that merely demonstrate constructive intent. Plaintiffs
approach also ignores the plain meaning of the word actual, the statutes lineage, and the way
courts have construed that provision. Section 548(a) (1)(A) descends directly from the common
law and the Statute of Elizabeth, and Congress adopted the well-known meaning of actual
intent to hinder, delay or defraud creditors to reach only those [transfers] which are actually
fraudulent. Coder v. Arts, 213 U.S. 223, 242 (1909) (emphasis added). Actual intent . . . has
always been held to require, in order to invalidate a conveyance, that there shall be . . . the
purpose of hindering, delaying, or defrauding creditors. Id. (emphasis added).
The Trustee contends that he can satisfy his burden and salvage his claim by pleading
facts from which he believes Tribune may be deemed to have intended or presumed to [have]
intend[ed] to hinder, delay, or defraud creditors. Opp. 18-19 (internal quotation marks omitted).
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But the Trustees construction would eviscerate the distinction between actual and constructive
fraudulent transfers. Indeed, the words deemed and presumed mean the exact opposite of the
term actual. Compare Blacks Law Dictionary 504 (10th ed. 2014) (defining deem as [t]o
treat (something) as if . . . it has qualities that it does not have), and id. at 1376 (defining
presume as to suppose to be true in the absence of proof), with 1 Oxford English Dictionary
96 (1st ed. 1933) (defining actual as existing in act or fact).
At the very least, actual intent requires a showing that the actor desires to cause
consequences of his act, or that he believes that the consequences are substantially certain to
result from it. ASARCO LLC v. Ams. Mining Corp., 396 B.R. 278, 387 (S.D. Tex. 2008)
(quoting Restatement (Second) of Torts 8A (1965) (the Restatement)).3 Plaintiff does not,
and cannot, allege that the tender and merger were substantially certain to lead to default on
the pre-merger debt. Even those critical of Tribunes plan for tender and merger did not claim
that degree of certainty in their predictions. 4 Notably, Sam Zell, a sophisticated investor,
invested over $300 million on the success of the post-merger Tribune. Compl. 81, 203. The
Trustee alleges that Zells investment was merely option value. Pl.s Opp. to Named Defs. Mots.
to Dismiss 1-7, at 15-16. But there are no allegations making a plausible inference, much less a
strong showing, that a $300 million option (assuming that characterization is correct) meant that
Tribune was substantially certain to fail. And even less so that Tribunes Special Committee
3 Tronox not only agreed with the ASARCO courts invocation of the Restatement definition but also approvingly referenced Shapiro v. Wilgus, 287 U.S. 348, 354 (1932), the Supreme Court decision cited in the Motion (p. 7) where the transfer of assets was both clearly intended and substantially certain to hinder, delay, or defraud creditors. Tronox, 503 B.R. at 279.
4 See Compl. 244 (Standard & Poors downgraded Tribunes debt in response to the approval of the merger only to B rating), 246 (Fitch explained that the downgrading reflected factors that could impair the companys ability to service its debt), 247 (Wall Street analysts stated it is possible that TRB is leveraged higher than the total asset value), 252 (the New York Times reported that the proposed sale came with some big risks) (emphasis added).
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intended it to fail. The Trustees attempt to find actual intent merely in the relative economics
of the transaction is simply a back-door attempt to bring the type of constructive fraudulent
transfer claim that Congress has expressly precluded with respect to public companies such as
Tribune, pursuant to Bankruptcy Code section 546(e).
B. None of the Trustees Proposed Lesser Standards for Establishing Intent Can Satisfy Section 548s Actual Intent Standard
1. Recklessness, Callous Indifference, or Willful Blindness
The Opposition makes much ado about other intent-based standards, including
recklessness, callous indifference, and willful blindness. Opp. 18-19. Even if those lower
standards may be sufficient to prove fraud by misrepresentation, they do not reach the requisite
level of actual intent necessary for an intentional fraudulent transfer claim. The cases cited in
the Opposition that purportedly favor these lower standards are inapplicable here. The court in
ASARCO used callous indifference language to describe its standard, but given the courts
express adoption of the Restatements definition of intent discussed above, ASARCO obviously
viewed callous indifference as tantamount to substantial certainty that the transfer would
hinder, delay, or defraud creditors. 396 B.R. at 387-88. Equating the two standards made sense in
ASARCO given the egregious nature of the facts before the court, including that the parent
corporation effected a transfer of the crown jewel asset of a wholly-owned subsidiary (i) over
the objections of the subsidiarys independent directors, (ii) while the subsidiary was insolvent, a
named defendant in thousands of lawsuits, and owed numerous past due obligations, and (iii)
while instructing the subsidiary to pay only those creditors to whom payment was necessary to
close the transaction. Id. at 386. Unsurprisingly, the ASARCO court found that the parent
company controlling the transfers was substantially certain the transfer would harm other
creditors. Id. at 388. The plaintiffs allegations regarding the Tribune boards and the Special
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Committees conduct, namely their failure to insist on a particular level of downside analysis and
reliance on a particular form of solvency opinion, fall well short of pleading knowledge of
substantial certainty that the merger would fail.
The Opposition asserts that alleging willful ignorance is also sufficient to state an
intentional fraudulent transfer claim. Opp. 19. That flatly contradicts section 548s express
requirement of actual intent, and the cases cited by the Opposition do not support its argument.
The Chorost v. Grand Rapids Factory Show Rooms, Inc. decision cited is entirely inapposite.
See 172 F.2d 327, 329 (3d Cir. 1949). That case stated that [i]t is undisputed in this case that the
intent of the bankrupt in making the transfer was fraudulent. Id. Instead, the question was
whether the defendant transferees, who had no control over the transfer, could affirmatively
show they lacked actual intent in connection with a good faith defense. Id. The court found that
the defendants made no effort to meet their affirmative obligation to demonstrate good faith, and
the court could not infer that the defendants automatically met their affirmative good faith
obligation in a case where fraud should have been so clearly apparent. Id. Even in that decision,
however, the court made a point of saying that it was not simply imputing presumed intent, but
rather drawing an inference or conclusion from facts in the record. Id.
The Oppositions citation to In re Adler Clearing Corporation is even further off the
mark, as it refers to analysis of potential intentional fraud claims only in the context of the
courts analysis of common law fraud claims. See 263 B.R. 406, 491 (S.D.N.Y. 2001). The Adler
court noted that the degree of culpability it would consider eligible for recklessness or actual
intentional misconduct consisted of [defendants] total appreciation of the full breadth of
Hanovers massive frauds and other criminal conduct, as well as its conscious and affirmative
complicity in those unlawful actions. Id. at 490-91 (emphasis added). That case addresses a
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defendant that in conscious or reckless disregard of the facts and for its own gain, chose to
facilitate Hanovers fraud. Id. at 491 (emphasis added). That level of affirmative fraud is a far
cry from the willful negligence standard the Opposition proposes.
2. The Securities Law Motive and Opportunity Standard
The Opposition also asks this Court to apply the motive and opportunity test derived
from the securities context to find a strong inference that the Special Committee had actual intent
to hinder, delay, or defraud creditors. Opp. 30-31. As explained in the Motion, the motive and
opportunity standard is inapplicable to intentional fraudulent transfers. That standard would be
satisfied every time a company with creditors conducts a transaction, and therefore it provides no
insight regarding corporate intent. Notably, that standard has never been applied in the
intentional fraudulent transfer context by a District Court in the Second Circuit. By contrast,
badges of fraud have long been recognized in this circuit and others as a permissible means for
establishing intentional fraudulent intent, and the Opposition presents no reason why the Court
should adopt a dramatically lower standard here.
3. The Natural Consequence Standard
In a similar attempt to avoid the actual intent standard, the Opposition contends that
because one is presumed to intend the natural consequence of ones actions, actual intent may be
presumed if it would have been foreseen as the natural consequence of the boards decision to
approve the tender and merger. Opp. 18-19. Again the Trustee attempts to dilute the standard for
actual intent by grafting on notions of constructive intent. Such a watered-down standard
improperly imports the concept of foreseeability, which is grounded in negligence, into the
analysis of actual intent to defraud.5 Notably, neither the statutory language nor the cases cited
5 See Lyondell, 503 B.R. at 389 n.201 (should have known negligence standard inapplicable to intentional fraudulent transfer claims); MFS/Sun Life Trust-High Yield Series v. Van Dusen
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by the Trustee support the application of such a relaxed standard.6 Thus, both the plain text of
the statute, see supra section II.A., and judicial decisions require plaintiff to demonstrate a clear
and actual intent to hinder, delay, or defraud creditors to adequately plead an intentional
fraudulent transfer claim. Applying a standard whereby one may be presumed to intend the
natural consequences of his or her actions is simply another way of pleading constructive fraud,
which is not and cannot be alleged in this case in light of section 546(e). Accordingly, the Court
should not countenance the Trustees attempt to plead actual intent through a lower standard of
constructive fraud.
C. Badges of Fraud Cannot Establish the Requisite Actual Intent of the Board in This Case
Because the statute, and the nature of the transfers at issue here require analysis of the
actual state of mind of the Tribune board, any badges of fraud analysis would have to center on
indicators of the state of mind of this public companys board, whose deliberations and decisions
were well documented. The Motion provided separate, detailed arguments setting forth why
each alleged badge of fraud contained in the Complaint, either on its own or in conjunction
with the other allegations in the Complaint, fails to support an inference that the Tribune board
displayed the requisite actual intent to hinder, delay, or defraud Tribunes creditors. Mot. 16-23.
In response, the Opposition merely reiterates the same list of badges already rebutted in the
Airport Servs. Co., 910 F. Supp. 913, 936 (S.D.N.Y. 1995) (concluding foreseeability standard incompatible with concept of actual fraud).
6 See, e.g., In re Sentinel Mgmt. Grp., Inc., 728 F.3d 660, 668 (7th Cir. 2013) (element of actual intent satisfied where defendant investment manager, in an unlawful manner, knowingly exposed customer assets to substantial risk of loss); United States v. Tabor Court Realty Corp., 803 F.2d 1288, 1304-05, 1305 n.9 (3d Cir. 1986) (affirming district courts use of foreseeability and natural consequences standard for actual intent, while noting that if the district courts use of such a standard was in error, the transaction was, in any event, avoidable under principles of constructive fraud); Tronox, 503 B.R. at 280 (spinoff of legacy liabilities had the clear and intended consequence of, and substantially certain to result in, hindering or delaying creditors).
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Motion, without addressing the Motions arguments as to why each fact either is not
appropriately adduced as a badge of fraud, or else does not rise to the level of demonstrating
actual intent by the Special Committee because it more plausibly reflects a legitimate
supervening purpose. See Tronox, 503 B.R. at 284 (cited at Opp. 35); Opp. 35-38.
III. THE COMPLAINTS MEAGER FACTUAL ALLEGATIONS ABOUT THE INTENT OF THE SPECIAL COMMITTEE DO NOT SUPPORT THE REQUISITE STRONG INFERENCE OF ACTUAL INTENT TO HINDER, DELAY, OR DEFRAUD CREDITORS
Focusing on the proper inquirywhether the Complaint adequately alleges that the
Tribune directors who approved the tender and merger acted with actual intent to hinder, delay,
and/or defraud Tribunes creditorsit is plain that the Complaints allegations are deficient. The
Opposition concedes that, under governing precedent, the complaint must allege facts that give
rise to a strong inference of fraudulent intent, Opp. 16 (quoting In re Musicland Holding Corp.,
398 B.R. 761, 773 (Bankr. S.D.N.Y. 2008)), but the Complaint does not even approach that
standard. The Trustee makes only a handful of allegations regarding the Special Committee, and
none of those facts leads to a strong inference that those individuals had actual intent to
hinder, delay, or defraud.
A. The Special Committees View of the Appropriate Legal Standard for Valuing an ESOP LBO Transaction Cannot Create a Strong Inference of Actual Intent to Hinder, Delay, or Defraud Creditors
The Opposition points to the Complaints allegations that the Special Committee knew
that Duff & Phelps, LLC (Duff & Phelps) determined, after six weeks of work, that it was not
willing formally to label an opinion as a solvency opinion in connection with the tender and
merger. Opp. 27.7 But the Complaint makes clear that the reason Duff & Phelps would not
7 While the Complaint alleges that managements efforts to obtain a solvency opinion from Houlihan Lokey were also rebuffed, Compl. 197, it includes no allegation that the Special Committee was aware of this effort, and it would not matter even if they did.
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provide a solvency opinion was its conclusion regarding the appropriate legal standard for
valuing employee stock ownership plan (ESOP) transaction tax savings. Specifically, the
Complaint acknowledges that Duff & Phelps did issue an LBO viability opinion to the Great
Banc Trust Company (GreatBanc), trustee of the Tribune ESOP:
The viability opinion was the equivalent of a solvency opinion with one, important exception: it took into account the tax savings which Duff & Phelps had determined could not properly be considered under applicable legal standards.
Compl. 90 (emphasis added). A non-lawyer advisers difference of view on a novel question of
law does not support a strong inference of the boards actual intent to hinder, delay, or defraud
creditors. What the Complaint actually alleges is that both Valuation Research Corporation
(VRC) and Duff & Phelps reached the same financial conclusion that Tribune would remain
able to repay pre-merger debt after the merger transaction; they differed only on the legal
question how to value ESOP transaction tax savings in a solvency opinion.
The Special Committee was advised on the tender and merger by Skadden, Arps, Slate,
Meagher & Flom LLP, a respected law firm with recognized expertise in complex transactions.8
Tribune Company, Tender Offer (Form SC TO-I, Exhibit 99(a)(1)(A)) 45 (Apr. 25, 2007),
available at https://www.sec.gov (Tender Offer). There is no basis to infer that even board
members with financial sophistication would be familiar with the legal standards for preparing
solvency opinions on relatively rare leveraged ESOP transactions. That the Special Committee
relied on these VRC and Duff & Phelps opinions does not create a strong inference of intent, or
even a plausible inference. Quite to the contrary, the inferences are all that the Special
Committee had guidance of independent and sophisticated counsel on this legal question. Indeed,
8 The Tribune board retained and received legal advice regarding the tender and merger from Wachtell, Lipton, Rosen & Katz, Sidley Austin LLP and, for ESOP matters, McDermott Will & Emery. Tender Offer 45.
Case 1:12-cv-02652-RJS Document 4717 Filed 07/03/14 Page 16 of 21
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the Complaint makes no allegation that the Special Committee was inappropriately advised or
even that the ESOP tax savings that VRC considered in its solvency opinion failed to materialize.
B. Allegations that the Special Committee Performed Insufficient Downside Analysis Cannot Support a Strong Inference of Actual Intent
The Opposition asserts that the Special Committee demonstrated conscious, callous
indifference to harming Tribune and its creditors by analyzing the tender and merger under only
two moderately negative economic projections. Opp. 28. But the Complaint is just as notable for
what it acknowledges: the Special Committee tested its LBO financial projections under various
economic conditions, including at least two different downside scenarios. Compl. 268. But
whatever arguments the Trustee might make on the basis of his criticism of that testing under
causes of action with lesser standards, it cannot establish a strong inference that directors had
actual intent to hinder, delay, or defraud creditors. To the contrary, the analysis and solvency
opinion reflect the Special Committees efforts to assure that creditors would not be harmed by
the merger. The Opposition dwells on comparisons to Tronox, where the transferor corporation
did no real analysis of how known liabilities would certainly affect post-transfer creditors. 503
B.R. at 291 (finding defendants assiduously avoided conducting or obtaining from advisors
any analysis of known liabilities effect on creditors). In Tribune, the Complaint itself alleges the
Special Committee, with the help of its advisors, did consider the impact the tender and merger
would have on pre-merger creditors under various positive and negative economic conditions.
C. Pre-Merger Tribune Creditors Cannot Assert Intentional Fraudulent Transfer Claims Seeking Recovery of Subsidiary Guarantees Because They Were Never Pre-Merger Creditors of the Subsidiary Guarantors
The Opposition also argues that evidence of the Special Committees actual intent to
harm creditors can be plausibly inferred because the Special Committee caused certain Tribune
subsidiaries (the Subsidiary Guarantors) to issue guarantees (the Subsidiary Guarantees) and
Case 1:12-cv-02652-RJS Document 4717 Filed 07/03/14 Page 17 of 21
14
authorized a series of complicated transactions (which are not identified by the Opposition)
designed to insulate those guarantees from a fraudulent transfer attack. Opp. 29-30. But it was
not the alleged complicated transactions that prevented the plaintiff from attacking the grant of
Subsidiary Guarantees; the pre-merger creditors had no claims against the Subsidiary Guarantors
and thus never had standing to attack the Subsidiary Guarantors grant of the Subsidiary
Guarantees as fraudulent transfers. Representing creditors of the parent company, the plaintiff
cannot support parent-company level claims with allegations that separate legal entities, against
which parent-level creditors had no claim, consummated fraudulent transfers.
D. Second-Guessing the Special Committees Analysis, Based on the Guidance of Expert Advisors, Cannot Create a Strong Inference of Actual Intent
The Opposition also argues that the Special Committee was aware of the view of certain
large shareholders regarding the decline of the newspaper publishing industry and Tribunes
performance in particular, as well as regular reports of Tribunes performance. Opp. 27. The
Trustee attempts to impugn the Special Committees process by citing In re Healthco Intl, Inc.,
208 B.R. 288, 307 (Bankr. D. Mass. 1997), for the proposition that the mere retention of . . . a
solvency advisor . . . does not . . . show that a board of directors has acted properly. Opp. 28-29.
However, Healthco considered whether a board breached its fiduciary duty of care under a gross
negligence standard; it did not consider whether improper reliance on professional advisors leads
to an inference, much less a strong inference, of intent to hinder, delay, or defraud creditors.
Further, the Healthco board could not rely on its advisors where it failed to review any financial
projections or even request that its financial advisor review projections. In re Healthco, 208 B.R.
at 306. No such allegations are present here.
In fact, the Trustees factual allegations are consistent with a special committees
reasonable actions under the circumstances. Tribune created the Special Committee for the exact
Case 1:12-cv-02652-RJS Document 4717 Filed 07/03/14 Page 18 of 21
15
purpose of engaging in a proper decision-making process with respect to potential transactions.
Compl. 136. As courts have recognized, one of the primary justifications for using independent
directors is that they are able to interact with outside advisors, particularly by monitoring the
processes used to account for the corporations financial affairs and compliance with applicable
laws. See In re Lear Corp. Sholder Litig., 967 A.2d 640, 653 (Del. Ch. 2008). Unlike the
directors in Healthco, who utterly failed to engage in the decision-making process, the Special
Committee actively worked to ensure it had a basis for an informed view of the tender and
merger by relying on the guidance of respected outside advisors and experts. See, e.g., Compl.
279, 326, 338. This conduct belies any claim that the Special Committee acted unreasonably
in approving the tender and merger, let alone with actual intent to harm creditors.
E. The Tender Offer Correctly Identified Potential for Decline in Tribunes Value as a Factor Weighing in Favor of the Offer and also Noted Potential for Increase in Tribunes Value as a Factor Weighing Against the Offer
Finally, the Opposition repeatedly makes the misleading assertion that the directors must
have expected Tribune to fail because the Tender Offer identified negative industry trends as a
factor in favor of participating in the tender. Opp. 9, 27. The Tender Offer statement, however,
supports the opposite conclusion by including 11 pages detailing how thoroughly the Special
Committee negotiated and considered the proposed tender and merger. Tender Offer 15-26. It
also lists numerous competing considerations that the Special Committee weighed, including
factors showing that the Special Committee considered Tribunes potentially bright future. Id. at
25-26. Indeed, one of the transaction risks that the Special Committee explicitly evaluated was
the potential that Tribunes stockholders will not participate in any future earnings or growth for
the Company and will not benefit from any appreciation in the value of the Company. Id. at 28.
The Special Committees consideration of this particular risk directly rebuts the Complaints
allegation that the Special Committee expected Tribune to fail after the merger.
Case 1:12-cv-02652-RJS Document 4717 Filed 07/03/14 Page 19 of 21
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Dated: July 3, 2014
Respectfully submitted,
ROPES & GRAY LLP By: /s/ D. Ross Martin
D. Ross Martin 1211 Avenue of the Americas New York, NY 10036-8704 (212) 596-9000 Joshua Y. Sturm 800 Boylston Street Boston, MA 02199-3600 (617) 951-7000 Liaison Counsel to the Exhibit A Shareholder Defendants
I certify that each of the other signatories has agreed to the form and substance of this document and that I have their consent to submit the document electronically.
BINGHAM MCCUTCHEN LLP By: /s/ P. Sabin Willett
Harold S. Horwich P. Sabin Willett Michael C. DAgostino Ainsley G. Moloney One Federal Street Boston, MA 02110-1726 (617) 951-8000
CARLTON FIELDS JORDEN BURT, LLP By: /s/ Mark A. Neubauer
Mark A. Neubauer 2029 Century Park East Suite 2000 Los Angeles, CA 90067-2901 (310) 651-2147
Case 1:12-cv-02652-RJS Document 4717 Filed 07/03/14 Page 20 of 21
17
DAVIS POLK & WARDWELL LLP By: /s/ Elliot Moskowitz
Elliot Moskowitz 450 Lexington Avenue New York, NY 10017 (212) 450-4000
DECHERT LLP By: /s/ Michael S. Doluisio
Michael S. Doluisio Alexander R. Bilus Cira Centre 2929 Arch Street Philadelphia, PA 19104-2808 (215) 994-4000
DELBELLO DONNELLAN WEINGARTEN WISE & WIEDERKEHR LLP By: /s/ Steven R. Schoenfeld
Steven R. Schoenfeld One North Lexington Avenue 11th Floor White Plains, New York 10601 (914) 681-0200
DRINKER BIDDLE & REATH LLP By: /s/ Seamus C. Duffy
Seamus C. Duffy William M. Connolly Chanda A. Miller One Logan Square, Suite 2000 Philadelphia, PA 19103-6996 (215) 988-2700
ENTWISTLE & CAPUCCI LLP By: /s/ Andrew J. Entwistle
Andrew J. Entwistle 280 Park Avenue, 26th Floor New York, NY 10017 (212) 894-7200
ICE MILLER LLP By: /s/ Matthew L. Fornshell
Matthew L. Fornshell 250 West Street Columbus, OH 43215 (614) 462-1061
PROSKAUER ROSE LLP By: /s/ Stephen L. Ratner
Stephen L. Ratner Gregg M. Mashberg Eleven Times Square New York, NY 10036 (212) 969-3000
Members of the Executive Committee
Case 1:12-cv-02652-RJS Document 4717 Filed 07/03/14 Page 21 of 21
I. ONLY THE INTENT OF THE SPECIAL COMMITTEE IS RELEVANT TO THE TRUSTEES INTENTIONAL FRAUDULENT TRANSFER CLAIMA. The Trustee Fails to Identify Any Case Where a Companys Intent for a Tender or Merger Was Established by Officer, Rather than Board, IntentB. Although an Officers Intent Is Relevant to Assessing His Own Actions, Officer Intent Cannot Determine the Actual Intent of a Board Action
II. SECTION 548 REQUIRES ACTUAL INTENT FOR INTENTIONAL FRAUDULENT TRANSFER CLAIMS; NO LESSER STANDARD SUFFICESA. Section 548 Cannot Be Construed to Eliminate the Statutory Element of Actual IntentB. None of the Trustees Proposed Lesser Standards for Establishing Intent Can Satisfy Section 548s Actual Intent Standard1. Recklessness, Callous Indifference, or Willful Blindness2. The Securities Law Motive and Opportunity Standard3. The Natural Consequence Standard
C. Badges of Fraud Cannot Establish the Requisite Actual Intent of the Board in This Case
III. THE COMPLAINTS MEAGER FACTUAL ALLEGATIONS ABOUT THE INTENT OF THE SPECIAL COMMITTEE DO NOT SUPPORT THE REQUISITE STRONG INFERENCE OF ACTUAL INTENT TO HINDER, DELAY, OR DEFRAUD CREDITORSA. The Special Committees View of the Appropriate Legal Standard for Valuing an ESOP LBO Transaction Cannot Create a Strong Inference of Actual Intent to Hinder, Delay, or Defraud CreditorsB. Allegations that the Special Committee Performed Insufficient Downside Analysis Cannot Support a Strong Inference of Actual IntentC. Pre-Merger Tribune Creditors Cannot Assert Intentional Fraudulent Transfer Claims Seeking Recovery of Subsidiary Guarantees Because They Were Never Pre-Merger Creditors of the Subsidiary GuarantorsD. Second-Guessing the Special Committees Analysis, Based on the Guidance of Expert Advisors, Cannot Create a Strong Inference of Actual IntentE. The Tender Offer Correctly Identified Potential for Decline in Tribunes Value as a Factor Weighing in Favor of the Offer and also Noted Potential for Increase in Tribunes Value as a Factor Weighing Against the Offer
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