UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF …...Directors of their duty of care (which he...
Transcript of UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF …...Directors of their duty of care (which he...
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
IN RE: TRIBUNE COMPANY FRAUDULENT
CONVEYANCE LITIGATION
Consolidated Multidistrict Litigation
No. 11 MD 2296 (RJS)
No. 12 MC 2296 (RJS)
No. 12 CV 2652 (RJS)
MEMORANDUM OF LAW IN SUPPORT OF
THE INDEPENDENT DIRECTORS’ MOTION TO DISMISS
(MOTION NO. 1)
Matthew R. Kipp
Donna L. McDevitt
Jason T. Manning
SKADDEN, ARPS, SLATE, MEAGHER
& FLOM LLP
155 North Wacker Drive
Chicago, Illinois 60606
(312) 407-0700
Counsel for the Independent Directors
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TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT .....................................................................................................1
BACKGROUND .............................................................................................................................3
A. Formation of the Special Committee To Review Tribune’s Strategic
Alternatives ..............................................................................................................3
B. The Special Committee’s Recommendation and the Board’s Approval
of the LBO ...............................................................................................................4
C. The Two-Step Structure of the LBO ........................................................................5
D. VRC’s Solvency Opinions and the Consummation of the LBO .............................5
E. Tribune’s Bankruptcy Petition .................................................................................6
ARGUMENT ..................................................................................................................................6
I. Count Three Fails To State a Claim Against the Independent Directors for Breach
of Fiduciary Duty .................................................................................................................6
A. The Trustee’s Breach of Care Claim Against the Independent Directors
Is Barred by Tribune’s Exculpatory Charter Provision ...........................................7
B. The Trustee’s Allegations Are Insufficient To Rebut the Business Judgment
Rule’s Presumption that the Independent Directors Acted Loyally and in
Good Faith .............................................................................................................10
II. Count Two Fails To State a Claim Against the Independent Directors for Violations
of Section 160 or Section 173 of the Delaware General Corporation Law .......................16
A. There Is No Plausible Inference that Tribune’s Capital Was Impaired at the
Time of, or as a Result of, the Step One Tender Offer Payments ..........................17
B. The Payment of Cash for Tribune Shares in the Step Two Merger Was
Neither a Dividend Nor a Purchase by Tribune of Its Own Shares .......................21
III. Count Thirty-One Fails To State an Unjust Enrichment Claim Against the
Independent Directors ........................................................................................................26
IV. Count Thirty-Three Fails To State a Claim for Equitable Subordination Against
the Independent Directors ..................................................................................................28
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Page
V. Count Thirty-Six-Fails To State a Claim for Avoidance of Tribune’s
Indemnification Obligations to the Independent Directors ................................................30
CONCLUSION ..............................................................................................................................34
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TABLE OF AUTHORITIES
Page
CASES
Ashcroft v. Iqbal, 556 U.S. 662 (2009) ..........................................................................................11
Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) ...................................................................11
Binks v. DSL.net, Inc., C.A. No. 2823-VCN,
2010 WL 1713629 (Del. Ch. Apr. 29, 2010) .....................................................................11
Brehm v. Eisner (In re Walt Disney Co. Derivative Litig.),
906 A.2d 27 (Del. 2006) ....................................................................................................13
Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) .........................................................12
Chamison v. HealthTrust, Inc., 735 A.2d 912 (Del. Ch. 1999),
aff’d sub nom. HealthTrust, Inc. v. Chamison, 748 A.2d 407 (Del. 2000) ........................33
In re Citigroup Inc. Shareholder Derivative Litigation,
964 A.2d 106 (Del. Ch. 2009)............................................................................................13
Contemporary Industries Corp. v. Frost, 564 F.3d 981 (8th Cir. 2009) .......................................28
Continuing Creditors’ Committee of Star Telecommunications Inc.
v. Edgecomb, 385 F. Supp. 2d 449 (D. Del. 2004) ............................................................12
C-T of Virginia, Inc. v. Barrett (In re C-T of Virginia, Inc.),
958 F.2d 606 (4th Cir. 1992) .............................................................................................22
eBusinessware, Inc. v. Technology Services Group Wealth Management
Solutions, LLC, No. 08 Civ. 09101(PKC), 2009 WL 5179535
(S.D.N.Y. Dec. 29, 2009)................................................................................................. 6-7
Enron Corp. v. Springfield Associates, L.L.C. (In re Enron Corp.),
379 B.R. 425 (S.D.N.Y. 2007) ...........................................................................................29
In re Estate of Lukens, 246 F.2d 403 (3d Cir. 1957) .....................................................................22
Field v. Allyn, 457 A.2d 1089 (Del. Ch.), aff’d 476 A.2d 1274 (Del. 1983) .................................24
Frank v. Elgamal, C.A. No. 6120-VCN, 2014 WL 957550 (Del. Ch. Mar. 10, 2014) .................27
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Page
Ferre v. McGrath, No. 06 Civ. 1684 (CM),
2007 WL 1180650 (S.D.N.Y. Feb. 16, 2007) ......................................................................7
Gantler v. Stephens, 965 A.2d 695 (Del. 2009) .............................................................................11
In re General Motors (Hughes) Shareholder Litigation,
Consolidated, C.A. No. 20269, 2005 WL 1089021
(Del. Ch. May 4, 2005), aff’d, 897 A.2d 162 (Del. 2006) .................................................27
Global Link Liquidating Trust v. Avantel (In re Global Link Telecom Corp.),
327 B.R. 711, 717-18 (Bankr. D. Del. 2005) .....................................................................33
In re Goldman Sachs Group, Inc. Shareholder Litigation, No. 5215-VCG,
2011 WL 4826104 (Del. Ch. Oct. 12, 2011) ....................................................................13
Greenmont Capital Partners I, LP v. Mary’s Gone Crackers, Inc.,
C.A. No. 7265-VCP, 2012 WL 4479999 (Del. Ch. Sept. 28, 2012)..................................23
Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003) ..........................................................................8
JPMorgan Chase Bank, N.A. v. Charter Communications Operating, LLC
(In re Charter Communications), 419 B.R. 221 (Bankr. S.D.N.Y. 2009) .........................18
KDW Restructuring & Liquidation Services LLC v. Greenfield,
874 F. Supp. 2d 213 (S.D.N.Y. 2012)..............................................................6, 8, 9, 10, 11
Klang v. Smith’s Food & Drug Centers, Inc., 702 A.2d 150 (Del. 1997) ...................17, 18, 21, 25
In re Lear Corp. Shareholder Litigation, 967 A.2d 640 (Del. Ch. 2008) .....................9, 15, 21, 26
Lemond v. Manzulli, No. 05 Civ. 2222 (ILG),
2009 WL 1269840 (E.D.N.Y. Feb. 9, 2009).................................................................... 8-9
Lyondell Chemical Co. v. Ryan, 970 A.2d 235 (Del. 2009) ..........................................................15
Malpiede v. Townson, 780 A.2d 1075 (Del. 2001) ..........................................................................8
In re Massey Energy Co. Derivative & Class Action Litigation,
C.A. No. 5430-VCS, 2011 WL 2176479 (Del. Ch. May 31, 2011) ............................11, 18
McMullin v. Beran, 765 A.2d 910 (Del 2000) .................................................................................9
Miller v. McDonald (In re World Health Alternatives, Inc.),
385 B.R. 576 (Bankr. D. Del. 2008) ..................................................................................32
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Page
Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) ....................................................................... 26-27
Official Committee of Unsecured Creditors v. Bay Harbour Master Ltd.
(In re BH S&B Holdings LLC), 420 B.R. 112 (Bankr. S.D.N.Y. 2009),
aff’d Geltzer v. Bay Harbor Management LC, 807 F. Supp. 2d 199
(S.D.N.Y. 2011) ...................................................................................................................7
Official Committee of Unsecured Creditors of Color Tile, Inc. v. Investcorp S.A.,
No. 97 Civ. 9261 (MGC), 1999 WL 754015 (S.D.N.Y. Sept. 24, 1999) ..........................11
Official Committee of Unsecured Creditors of Hechinger Investment Co. of
Delaware v. Fleet Retail Finance Group (In re Hechinger Investment
Co. of Delaware), 274 B.R. 71 (D. Del. 2002) ..................................................................28
Official Committee of Unsecured Creditors of Hydrogen, L.L.C. v. Blomen
(In re Hydrogen, L.L.C.), 431 B.R. 337 (Bankr. S.D.N.Y. 2010) .............................. 29-30
Official Committee of Unsecured Creditors of Verestar, Inc. v. American
Tower Corp.(In re Verestar, Inc.), 343 B.R. 444 (Bankr. S.D.N.Y. 2006) ................10, 14
O’Toole v. McTaggart (In re Trinsum Group, Inc.),
466 B.R. 596 (Bankr. S.D.N.Y. 2012) .................................................................................8
Pereira v. Farace, 413 F.3d 330 (2d Cir. 2005) ............................................................................10
In re Ply Gem Industries, Inc. Shareholders Litigation,
C.A. No. 15779-NC, 2001 WL 755133 (Del. Ch. June 26, 2001).....................................12
Production Resources Group, L.L.C. v. NCT Group, Inc.,
863 A.2d 772 (Del. Ch. 2004)............................................................................................10
Rauch v. RCA Corp., 861 F.2d 29 (2d Cir. 1988) .................................................................... 24-25
Roselink Investors, L.L.C. v. Shenkman, 386 F. Supp. 2d 209 (S.D.N.Y. 2004) ...........................16
Rothschild International Corp. v. Liggett Group, Inc., 474 A.2d 133 (Del. 1984) .................23, 24
Shubert v. Lucent Technologies Inc. (In re Winstar Communications, Inc.),
554 F.3d 382, 411 (3d Cir. 2009).......................................................................................29
Stanziale v. Nachtomi (In re Tower Air, Inc.), 416 F.3d 229 (3d Cir. 2005) ...........................10, 11
Stone v. Ritter, 911 A.2d 362 (Del. 2006) ...........................................................................8, 13, 16
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Page
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) .................................................3
Tourangeau v. Uniroyal, Inc., 138 F. Supp. 2d 259 (D. Conn. 2001) ..........................................32
Trenwick American Litigation Trust v. Ernst & Young, L.L.P.,
906 A.2d 168 (Del. Ch. 2006), aff’d sub nom., Trenwick American
Litigation Trust v. Billett, 931 A.2d 438 (Del. 2007) (TABLE) ....................................9, 16
In re Walt Disney Co. Derivative Litigation, 907 A.2d 693, 752 (Del. Ch. 2005),
aff’d 906 A.2d 27 (Del. 2006) ........................................................................................8, 12
Wood v. Baum, 953 A.2d 136 (Del. 2008) .....................................................................................13
STATUTES
8 Del. C. § 102(b)(7) ........................................................................................................................7
8 Del. C. § 141(e) ..................................................................................................................... 14-15
8 Del. C. § 145(h) ..........................................................................................................................32
8 Del. C. § 154 ...............................................................................................................................17
8 Del. C. § 160(a)(1) ......................................................................................................................17
8 Del. C. § 170(a) ..................................................................................................................... 21-22
8 Del. C. § 172 ...............................................................................................................................18
8 Del. C. § 173 ...............................................................................................................................21
8 Del. C. § 174 ......................................................................................................................... 16-17
8 Del. C. § 251 ...............................................................................................................................23
8 Del. C. § 259(a) ...........................................................................................................................32
8 Del. C. § 253 ...............................................................................................................................24
11 U.S.C. §510(c)(1) ................................................................................................................ 28-29
11 U.S.C. §546(e) ..........................................................................................................................28
11 U.S.C. §548(a)(1) ................................................................................................................ 30-31
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TREATISES
Edward P. Welch, Andrew J. Turezyn, & Robert S. Saunders,
FOLK ON THE DELAWARE GENERAL CORPORATION LAW §174.4 (5th
ed. 2010) .................17
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PRELIMINARY STATEMENT
Defendants Enrique Hernandez, Jr., Betsy D. Holden, Robert S. Morrison, William A.
Osborn, J. Christopher Reyes, Dudley S. Taft, and Miles D. White (collectively, the
“Independent Directors”) respectfully submit this memorandum of law in support of their motion
to dismiss all claims (other than Count One) asserted against them in the Fifth Amended
Complaint (the “Complaint”) filed by the Litigation Trustee (the “Trustee”).1
The Trustee’s overarching claim against the Independent Directors, asserted in Count
Three of the Complaint, is that they breached their duties of care, loyalty, and good faith by
approving the leveraged buyout (the “LBO”) of Tribune Company (“Tribune” or the
“Company”). Count Three fails to state a breach of fiduciary duty claim against the Independent
Directors. First, even if the Trustee sufficiently had alleged a breach by the Independent
Directors of their duty of care (which he has not), Tribune’s certificate of incorporation included
a provision, authorized by Section 102(b)(7) of the Delaware General Corporation Law (the
“DGCL”), that exculpates Tribune’s directors from liability for breach of their duty of care. See
Argument, Section I.A. Second, the Trustee’s allegations are insufficient to rebut the business
judgment rule’s presumption that the Independent Directors acted loyally and good faith. See id.,
Section I.B.
In Count Two of the Complaint, the Trustee attempts to hold each of the Independent
Directors jointly and severally liable for the over $8 billion of payments received by Tribune’s
former shareholders in the LBO by alleging that these payments were “in substance, unlawful
dividends and/or stock purchases in violation of Sections 160 and/or 173 of the DGCL.” (Compl.
1 Pursuant to this Court’s Phase Two Motion Protocol (Dkt. No. 5697), a separate motion to
dismiss is being filed on behalf of the Shareholder Defendants (including the Independent
Directors) who are named in Count One of the Complaint.
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¶ 386 (emphasis added).) Count Two fails to state a claim against the Independent Directors
because there is no plausible inference that Tribune’s capital was impaired at the time of, or as a
result of, the Step One tender offer payments, and because, under applicable Delaware law, the
Step Two merger payments were neither dividends nor payments for the purchase of Tribune’s
shares. Nor is there any plausible inference that the Independent Directors acted willfully or
with gross negligence in performing their duties in approving the Step One tender offer payments
or Step Two merger payments. See Argument, Section II.
Count Thirty-One of the Complaint, for alleged unjust enrichment, would fail to state a
claim against the Independent Directors even if the Trustee adequately had alleged that the
Independent Directors were unjustly enriched (which he has not). Under Delaware law, an unjust
enrichment claim may be asserted only where there is no adequate remedy at law. It is apparent
on the face of the Complaint that the Trustee has an adequate remedy at law. In addition, to the
extent the Trustee is attempting to recover the payments the Independent Directors received for
their Tribune shares in the LBO, that attempt is precluded by Section 546(e) of the Bankruptcy
Code. See id., Section III.
In Count Thirty-Three of the Complaint, the Trustee seeks equitable subordination of the
claims filed by the Independent Directors in the bankruptcy proceeding. Count Thirty-Three fails
to state a claim against the Independent Directors because there is no plausible inference that the
Independent Directors engaged in any inequitable conduct. See id., Section IV.
Finally, in Count Thirty-Six of the Complaint, the Trustee seeks avoidance of Tribune’s
continuing indemnification obligations to the Independent Directors. Count Thirty-Six is barred
by Section 548(a) of the Bankruptcy Code because Tribune’s indemnification obligations to its
Independent Directors were incurred more than two years before Tribune filed its bankruptcy
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petition. And even if that were not the case, the Trustee has failed to plead any facts to support
his assertion that Tribune’s indemnification obligations to the Independent Directors constituted
actual or constructive fraudulent transfers. See id., Section V.
For these reasons and those set forth more fully herein, the Court should dismiss with
prejudice the claims asserted against the Independent Directors in Counts Two, Three, Thirty-
One, Thirty-Three, and Thirty-Six of the Complaint.2
BACKGROUND3
A. Formation of the Special Committee To Review Tribune’s Strategic
Alternatives
In May 2006, Tribune’s Board of Directors consisted of eleven members: Tribune
President and Chief Executive Officer (“CEO”) Dennis J. FitzSimons (Compl. ¶ 27), the seven
Independent Directors (id. ¶¶ 28-34), and three representatives of the Chandler Trusts (id. ¶¶ 35-
37). The Chandler Trusts were Tribune’s largest shareholders and owned approximately 20% of
Tribune’s stock. (Id. ¶ 127.)
On June 13, 2006, in reaction to a decline in the newspaper publishing industry and
deteriorating performance by Tribune, a representative of the Chandler Trusts sent a publicly
2 The headings of Counts Thirty-Four and Thirty-Five state that those claims are asserted
against the “D&O Defendants” (and other defendants). The “D&O Defendants” are defined
to include the “Director Defendants” and the “Officer Defendants.” (Compl. ¶ 48.) The
allegations in Counts Thirty-Four and Thirty-Five make clear, however, that the those counts
are asserted only against the Officer Defendants (and other defendants) and not against any
of the Independent Directors.
3 The facts set forth in this section are based solely on the allegations in the Complaint and
matters of public record of which the Court may take judicial notice. See Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007) (explaining that, when ruling on a
motion to dismiss, “courts must consider the complaint in its entirety, as well as other
sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in
particular, documents incorporated into the complaint by reference, and matters of which a
court may take judicial notice”).
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filed letter to Tribune’s Board. (Id. ¶ 129.) The Chandler Trusts’ representative requested that the
Board “‘promptly appoint a committee of independent directors to oversee a thorough review of
the issues facing Tribune and to take prompt decisive action to enhance stockholder value.’”
(Id. ¶ 130.) The Company’s financial advisors at the time were Merrill Lynch, Pierce, Fenner &
Smith Incorporated (“Merrill Lynch”) and Citigroup Global Markets, Inc. (“Citigroup”).
(Id. ¶¶ 92, 93.)
In response to the Chandler Trusts’ request, the Tribune Board announced in September
2006 that it had formed a Special Committee consisting of the seven Independent Directors to
oversee the exploration of alternatives to maximize shareholder value. (Id. ¶ 136.) The
Independent Directors were “highly sophisticated” and “financially literate” directors, a majority
of whom also were “audit committee financial experts.” (Id. ¶¶ 136, 220-22.) The Special
Committee retained Morgan Stanley to act as its financial advisor. (Id. ¶ 137.) The Special
Committee also retained separate legal counsel. See Schedule 14A Proxy Statement dated July
13, 2007 (the “Proxy Statement”) at 19, available at www.sec.gov.
B. The Special Committee’s Recommendation and the Board’s Approval
of the LBO
On February 2, 2007, Equity Group Investments, L.L.C. (“EGI”), a company affiliated
with billionaire investor Samuel Zell (“Zell”), proposed a transaction by which an EGI affiliate,
(ultimately, EGI-TRB, L.L.C. (“EGI-TRB”)), would acquire all of Tribune’s outstanding stock
through an LBO. (Id. ¶ 146.) During the two months from February 2, 2007, through April 1,
2007, the Special Committee and the Board met on eight occasions to consider Zell’s proposal.
