Tribune Company Fraudulent Conveyance Litigation: Second Circuit's Enforcement of Actual Intent Standard

Tribune Company Fraudulent Conveyance Litigation: Second Circuit's Enforcement of Actual Intent Standard

Introduction

In the case of IN RE: TRIBUNE COMPANY FRAUDULENT CONVEYANCE LITIGATION, the United States Court of Appeals for the Second Circuit addressed significant issues surrounding fraudulent conveyance claims in the context of a leveraged buyout (LBO). The plaintiff, Marc S. Kirschner, acting as Litigation Trustee for the Tribune Litigation Trust, appealed against a diverse group of defendants, including large shareholders and major financial institutions such as Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. The core of the litigation revolved around allegations that Tribune's LBO constituted fraudulent conveyance intended to defraud creditors, leading to the company's subsequent Chapter 11 bankruptcy filing in 2008.

Summary of the Judgment

The Second Circuit affirmed certain dismissals made by the district court while vacating others. Specifically:

  • The dismissal of intentional fraudulent conveyance claims against the shareholders was affirmed.
  • The breach of fiduciary duty claims against the allegedly controlling shareholders were affirmed.
    • The dismissal of aiding and abetting breach of fiduciary duty and professional malpractice claims against the financial advisors was affirmed.
    • The dismissal of actual fraudulent conveyance claims was affirmed for Morgan Stanley, Citigroup, and Merrill Lynch, but vacated for VRC.
    • The dismissal of constructive fraudulent conveyance claims was affirmed for Morgan Stanley and VRC, but vacated for Citigroup and Merrill Lynch.
  • The denial of the Trustee's motion to amend the complaint was affirmed.

The court's decision primarily hinged on the stringent requirements for proving "actual intent to defraud" under the Bankruptcy Code and clarified standards for imputing intent within corporate structures.

Analysis

Precedents Cited

The judgment references several key cases and statutes that shaped its outcome:

  • 11 U.S.C. § 548(a): Defines fraudulent conveyance under the Bankruptcy Code, distinguishing between intentional and constructive fraudulent transfers.
  • IN RE KAISER: Discusses "badges of fraud" which courts use to infer intent.
  • IN RE ROCO CORP.: Applies a "control" test for imputing fraudulent intent within a corporation.
  • Staub v. Proctor Hospital: Although pertaining to ERISA, this case was considered but deemed not directly applicable due to different standards.
  • Merit Mgmt. Grp., LP v. FTI Consulting, Inc.: Influenced the court's reconsideration of the safe harbor provisions under the Bankruptcy Code.
  • Other notable cases include Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. and RBC Capital Markets, LLC v. Jervis, which informed fiduciary duty and in pari delicto doctrines.

Impact

This judgment clarifies the stringent requirements for establishing fraudulent conveyance claims, particularly emphasizing the necessity of demonstrating actual intent rather than relying on circumstantial evidence or negligence. It underscores the challenges plaintiffs face in imputing intent within corporate structures and sets a high bar for proving fraudulent intent in bankruptcy litigation.

Future cases involving fraudulent conveyance will likely reference this decision to assess the adequacy of pleadings related to intent. Additionally, the court's stance on the role of financial advisors may influence how such parties engage in corporate transactions and how their responsibilities are interpreted in litigation contexts.

Complex Concepts Simplified

Fraudulent Conveyance

A fraudulent conveyance occurs when a debtor transfers assets to another party with the intent to hinder, delay, or defraud creditors. Under the Bankruptcy Code, there are two types:

  • Intentional Fraudulent Conveyance: Involves deliberate actions taken to defraud creditors.
  • Constructive Fraudulent Conveyance: Occurs when a transfer is made without receiving reasonable value in return, especially if the debtor was insolvent at the time.

Actual Intent vs. Constructive Fraud

Actual Intent requires proving that the debtor specifically intended to defraud creditors. This is a high standard and requires detailed evidence.

Constructive Fraud does not require proof of intent but focuses on the fairness of the exchange. If the debtor did not receive reasonable value in the transfer, it may be deemed fraudulent.

