Tribune law suit defendant's reply motion

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

Case 1:12-cv-02652-RJS Document 4717 Filed 07/03/14 Page 1 of 21

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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


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.


13

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


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


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.


16

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


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


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

Documents

Tribune law suit defendant's reply motion