In re Tribune Co.

• Decision Date: 23 January 2019
• Docket Number: 12cv2652 (DLC),11md2296 (DLC),12cv6055 (DLC)
• Parties: In re: Tribune Company Fraudulent Conveyance Litigation
• Court: U.S. District Court — Southern District of New York

In re: Tribune Company Fraudulent Conveyance Litigation

11md2296 (DLC)

12cv2652 (DLC)

12cv6055 (DLC)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

January 23, 2019

OPINION & ORDER

APPEARANCES:

For the Trustee:

David M. Zensky

Mitchell P. Hurley

Deborah J. Newman

Akin Gump Strauss Hauer & Feld LLP

One Bryant Park

New York, NY 10036

Michael L. Waldman

Mark A. Hiller

Robbins, Russel, Englert, Orseck, Untereiner & Sauber LLP

1801 K Street, N.W., Suite 411L

Washington, DC 20006

Jeffrey T. Golenbock

Dougles L. Furth

Golencok Eiseman Assor Bell & Peskoe LLP

437 Madison Ave

New York, NY 10022

Robert J. Lack

Hal Neier

Amy C. Brown

Jeffrey R. Wang

Friedman Kaplan Seiler & Adelman LLP

7 Times Square

New York, NY 10036

For the Independent Directors:

Matthew R. Kipp

Donna L. McDevitt

Jason T. Manning

Skadden, Arps, Slate, Meagher & Flom LLP

155 North Wacker Drive

Chicago, Illinois 60606

For Samuel Zell, EGI-TRG, LLC, Equity Group Investments, LLC, and Sam Investment Trust:

David J. Bradford

Catherine L. Steege

Daniel J. Weiss

Andrew W. Vail

Jenner & Block LLP

353 North Clark Street

Chicago, Illinois 60654

For GreatBanc Trust Company:

Roger H. Stetson

William J. Barrett

Jack O. Snyder, Jr.

Barack Ferrazzano Kirschbaum & Nagelberg LLP

200 West Madison Street, Suite 3900

Chicago, IL 60606

For Morgan Stanley & Co. LLC:

Jonathan D. Polkes

Michael F. Walsh

Stacy Nettleton

Weil, Gotshal & Manges LLP

767 Fifth Avenue

New York, NY 10153

For Merrill Lynch, Pierce, Fenner & Smith Inc.:

Daniel L. Cantor

Evan M. Jones

Daniel S. Shamah

O'Melveny & Myers LLP

7 Times Square

New York, NY 10036

For Citigroup Global Markets Inc.:

Andrew G. Gordon

Kira A. Davis

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, NY 10019

For Duff & Phelps, LLC:

Steven V. D'Amore

Michael S. Pullos

Winston & Strawn LLP

35 W. Wacker Drive

Chicago, IL 60601

For Valuation Research Corporation:

Richard W. Reinthaler

David Neier

Winston & Strawn LLP

200 Park Avenue

New York, NY 10166

DENISE COTE, District Judge:

Background ..................................................... 6

Procedural History ............................................ 19

Discussion .................................................... 25

I. General Principles of Law ................................ 26

A. Avoidance of Transfers and Preference Payments ......... 27

B. DGCL Sections 160 and 173 .............................. 31

C. Corporate Directors' Fiduciary Duties .................. 33

D. Aiding and Abetting Breach of Fiduciary Duty ........... 35

E. Unjust Enrichment ...................................... 36

F. Professional Malpractice ............................... 40

G. In Pari Delicto ........................................ 44

II. Independent Directors (Motion 1) ........................ 47

A. Breach of Fiduciary Duty ............................... 48

B. DGCL Sections 160 and 173 .............................. 51

C. Unjust Enrichment ...................................... 55

D. Equitable Subordination ................................ 59

E. Avoidance of Indemnification Obligations ............... 59

III. Zell Defendants (Motion 2) ............................. 61

A. Breach of Fiduciary Duty ............................... 62

B. DGCL Sections 160 and 173 .............................. 65

C. Aiding and Abetting Liability .......................... 66

D. Avoidance of Indemnification Obligations to Zell ....... 67

E. Alter Ego Liability .................................... 68

F. Avoidance of EGI and EGI-TRB Fraudulent Transfers and Preference Payments ....................................... 70G. Unjust Enrichment ...................................... 72

H. Equitable Subordination ................................ 73

IV. Advisor Defendants (Motions 8-10) ....................... 74

A. Aiding and Abetting Breach of Fiduciary Duty ........... 74

1. Morgan Stanley ........................................ 75

2. VRC ................................................... 78

3. Duff & Phelps ......................................... 79

4. Affirmative Defense - In Pari Delicto ................. 80

B. Professional Malpractice ............................... 85

C. Unjust Enrichment ...................................... 88

D. In Pari Delicto ........................................ 89

E. Fraudulent Transfers ................................... 90

1. Constructive Fraudulent Transfers ..................... 90

2. Actual Fraudulent Transfer ............................ 92

Conclusion .................................................... 94

On July 23, 2012, the Tribune Company ("Tribune" or the "Company") emerged from bankruptcy. The reorganization plan confirmed by the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") transferred certain claims of the bankruptcy estate to Tribune's litigation trust, whose board later selected Marc S. Kirschner as litigation trustee (the "Trustee"), to recover assets for the benefit of Tribune's creditors. This Opinion addresses motions to dismiss filed in two actions being pursued by the Trustee.

In Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Dennis J. FitzSimons, et al., 12cv2652 (the "FitzSimons Action"), which was originally filed on November 1, 2010 in the Bankruptcy Court as Official Committee of UnsecuredCreditors of Tribune Company, et al. v. FitzSimons, et al., and was transferred to this district on March 20, 2012, the Trustee asserts a claim of intentional fraudulent transfer of assets and various other claims against several individuals and entities. Most but not all defendants have moved to dismiss the claims against them. Opinions of January 6, 2017 and November 30, 2018 addressed some of the motions to dismiss. See In re Tribune Co. Fraudulent Conveyance Litig., 11md2296 (RJS), 2018 WL 6329139 (S.D.N.Y. Nov. 30, 2018) ("the November 2018 Opinion"); In re Tribune Co. Fraudulent Conveyance Litig., 11md2296 (RJS), 2017 WL 82391 (S.D.N.Y. Jan. 6, 2017) ("the January 2017 Opinion"). Familiarity with those Opinions is assumed.

In Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Citigroup Global Markets Inc. and Merrill, Lynch, Pierce, Fenner, & Smith, Inc., 12cv6055 (the "Citigroup Action"), which was originally filed in the Bankruptcy Court for the District of Delaware on April 2, 2012 as Official Committee of Unsecured Creditors v. Citigroup Global Markets, Inc. and Merrill, Lynch, Pierce, Fenner & Smith Inc., and was transferred to this district on August 8, 2012, the Trustee asserts claims for aiding and abetting breaches of fiduciary duties and other claims against Citigroup Global Markets, Inc. ("Citigroup") and Merrill, Lynch, Pierce, Fenner, and Smith, Inc. ("MLPFS").

This Opinion resolves most of the remaining motions to dismiss in the FitzSimons and Citigroup Actions.¹ These motions are granted or denied for the following reasons.

Background

This lawsuit arises out of the 2007 leveraged buyout ("LBO") of Tribune and its subsequent bankruptcy in 2008. Prior to filing for bankruptcy in 2008, Tribune was "America's largest media and entertainment company," owning numerous radio and television stations and major newspapers, including the Chicago Tribune and the Los Angeles Times. In the years preceding the 2007 LBO, the newspaper publishing business, which made up approximately 75% of Tribune's revenues, experienced a consistent decline in circulation and profits.

Retention of MLPFS and Citigroup and 2006 Recapitalization

Tribune retained the services of MLPFS in October 2005, and later Citigroup, to assist with a strategic review of its business, including evaluation of potential strategic transactions. Both advisors' retention agreements expressly provided that they would be permitted to participate as lenders in any strategic transaction in which the Company engaged.

In May 2006, with the advice of MLPFS and Citigroup, Tribune engaged in a leveraged recapitalization. Following the May 2006 transaction, 33% of Tribune stock was held by two constellations of family trusts and foundations: (1) the Chandler Trusts, which owned 20% of Tribune stock, and (2) the Robert R. McCormick Foundation ("McCormick Foundation") and the Cantigny Foundation (together with the McCormick Foundation, the "Foundations"), which collectively owned approximately 13% of Tribune stock.

Tribune had an eleven-member board of directors (the "Board"), which was chaired by Tribune's President and Chief Executive Officer ("CEO"), Dennis FitzSimons ("FitzSimons"), who also served as Chairman of the McCormick Foundation and a board member of the Cantigny Foundation. The Board also included three trustees and/or beneficiaries of the Chandler Trusts: Jeffrey Chandler, Roger Goodan, and William Stinehart Jr. (the "Chandler Directors"). Finally, the Board included seven independent members who neither served as Tribune officers nor were affiliated with the Chandler Trusts or the Foundations (the "Independent Directors").²

Formation of Special Committee and Retention of Morgan Stanley

In June of 2006, soon after the recapitalization, William Stinehart, Jr. ("Stinehart"), acting in his capacity as a trustee of the Chandler Trusts, wrote to the Board expressing dismay over the Company's deteriorating business. Stinehart "demanded" that a special committee of independent directors be formed to "take prompt decisive action to enhance stockholder value." Accordingly, in September 2006, the Board established a special committee of the seven Independent Directors to explore the possibility of further strategic transactions to keep the Company afloat (the "Special Committee").

In October of 2006, Morgan Stanley was retained to act as financial advisor to the Special Committee. Morgan Stanley's engagement letter provided for a $7.5 million fee contingent upon the preparation of an opinion concerning, or the closing of, a financial transaction, recapitalization, or restructuring plan for Tribune, as well as an additional discretionary fee. Morgan Stanley ultimately received more than...