On March 22, 2011, the Bankruptcy Court in the Tribune Company bankruptcy case indicated that it would unlock (but not fully open) the floodgates for new fraudulent transfer litigation against former shareholders of Tribune. This time, the litigation will be brought not by the Tribune estate or its creditors’ committee, but by individual creditors in state courts. The purpose of the suits will be to recover the billions of dollars that former Tribune public shareholders received as a result of the company’s leveraged buy-out in 2007.
This would not be the first such litigation against shareholders arising out of the leveraged buy-out. Late last year, in December 2010, the Tribune creditors’ committee launched a fraudulent transfer case against the former shareholders (and others, including the sponsors of the leveraged buy-out) based on a theory of intentional fraudulent transfer under Bankruptcy Code Section 548(a). That suit, however, did not include constructive fraudulent transfer claims against the shareholders. Such claims were not available to the committee due to the safe harbor provisions of Bankruptcy Code Section 546(e), which protects public shareholders from this type of litigation, at least when brought by a bankruptcy estate or a creditors’ committee acting on behalf of the estate.
The new litigation being proposed would allow Tribune’s creditors immediately to commence litigation in state courts asserting constructive fraudulent transfer claims to recover stock redemption payments made to the former shareholders. Those urging the Court to allow such claims contended that the Tribune estate failed to assert the claims in the bankruptcy proceedings in a timely manner and, therefore, the right to assert those claims reverted back to the individual creditors. They further argued that they can proceed with such litigation under state law, even though the bankruptcy estate and creditors’ committee cannot bring such claims under federal law.
Those objecting to this effort argued principally that the Court, if it were inclined to allow the litigation to proceed, should carefully and specifically state that it is not ruling on the merits of the state law constructive fraudulent transfer claims, the standing (or lack thereof) of any creditors to bring such claims, or whether those claims in fact have reverted to such creditors or been eschewed by the estate.
At a hearing on March 22, the Court indicated that it would enter an order that would, at the very least, permit certain creditors – including Aurelius Capital Management, LP – to file and serve state law constructive fraudulent transfer actions against the shareholders. The Court may also expand its order to allow any Tribune creditor to file such a suit. The Court, however, indicated that its order would also require any creditors bringing suit to seek a stay of those actions, pending final plan confirmation by the Court (a process that appears to be weeks from resolution). We expect that the Court will enter the order permitting the litigation soon, resulting in one or more state court actions to be commenced against all former shareholders immediately thereafter. As a result of prior litigation and proceedings, there is a list of several thousand institutions and individuals that held Tribune shares on the date of the leveraged buy-out transactions.
Based on its comments at the hearing, it appears that the Court will craft an order that makes clear that it is approving the commencement of such actions only as a procedural device, and will not rule on the merits of such state law fraudulent transfer claims. This would preserve the shareholder defendants’ ability to challenge the claims on any basis, from the standing of the creditors to assert them to the merits themselves, without facing res judicata or issue preclusion.
We believe that the shareholders may have bankruptcy-based defenses to these state law claims as well as defenses to the substantive merits of the claims, including that the leveraged buy-out was not a fraudulent transfer.
Please contact Hal Horwich or Michael D’Agostino if you would to discuss further these developments: