The bankruptcy cases of the Tribune Company (“Tribune”) finally came to a conclusion last month. The Tribune cases “enjoyed” an exceptionally long life (at least by bankruptcy standards), but the Supreme Court finally sounded the death knell on February 22, 2022 by declining to review the last two pending Second Circuit decisions. Although the Tribune cases are no longer with us, they leave behind a lasting legacy—including the adoption of the “control” test for section 548(a)(1)(A) claims in the Second Circuit, which was one of the appellate holdings that the Supreme Court declined to resuscitate.1
After the U.S. Bankruptcy Court for the District of Delaware confirmed Tribune’s plan of reorganization in 2012, certain causes of action held by the estates were channeled to a litigation trust. The litigation trustee (the “Trustee”) was empowered to pursue those causes of actions, including 548(a)(1)(A) claims stemming from over $8 billion in payments (the “Transfers”) made to Tribune shareholders in connection with the company’s failed 2007 leveraged buyout (“LBO”). Section 548(a)(l)(A) permits the avoidance of any property transfer of the debtor made (1) in the two-year window prior to a bankruptcy filing and (2) “with an actual intent to hinder, delay, or defraud” creditors.
The Trustee alleged that the Transfers constituted intentional fraudulent conveyances because Tribune’s senior management authorized those transfers with an actual intent to hinder, delay, or defraud its creditors. The difficulty with this theory was that Tribune’s board of directors had created a special committee, consisting of the board’s independent directors, which evaluated and recommended the LBO. In late 2021, the Second Circuit affirmed the dismissal of the Trustee’s intentional fraudulent conveyance claims after finding that even if Tribune’s senior officers and inside directors had the requisite intent, such intent could not be imputed to the special committee.2 In doing so, the Second Circuit applied a “control” test to determine whether the body (here, the special committee) approving a transfer had the actual intent to harm creditors. The Trustee petitioned for certiorari to the Supreme Court arguing that the “control” test was improper and the fact that senior management had the necessary fraudulent intent was sufficient. The Supreme Court, however, declined to review the issue.
The Supreme Court’s decision to deny certiorari ensures two things: the Transfers made to Tribune shareholders will not be clawed back and, more noteworthy from a practical perspective, the Second Circuit’s “control” test for section 548(a)(1)(A) claims will continue to apply going forward. That test can be summed up as follows: “for an intentional fraudulent transfer claim, which requires ‘actual intent,’ a company’s intent may be established only through the ‘actual intent’ of the individuals ‘in a position to control the disposition of [the transferor’s] property.’”3 Accordingly, plaintiffs seeking to recover on fraudulent transfers when a special committee or independent director is in play must allege that the independent body was not, in its decision-making process, actually or fully independent. Such allegations may include that management pressured independent directors to approve the transfer, “dominated” the special committee in some fashion, or the existence of ties between management and the independent body that could have affected its impartiality. Lest Tribune’s death be in vain, counsel for the independents or special committees should be mindful of this pleading standard, and seek to dismiss any claims that fail to adhere to it.
1 See In re Trib. Co. Fraudulent Conv. Litig., 10 F.4th 147 (2d Cir. 2021), reh’g en banc denied, No. 19-3049 (2d Cir. Oct. 7, 2021), cert. denied (Feb. 22, 2022). The Supreme Court also declined to review the Second Circuit’s decision upholding the safe harbor defense under section 546(e) of the Bankruptcy Code, an issue which we have previously covered.
2 Tribune, 10 F.4th at 177.
3 Id. at 160.