See Proxy Statement at 22-27 (reciting details of Board and/or Special Committee meetings on
February 3, February 12, February 13, February 19, February 24, March 21, March 30, and April
1, 2007).
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On April 1, 2007, the Special Committee unanimously recommended that the Board
approve Zell’s proposal. (Compl. ¶ 211.) The Board (excluding Independent Director Taft, who
was absent, and the three representatives of the Chandler Trusts, who abstained from voting)
then voted to accept Zell’s proposal and cause Tribune to enter into a merger agreement with
EGI-TRB (the “Merger Agreement”). (Id.)
C. The Two-Step Structure of the LBO
The Merger Agreement contemplated that the LBO would proceed in two-steps. In the
first step (“Step One”), Tribune would incur approximately $7.015 billion in debt, which would
be used to retire its existing bank facility and to purchase approximately 50% of Tribune’s
outstanding shares in a tender offer for $34 per share. (Id.) In the second step (“Step Two”),
Tribune would incur approximately $3.7 billion of additional debt, which would be paid to
Tribune’s shareholders in exchange for their remaining Tribune shares in a go-private merger,
following certain regulatory and shareholder approvals. (Id.) The Merger Agreement required
Tribune to use its best efforts to consummate both Step One and Step Two of the LBO.
(Id. ¶ 240(e).)
D. VRC’s Solvency Opinions and the Consummation of the LBO
One of the Merger Agreement’s conditions was that Tribune obtain solvency opinions
prior to the consummation of both Step One and Step Two of the LBO. (Id. ¶ 17.) On April 11,
2007, Tribune retained Valuation Research Corporation (“VRC”), a financial advisory firm that
issues fairness and solvency opinions in support of transactions, to provide the solvency opinions
required at Step One and Step Two of the LBO. (Id. ¶¶ 89, 201.)
On May 24, 2007, VRC presented Tribune’s Board with VRC’s Step One solvency
opinion, which concluded that Tribune would be solvent immediately after and giving effect to
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Step One of the transaction. (Id. ¶ 279.) The Step One tender offer was consummated on June 4,
2007. (Id. ¶ 287.)
The Board met several times in the two months leading up to the closing of the Step Two
merger. (Id. ¶¶ 326, 338.) The Special Committee’s financial advisor, Morgan Stanley,
participated in at least five of these meetings. (Id. ¶¶ 336, 338.) On December 4, 2007, the Board
met with Morgan Stanley and representatives of VRC and received a “‘comprehensive
presentation . . . regarding VRC’s solvency analysis and solvency opinion required to close the
merger,’” which included a review of “‘the various tests used by VRC in its solvency analysis,
comparable transactions, case comparisons and the assumptions VRC relied upon in reaching its
solvency determination.’” (Id. ¶ 338.) On December 18, 2007, the Special Committee and the
Board met to consider VRC’s Step Two solvency opinion. (Id. ¶ 326.) Representatives of
Morgan Stanley participated in the meeting of the Special Committee. (Id. ¶ 338.) The Step Two
merger was completed in December 2007. (Id. ¶ 20.)
E. Tribune’s Bankruptcy Petition
On December 8, 2008, Tribune and related entities filed voluntary petitions for relief
under the Bankruptcy Code. (Id. ¶ 359.)
ARGUMENT
I. Count Three Fails To State a Claim Against the Independent Directors for Breach
of Fiduciary Duty.
In Count Three of the Complaint, the Trustee asserts that the Director Defendants (former
Tribune CEO Fitzsimons and the seven Independent Directors (id. ¶ 38)) breached their duties of
care, loyalty, and good faith by approving the LBO. (Id. ¶ 395.) Under applicable Delaware law,
the Trustee’s allegations fail to state any claim for breach of fiduciary duty against the
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Independent Directors.4
A. The Trustee’s Breach of Care Claim Against the Independent
Directors Is Barred by Tribune’s Exculpatory Charter Provision.
Any claim against the Independent Directors for breach of their duty of care is barred as a
matter of law by Tribune’s certificate of incorporation. Section 102(b)(7) of the DGCL allows
the shareholders of a Delaware corporation to include in the corporation’s certificate of
incorporation
[a] provision eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary duty
as a director, provided that such provision shall not eliminate or limit the liability
of a director: (i) For any breach of the director’s duty of loyalty to the corporation
or its stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) under § 174 of this title;
or (iv) for any transaction from which the director derived an improper personal
benefit.
8 Del. C. § 102(b)(7). Tribune’s shareholders chose to adopt a Section 102(b)(7) exculpatory
charter provision.5
4 Because Tribune is a Delaware corporation, Delaware law applies to the Trustee’s claims
against the Independent Directors. See, e.g., KDW Restructuring & Liquidation Servs. LLC v.
Greenfield, 874 F. Supp. 2d 213, 221 (S.D.N.Y. 2012) (“Jennifer is a Delaware corporation;
therefore, Delaware law governs this breach of fiduciary duty claim.”); eBusinessware, Inc. v.
Tech. Servs. Grp. Wealth Mgmt. Solutions, LLC, No. 08 Civ. 09101(PKC), 2009 WL
5179535, at *7 (S.D.N.Y. Dec. 29, 2009) (“[T]he law of a company’s state of incorporation
governs a claim for breach of fiduciary duties by a corporate officer.”).
5 During the period at issue, Tribune’s exculpatory charter provision was set forth first in
Article Twelfth of Tribune’s Amended and Restated Certificate of Incorporation, dated June
12, 2000, and subsequently in Article Seventh of Tribune’s Amended and Restated
Certificate of Incorporation, effective December 20, 2007, copies of which are attached to the
accompanying Declaration of Matthew R. Kipp as Exhibits A and B, respectively. The Court
may take judicial notice of Tribune’s exculpatory charter provision in ruling on this motion
to dismiss. See, e.g., Official Comm. of Unsecured Creditors v. Bay Harbour Master Ltd. (In
re BH S&B Holdings LLC), 420 B.R. 112, 145 (Bankr. S.D.N.Y. 2009) (stating that the court
“may take judicial notice of an exculpatory provision at the motion to dismiss stage”), aff’d
Geltzer v. Bay Harbour Mgmt. LC, 807 F. Supp. 2d 199 (S.D.N.Y. 2011); see also Ferre v.
McGrath, No. 06 Civ. 1684 (CM), 2007 WL 1180650, at *8 (S.D.N.Y. Feb. 16, 2007) (cont'd)
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The Delaware General Assembly’s purpose in enacting Section 102(b)(7) was “to permit
stockholders to adopt a provision in the certificate of incorporation to free directors of personal
liability in damages for due care violations, but not duty of loyalty violations, bad faith claims
and certain other conduct.” Malpiede v. Townson, 780 A.2d 1075, 1095 (Del. 2001); accord
Stone v. Ritter, 911 A.2d 362, 367 (Del. 2006); see also Guttman v. Huang, 823 A.2d 492, 506
n.34 (Del. Ch. 2003) (explaining that the exceptions to exculpation listed in Section 102(b)(7)’s
four subparts “all illustrate conduct that is disloyal”).
One of the principal aims of a Section 102(b)(7) charter provision is to protect the
corporation’s directors from duty of care claims based on hindsight. See, e.g., In re Walt Disney
Co. Derivative Litig., 907 A.2d 693, 752 (Del. Ch. 2005) (explaining that Ҥ 102(b)(7) is most
useful ‘when, despite the directors’ good intentions, [the challenged transaction] did not generate
financial success and . . . the possibility of hindsight bias about the directors’ prior ability to
foresee that their business plans would not pan out’ could improperly influence a post hoc
judicial evaluation of the directors’ actions” (quoting Prod. Res. Group, L.L.C. v. NCT Group,
Inc., 863 A.2d 772, 777 (Del. Ch. 2004)), aff’d 906 A.2d 27 (Del. 2006)); accord O’Toole v.
McTaggart (In re Trinsum Group, Inc.), 466 B.R. 596, 612 (Bankr. S.D.N.Y. 2012).
Because of Tribune’s exculpatory charter provision, even well-pleaded allegations of fact
that the Independent Directors were grossly negligent in approving the LBO (which are absent
here) could not survive a motion to dismiss. See, e.g., Malpiede, 780 A.2d at 1094–95 (“[E]ven if
the plaintiffs had stated a claim for gross negligence, such a well-pleaded claim is unavailing
because defendants have brought forth the Section 102(b)(7) charter provision that bars such
________________________
(cont'd from previous page) (“Although plaintiff left this significant fact out of his pleading, the court may take judicial
notice of the existence of this provision.”).
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9
claims.”); KDW, 874 F. Supp. 2d at 223-24 (“Jennifer’s certificate of incorporation includes an
exculpatory clause, pursuant to section 102(b)(7) of Delaware’s General Corporation Law. . . .
As such, no claim for the breach of the duty of care can be maintained against any defendant.”);
Lemond v. Manzulli, No. 05 Civ. 2222 (ILG), 2009 WL 1269840, at *5 (E.D.N.Y. Feb. 9, 2009)
(“Section 102(b)(7) was designed ‘to render duty of care claims not cognizable. . . .’” (quoting In
re Lukens Inc. S’holders Litig., 757 A.2d 720, 734 (Del. Ch. 1999))).6
The fact that the breach of care claim in this case is being asserted by the Trustee rather
than by Tribune shareholders does not abrogate the protections afforded the Independent
Directors by Tribune’s exculpatory charter provision. In holding that duty of care claims asserted
by the creditors of an insolvent corporation were barred by the corporation’s exculpatory charter
provision, the Delaware Court of Chancery explained:
6 In the absence of an exculpatory charter provision, a director of a Delaware corporation can
be held liable for breach of the duty of care only if the director’s conduct was grossly
negligent. McMullin v. Beran, 765 A.2d 910, 921 (Del 2000). “Gross negligence has a
‘stringent meaning’ in Delaware corporate law, involving ‘indifference amounting to
recklessness.’” KDW, 874 F. Supp. 2d at 221 (quoting Zimmerman v. Crothall, No. 6001-
VCP, 2012 WL 707238, at *6 (Del. Ch. Mar. 5, 2012)). “To state a claim for gross
negligence, a complaint might allege, by way of example, that a board undertook a major
acquisition without conducting due diligence, without retaining experienced advisors, and
after holding a single meeting at which management made a cursory presentation.” Trenwick
Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 194 (Del. Ch. 2006), aff’d sub nom.,
Trenwick Am. Litig. Trust v. Billett, 931 A.2d 438 (Del. 2007) (TABLE). Here, the Trustee’s
own allegations and the disclosures in the Proxy Statement show that the Independent
Directors considered the LBO proposal on multiple occasions (Compl. ¶¶ 148, 150, 151, 184;
Proxy Statement at 22-27), and were advised by financial advisors Merrill Lynch, Citigroup,
and Morgan Stanley (Compl. ¶¶ 92, 93, 137) and legal counsel. (Proxy Statement at 19.) The
Trustee’s allegations, therefore, would fail to state a breach of care claim against the
Independent Directors even if Tribune’s shareholders had not adopted an exculpatory charter
provision. See e.g., In re Lear Corp. S’holder Litig., 967 A.2d 640, 649 (Del. Ch. 2008)
(stating, where complaint showed that the Board and Special Committee met regularly and
were advised by two reputable advisors and legal counsel: “Put bluntly, the complaint would
not state a claim for lack of due care even if simple negligence were the applicable
standard.”(emphasis added)).
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10
Whether a firm is solvent or insolvent, it—and not a constituency such as its
stockholders or its creditors—owns a claim that a director has, by failing to
exercise sufficient care, mismanaged the firm and caused a diminution to its
economic value. Although § 102(b)(7) itself does not mention creditors
specifically, its plain terms apply to all claims belonging to the corporation itself,
regardless of whether those claims are asserted derivatively by stockholders or by
creditors.
Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 793 (Del. Ch. 2004).
In Pereira v. Farace, 413 F.3d 330 (2d Cir. 2005), the Second Circuit followed the
Delaware Court of Chancery’s holding in Production Resources in a case involving claims
brought by a litigation trustee against the former directors of a Delaware corporation. Id. at 342.
After discussing Production Resources, the Second Circuit held:
In this case, because breach of fiduciary duty claims belong to the corporation,
they are subject to the exculpatory clause defense even when pressed by a trustee.
We hold, therefore, that the exculpatory clause in Trace’s Certificate of
Incorporation precludes the Trustee from bringing any due care claims seeking
monetary awards against the directors, whether brought on behalf of the creditors
or Trace itself.
Id.; accord Official Comm. of Unsecured Creditors of Verestar, Inc. v. Am. Tower Corp. (In re
Verestar, Inc.), 343 B.R. 444, 473 (Bankr. S.D.N.Y. 2006) (“Based on the foregoing authority
[Production Resources and Pereira] and the Verestar charter provision, the allegations of the
Complaint that charge the directors with breach of the duty of care must be dismissed.”).
Thus, there is no set of allegations under which the Trustee could succeed in his quest to
recover monetary damages from the Independent Directors for any alleged breach of their duty
of care. The Trustee’s breach of care claim is barred as a matter of law by Tribune’s Section
102(b)(7) exculpatory charter provision and must be dismissed.
B. The Trustee’s Allegations Are Insufficient To Rebut the Business
Judgment Rule’s Presumption that the Independent Directors Acted
Loyally and in Good Faith.
To state a claim against the Independent Directors for breach of their duty of loyalty, the
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11
Trustee must “plead around” the business judgment rule. Stanziale v. Nachtomi (In re Tower Air,
Inc.), 416 F.3d 229, 238 (3d Cir. 2005); accord KDW, 874 F. Supp. 2d at 222 n.75. “The
business judgment rule is a presumption that, in making business decisions, ‘the directors of a
corporation acted on an informed basis, in good faith and in the honest belief that the action
taken was in the best interests of the company.’” Id. at *14 (quoting In re Citigroup Inc. S’holder
Derivative Litig., 964 A.2d 106, 124 (Del. Ch. 2009)); see also Gantler v. Stephens, 965 A.2d
695, 705–06 (Del. 2009). The business judgment rule “is at the foundation and . . . core of
Delaware corporate law.” Binks v. DSL.net, Inc., C.A. No. 2823-VCN, 2010 WL 1713629, at *5
(Del. Ch. Apr. 29, 2010) (internal quotations and citations omitted). “An essential purpose of the
business judgment rule is to free fiduciaries making risky business decisions in good faith from
the worry that if those decisions do not pan out in the manner they had hoped, they will put their
personal net worths at risk.” In re Massey Energy Co. Derivative & Class Action Litig., C.A. No.
5430-VCS, 2011 WL 2176479, at *22 (Del. Ch. May 31, 2011).
On a motion to dismiss for failure to state a claim, “the plaintiffs have the burden to plead
facts sufficient to rebut th[e] presumption.” Gantler, 965 A.2d at 706 (emphasis added); accord
Official Comm. of Unsecured Creditors of Color Tile, Inc. v. Investcorp S.A., No. 97 Civ. 9261
(MGC), 1999 WL 754015, at *3 (S.D.N.Y. Sept. 24, 1999). The Trustee’s allegations fail to give
rise to any plausible inference that the Independent Directors breached their duty of loyalty by
approving the LBO.7
7 Although Delaware substantive law governs the Trustee’s breach of fiduciary duty claim,
federal pleading standards determine whether the Trustee’s allegations are sufficient to rebut
the presumption that the Independent Directors acted loyally and in good faith in approving
the LBO. See In re Tower Air, 416 F.3d at 237 n.11 (citing Hanna v. Plumer, 380 U.S. 460
(1965)). In Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007), the Supreme Court
held that, to survive a Rule 12(b)(6) motion to dismiss, “[f]actual allegations must be enough
to raise a right to relief about the speculative level.” In other words, the complaint must (cont'd)
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12
“[T]the duty of loyalty mandates that the best interest of the corporation and its
shareholders takes precedence over any interest possessed by a director, officer or controlling
shareholder and not shared by the stockholders generally.” Cede & Co. v. Technicolor, Inc., 634
A.2d 345, 361 (Del. 1993). To allege a breach of the duty of loyalty based on actions or
omissions of a board of directors, a plaintiff “must ‘plead facts demonstrating that a majority of a
board that approved the transaction in dispute was interested and/or lacked independence.’”
Continuing Creditors’ Comm. of Star Telecomms. Inc. v. Edgecomb, 385 F. Supp. 2d 449, 460
(D. Del. 2004) (quoting Orman v. Cullman, 794 A.2d 5, 23 (Del. Ch. 2002)).
The Trustee does not allege even a bare conclusion that any of the seven Independent
Directors lacked independence. The Trustee, therefore, necessarily has failed to allege that a
majority of the Board who voted to approve the LBO lacked independence.8
The Trustee’s allegations also fail to plead that any—let alone a majority—of the
Independent Directors was “interested” in the LBO. To be considered “interested,” a director
must receive “a personal benefit from a transaction not received by the shareholders generally.”
Cede, 634 A.2d at 362 (emphasis added); see In re Walt Disney, 907 A.2d at 751 (“The classic
example that implicates the duty of loyalty is when a fiduciary either appears on both sides of a
transaction or receives a personal benefit not shared by all shareholders.”). The Trustee does not
________________________
(cont'd from previous page) contain “enough facts to state a claim to relief that is plausible on its face.” Id. at 570
(emphasis added). If a plaintiff “ha[s] not nudged its claims across the line from conceivable
to plausible, the[ ] complaint must be dismissed.” Id.; see also Ashcroft v. Iqbal, 556 U.S.
662, 679 (2009) (a complaint must be dismissed “where the well-pleaded facts do not permit
the court to infer more than the mere possibility of misconduct”).
8 Seven of the eleven members of the Board voted to approve the LBO—CEO FitzSimons and
six of the seven Independent Directors. (Compl. ¶ 211.) Independent Director Taft was
absent and the three representatives of the Chandler Trusts abstained from voting. (Id.) Thus,
six of the seven members of the Board who voted to approve the LBO were independent.
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13
(and cannot) allege that any of the Independent Directors received more per share for his or her
Tribune stock than did the other Tribune shareholders. See, e.g., In re Ply Gem Indus., Inc.
S’holders Litig., C.A. No. 15779-NC, 2001 WL 755133, at *7 (Del. Ch. June 26, 2001)
(allegations insufficient to plead interest as to directors who “received the merger consideration
on the same terms as any other shareholder”).
Because the Trustee is unable to allege a “classic example” of a breach of loyalty claim,
the Trustee contends that the Independent Directors breached their duty of good faith. (Compl.
¶ 395.) The Complaint, however, is devoid of any allegations of fact that would support a
conclusion that the Independent Directors failed to act in good faith.
It is well-settled under applicable Delaware law that “a failure to act in good faith
requires conduct that is qualitatively different from, and more culpable than, the conduct giving
rise to a violation of the fiduciary duty of care (i.e., gross negligence).” Stone, 911 A.2d at 369;
see also Brehm v. Eisner (In re Walt Disney Co. Derivative Litig.), 906 A.2d 27, 64-65 (Del.
2006) (“[G]rossly negligent conduct, without more, does not and cannot constitute a breach of
the fiduciary duty to act in good faith.”). Rather, “[t]o act in bad faith, there must be scienter on
the part of the defendant director.” In re Goldman Sachs Group, Inc. S’holder Litig., No. 5215-
VCG, 2011 WL 4826104, at *20 (Del. Ch. Oct. 12, 2011) (emphasis added).
To plead scienter, a plaintiff must allege “with particularity that a director knowingly
violated a fiduciary duty or failed to act in violation of a known duty to act, demonstrating a
conscious disregard for her duties.” In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106,
125 (Del. Ch. 2009); see also, e.g., Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (“Where, as
here, directors are exculpated from liability except for claims based on ‘fraudulent,’ ‘illegal’ or
‘bad faith’ conduct, a plaintiff must also plead particularized facts that demonstrate that the
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14
directors acted with scienter, i.e., that they had ‘actual or constructive knowledge’ that their
conduct was legally improper.”).
The Trustee has failed to identify any facts that would support a conclusion that any of
the Independent Directors acted with scienter (because there are none). Notably, the Trustee
relies on the very same alleged actions and inactions by the Independent Directors as the basis
for both his breach of care and breach of good faith claims. Specifically, in paragraph 395 of the
Complaint, the Trustee recites a series of alleged actions and inactions by the Independent
Directors and concludes that these allegations show that the Independent Directors “breached
their respective duties of good faith, care, and loyalty.” (Compl. ¶ 395.) The Trustee cannot
survive a motion to dismiss simply by labeling a breach of care claim as one for breach of the
duty of good faith. See In re Verestar, 343 B.R. at 473 (dismissing breach of care claims because
of exculpatory charter provision and adding: “These allegations are not saved by a conclusory
assertion that the directors’ acts and omissions were not taken in good faith or involved
intentional misconduct or a knowing violation of the law . . . . Delaware’s decision to permit
exculpatory provisions relating to the duty of care cannot be overcome by conclusory allegations
of bad faith.”).
Also unavailing are the Trustee’s attempts to suggest that the process by which the
Independent Directors arrived at their decision to approve the LBO was flawed, principally by
accusing certain members of Tribune management of creating unrealistic financial projections
(Compl. ¶¶ 12, 13), impugning the independence of the Board’s and the Special Committee’s
financial advisors (id. ¶¶ 14, 15), and challenging the methodology VRC used in preparing its
solvency opinions. (Id. ¶ 19.) As a threshold matter, the Independent Directors were entitled
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15
under Section 141(e) of the DGCL to rely on information provided by Tribune’s management
and the Company’s and Special Committee’s advisors.9
Moreover, even if well-pleaded (which they are not), the Trustee’s process allegations at
most would state a breach of care claim that would be barred by Tribune’s exculpatory charter
provision. See Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243-44 (Del. 2009) (“[I]f the directors
failed to do all they should have under the circumstances, they breached their duty of care. Only
if they knowingly and completely failed to undertake their responsibilities would they breach
their duty of loyalty.” (emphasis added, reversing judgment against outside directors where
directors met several times to consider offer and were assisted by financial experts and legal
counsel)); see also In re Lear, 967 A.2d at 654 (dismissing bad faith claim with prejudice where
“[t]he complaint makes clear that the Lear board held regular meetings and received advice from
several relevant experts”).
There is no plausible inference that the Independent Directors “knowingly and
completely failed to undertake their responsibilities.” Lyondell, 970 A.2d at 243-44. Rather, the
Trustee’s own allegations and the disclosures in the Proxy Statement show that, like the outside
directors in Lyondell and Lear, the Independent Directors met on multiple occasions to consider
9 Section 141(e) of the DGCL provides:
A member of the board of directors, or a member of any committee designated by the
board of directors, shall, in the performance of such member’s duties, be fully protected in
relying in good faith upon the records of the corporation and upon such information,
opinions, reports or statements presented to the corporation by any of the corporation’s
officers or employees, or committees of the board of directors, or by any other person as
to matters the member reasonably believes are within such other person’s professional or
expert competence and who has been selected with reasonable care by or on behalf of the
corporation.
8 Del. C. § 141(e).
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16
the LBO proposal and were advised by financial experts and legal counsel. (Compl. ¶¶ 92, 93,
137, 148, 150, 151, 184; Proxy Statement at 19-27.)
In the end, the Trustee’s breach of good faith claim against the Independent Directors is
based on nothing more than the unfortunate outcome of the LBO. But under Delaware law,
neither a claim for breach of a director’s duty of care nor a claim for breach of a director’s duty
of good faith can be based on hindsight. See, e.g., Trenwick, 906 A.2d at 173 (dismissing duty of
care claim brought by litigation trust on behalf of creditors of bankrupt company, where “the
complaint argues from hindsight, that the fact that the holding company’s strategy ultimately
failed must mean that the process that led to its adoption was the product of culpably sloppy
efforts”); Stone, 911 A.2d at 373 (“With the benefit of hindsight, the plaintiffs’ complaint seeks
to equate a bad outcome with bad faith.”) (finding allegations insufficient to plead directors’ bad
faith); see also, e.g., Roselink Investors, L.L.C. v. Shenkman, 386 F. Supp. 2d 209, 220-21
(S.D.N.Y. 2004) (“Creditors’ allegations boil down to a single contention: defendants made a
poor decision. . . . Under the business judgment rule, courts do not ‘examine the wisdom of the
decision itself.’” (quoting Brazen v. Bell Atl. Corp., 695 A.2d 43, 49 (Del. 1997))). Because the
Trustee’s allegations are simply an attempt, with the benefit of hindsight, to second-guess the
Independent Directors’ decision to approve the LBO, the Trustee’s breach of good faith claim is
precluded by the business judgment rule and should be dismissed with prejudice.
