This is how Tribune ends: not with a bang, but a whimper. The 12-year litigation saga, rooted in the spectacular failure of the media and sports conglomerate’s 2007 leveraged buyout, reached an end in late February with a curt “cert. denied” from the US Supreme Court.
Morgan Lewis was one of the firms that captained the defense for Tribune’s former shareholders. This post notes some lessons that we learned—and relearned.
At first, we prevailed on constructive claims under the old, expansive view of the Section 546(e) safe harbor for settlement payments. Victory did not last. In 2018, the Supreme Court narrowed the harbor, holding in Merit Management that the presence of a bank or other financial institution somewhere in the chain of securities transfer is not enough. The “settlement payment” defense now requires that the “financial institution” be the ultimate transferee or transferor.
We pivoted to a new approach. Tribune involved a tender offer, and because the agent to whom shareholders tendered (Computershare, N.A.) was a financial institution, we argued that an awkward agency clause in the Bankruptcy Code clothed Tribune itself with the same status. The courts agreed.
Thus the first lesson learned: In tender offers, a sponsor and its shareholders can protect themselves from constructive fraudulent transfer claims by insisting that the tender agent be a financial institution.
Tribune’s complaint was not for the faint of heart. One firm refused to give a solvency opinion and another redefined solvency to do so. Management allegedly cooked the projections. The capital structure involved a peppercorn of equity and a mountain of debt. Tribune’s failure was rapid. The safe harbor has never protected transfers made with “actual intent” to hinder, delay, or defraud creditors from avoidance under federal law. Surely, argued the plaintiff, someone’s intent was suspect.
But whose? Where do we locate the “actual intent” of a Delaware corporation making a transfer? Turns out, only in the people whom governing corporation law invests with the power to make it.
If the power to approve mergers lies with the board of directors, then the actual intent to hinder, delay, or defraud creditors must be found somewhere in their heads. Finding it in a corporation’s officers, management, or other individuals (whose intent may ordinarily be imputed to the corporation in connection with run-of-the-mill torts) is not enough.
Tribune’s board created a special committee to assess the LBO. The trustee could not allege facts showing that its members had a conscious purpose to injure creditors. The result was dismissal, affirmed by the Second Circuit.
Lesson Two: Look to corporation law to determine who has authority to cause the transfer to occur—only his or her “actual intent” counts.
Tribune reminds us of some old lessons, too.
Major fraudulent transfer cases are long—so long that had the clients lost, prejudgment interest might well have doubled the liability. Tribune burned 12 years on pleadings alone. It went from bankruptcy court to disparate courts to the multidistrict litigation platform, to the Second Circuit, back down again, and up once more. Had the case gone to discovery, who knows when it would have ended.
A painful reminder: When you are the defendant in a major fraudulent transfer case, prepare yourself for a long ride.
Nothing new here, but Tribune astonished thousands of shareholder defendants with the news that their intent, or lack of it, was irrelevant.
In fraudulent transfers, the relevant intent is that of the transferor. Tribune’s outside public shareholders were innocent of wrongful intent, and powerless to influence the merger. But they might have been liable, had actual intent been ascribed to a special committee whose members they had never met—and probably never heard of.