A New Page in the Tribune Bankruptcy Diary

For the last nine years, the ­bankruptcy of media conglomerate Tribune Co. has produced a long diary of court opinions interpreting a variety of Bankruptcy Code provisions. It is time for a new entry. Last month, the U.S. District Court for the Southern District of New York dismissed with prejudice a fraudulent conveyance claim brought by a litigation trustee seeking recovery on behalf of the company’s unsecured ­creditors in In re Tribune Fraudulent Conveyance Litigation, No. 11-md-2296, 2017 BL 5202 (S.D.N.Y. Jan. 6). This was no garden-variety fraudulent conveyance claim: the trustee sought to recover $8 billion that certain Tribune public shareholders received as part of the ill-fated leveraged buyout that took place prior to the company’s December 2008 bankruptcy. The Tribune court dismissed the trustee’s claim for ­several reasons, but most significantly for failure to sufficiently allege that the actions of the company’s officers should have be imputed to the company for purposes of determining whether Tribune entered in the LBO with the requisite intent to defraud ­creditors. Judge Richard Sullivan’s decision on this issue is important not only because of its applicability to fraudulent conveyance actions involving corporations, but also because he applied a different legal standard and reached a different conclusion than his colleague, Judge Denise Cote, in In re Lyondell Chemical, 554 B.R. 635, 638 
(S.D.N.Y. 2016).

The events precipitating the Tribune bankruptcy are familiar by now but will be summarized briefly below. In June 2006, in the midst the company’s deteriorating financial condition, Tribune’s board of ­directors formed a special committee of independent directors to pursue a sale of the company, including through an LBO, in which a target company is acquired for a purchase price that is funded largely by a loan secured on the target company’s assets. Notably excluded from the special committee were board members who owned significant amounts of company stock, CEO Dennis FitzSimons (13 percent owner) and three members who represented various trusts (collective 20 percent owners). In early 2007, an investment group led by Sam Zell reached an agreement in principle to acquire a controlling interest in Tribune through a two-step LBO. The board and special committee each engaged investment banks and other advisers to vet the transaction. After the banks and advisers issued ­initial fairness and “solvency opinions”—i.e., statements opining that post-transaction, the company would be able to pay its debts as they came due—the special committee unanimously recommended that the full board ­approve the transaction. The full board did so.