In Pari Delicto Doctrine

This legal doctrine prevents a plaintiff from recovering damages if they were equally at fault in the wrongdoing. In the context of fiduciary duty claims, it bars claims against parties who were involved in the wrongdoing.

Step-Transaction Doctrine

This doctrine allows courts to treat a series of separate transactions as a single integrated transaction if they are interdependent, prearranged, or part of a binding commitment. This is crucial in evaluating whether different steps of a complex financial maneuver should be viewed collectively.

Badges of Fraud

These are circumstantial indicators that suggest intent to defraud, such as transfer under duress, lack of consideration, or significant undervaluation of assets.

Conclusion

The Second Circuit's decision in the Tribune Company Fraudulent Conveyance Litigation emphasizes the necessity of precise and robust pleading in fraudulent conveyance claims, especially regarding the demonstration of actual intent to defraud creditors. By affirming and vacating specific claims, the court delineates the boundaries of imputing intent within corporate entities and the roles of financial advisors in complex transactions. This judgment serves as a critical reference point for future bankruptcy litigations, ensuring that claims are grounded in substantial allegations rather than speculative inferences.

Ultimately, the ruling reinforces the protective measures for defendants against broad or unfounded fraudulent conveyance allegations, while still allowing for claims where clear and specific intent can be established. It underscores the judicial system's role in maintaining the integrity of financial transactions and the importance of adhering to legal standards in corporate restructuring endeavors.

Case Details

Year: 2021
Court: United States Court of Appeals, Second Circuit.

Judge(s)

Chin, Circuit Judge

Attorney(S)

Lawrence S. Robbins (Roy T. Englert, Jr., on the brief), Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, DC; Robert J. Lack, Jeffrey R. Wang, Friedman Kaplan Seiler & Adelman LLP, New York, New York; David M. Zensky, Akin Gump Strauss Hauer & Feld LLP, New York, New York, for Plaintiff-Appellant. Douglas Hallward-Driemeir, (Jonathan Ference-Burke on the brief), Ropes & Gray LLP, Washington, DC; Andrew Devore, Joshua Sturm, Ropes & Gray LLP, Boston, MA; Philip D. Anker, Alan E. Schoenfeld, Ryan Chabot, Wilmer Cutler Pickering Hale & Dorr LLP, New York, New York; Joel W. Millar, Wilmer Cutler Pickering Hale & Dorr LLP, Washington, DC; Matthew L. Fornshell, Ice Miller LLP, Columbus, Ohio; Andrew J. Entwistle, Entwistle & Cappucci LLP, New York, New York; Mark A. Neubauer, Carlton Fields, LLP, Los Angeles, California; P. Sabin Willett, Michael C. D'Agostino, Morgan, Lewis & Bockius LLP, Boston, Massachusetts; Michael S. Doluisio, Dechert LLP, Philadelphia, Pennyslvania, for Defendants-Appellees Pension Funds, Financial Institution Holders, Individual Beneficial Owners, Mutual Funds, Certain Large Shareholders, and Financial Institution Conduits. Erin E. Murphy, Kirkland & Ellis LLP, Washington, DC; Gabor Balassa, Brian Borchard, Kirkland & Ellis LLP, Chicago, Illinois; Oscar Garza, Douglas G. Levin, Gibson, Dunn & Crutcher LLP, Irvine, California; Matthew D. McGill, Gibson, Dunn & Crutcher LLP, Washington, D.C., for Defendants-Appellees Large Shareholders. Kannon K. Shanmugam (Masha G. Hansford, Joel S. Johnson, on the brief), Paul, Weiss, Rifkind, Wharton & Garrison LLP, Washington, D.C.; Andrew G. Gordon, Kira A. Davis, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, New York; Daniel L. Cantor, Daniel S. Shamah, O'Melveny & Myers LLP, New York, New York, for Defendants-Appellees Citigroup Global Markets, Inc. and Merrill Lynch, Pierce, Fenner & Snith Inc. Jonathan D. Polkes (Gregory Silbert, Stacy Nettleton, on the brief), Weil, Gotshal & Manges LLP, New York, New York; George E. Mastoris, Winston & Strawn LLP, New York, New York, for Defendants-Appellees Financial Advisors.

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