II. Count Two Fails To State a Claim Against the Independent Directors for
Violations of Section 160 or Section 173 of the Delaware General Corporation Law.
In an attempt to hold each of the Independent Directors jointly and severally liable under
8 Del. C. §174 for the over $8 billion of payments received by Tribune’s former shareholders in
the LBO, the Trustee alleges in Count Two of the Complaint that these payments were “in
substance, unlawful dividends and/or stock purchases in violation of Sections 160 and/or 173 of
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17
the DGCL.” (Compl. ¶ 386 (emphasis added).)10
Count Two fails to state a claim against the Independent Directors because there is no
plausible inference that Tribune’s capital was impaired at the time of, or as a result of, the Step
One tender offer payments, and because the Step Two merger payments were neither dividends
nor payments by Tribune for the purchase of its shares. Nor is there any plausible inference that
the Independent Directors’ conduct was “negligent or willful” within the meaning of Section 174
of the DGCL.
A. There Is No Plausible Inference that Tribune’s Capital Was Impaired
at the Time of, or as a Result of, the Step One Tender Offer Payments.
Section 160 of the DGCL prohibits a corporation from “[p]urchas[ing] or redeem[ing] its
own shares of capital stock for cash or other property when the capital of the corporation is
impaired or when such purchase or redemption would cause any impairment of the capital of the
corporation. . . .” 8 Del. C. § 160(a)(1). “A repurchase impairs capital if the funds used in the
repurchase exceed the amount of the corporation’s ‘surplus,’ defined by 8 Del. C. § 154 to mean
the excess of net assets over the par value of the corporation’s issued stock.” Klang v. Smith’s
Food & Drug Ctrs., Inc., 702 A.2d 150, 153 (Del. 1997). “Net assets means the amount by
which total assets exceed total liabilities.” 8 Del. C. §154. Section 154 of the DGCL “does not
require any particular method of calculating surplus, but simply prescribes factors that any such
10
Section 174 of the DGCL provides that directors “shall be jointly and severally liable” for
any “willful or negligent violation of §160 or §173 . . . to the corporation, and to its creditors
in the event of its dissolution or insolvency, to the full amount of the dividend unlawfully
paid, or to the full amount unlawfully paid for the purchase or redemption of the
corporation’s stock, with interest from the time such liability accrued.” 8 Del. C. § 174(a).
“Section 174(a) codifies the common law by making the directors’ duty not to declare
improper dividends [or improper stock repurchase payments] part of their general duty to
maintain the corporation in good faith and in the exercise of reasonable care.” Edward P.
Welch, Andrew J. Turezyn, & Robert S. Saunders, FOLK ON THE DELAWARE GENERAL
CORPORATION LAW §174.4 (5th
ed. 2010).
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calculation must include.” Klang, 702 A.2d at 155.
“Under Delaware law, a determination of surplus is subject to the business judgment
standard and may be set aside only on a finding of bad faith or fraud on the part of the board.”
JPMorgan Chase Bank, N.A. v. Charter Communications Operating, LLC (In re Charter
Communications), 419 B.R. 221, 247 (Bankr. S.D.N.Y. 2009) (citing Klang, 702 A.2d at 156);
see also In re Massey Energy, 2011 WL 2176479, at *22 (explaining that it is “well understood”
under Delaware law that “the business judgment rule would itself act to preclude any claim
based on simple negligence” against Delaware directors). Furthermore, under Section 172 of the
DGCL, directors are entitled to rely on the opinions of experts when determining if a surplus
exists. See Klang, 702 A.2d at 156 n.12 (“We interpret 8 Del. C. § 172 to entitle boards to rely on
experts such as Houlihan to determine compliance with 8 Del. C. §160.”).11
As the Trustee acknowledges, Tribune obtained a Step One solvency opinion from
valuation expert VRC, “which concluded that the Company would be solvent immediately after
and giving effect to the consummation of the Step One transactions.” (Compl. ¶ 279.) The
Independent Directors were entitled to rely on VRC’s Step One solvency opinion. Klang, 702
11
Section 172 of the DGCL provides:
A member of the board of directors, or a member of any committee designated by the
board of directors, shall be fully protected in relying in good faith upon the records of
the corporation and upon such information, opinions, reports or statements presented
to the corporation by any of its officers or employees, or committees of the board of
directors, or by any other person as to matters the director reasonably believes are
within such other person’s professional or expert competence and who has been
selected with reasonable care by or on behalf of the corporation, as to the value and
amount of assets, liabilities and/or net profits of the corporation or any other facts
pertinent to the existence and amount of surplus or other funds from which dividends
might properly be declared and paid . . . .
8 Del. C.§ 172.
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A.2d at 156 n.12; 8 Del. C. §172. But even if that were not the case, the Trustee’s claim against
the Independent Directors would fail because the Trustee’s allegations do not give rise to any
plausible inference that Tribune’s capital was impaired at the time of, or as a result of, the Step
One tender offer payments.
Notwithstanding VRC’s opinion to the contrary, the Trustee asserts that “[c]onsummation
of Step One rendered the Company balance sheet insolvent, unable to pay its debts as they came
due, and inadequately capitalized.” (Compl. ¶ 288.) The Trustee, however, has failed to allege a
single fact to support this bare conclusion.12
Tacitly conceding that Tribune was not rendered insolvent as a result of the Step One
tender offer payments, the Trustee devotes an entire section of the Complaint to allegations that
Morgan Stanley failed to inform Tribune of Morgan Stanley’s “concerns that Tribune would be
insolvent if Step Two closed.” (Compl. Section XVIII.B. (heading) (emphasis added).) The
Trustee further asserts that the two-step LBO was a “unitary transaction” and that VRC,
therefore, should have considered the debt Tribune would incur at Step Two in determining
Tribune’s solvency at Step One. (Id. ¶ 271.) The Trustee’s own allegations of fact refute his
implication that, at Step One, the incurrence of the Step Two debt was a foregone conclusion.
The Complaint makes clear that consummation of the Step Two merger was subject to
multiple conditions precedent, including approval of the merger by the Federal Communications
12
The Trustee’s failure to cite any facts to support his assertion that Step One rendered Tribune
“balance sheet insolvent” is particularly telling, given that Tribune remained a public
company following the consummation of the Step One tender offer and continued to file
periodic reports with the SEC that included Tribune’s financial statements. The Delaware
Supreme Court in Klang, moreover, rejected the argument that “balance sheet net worth is
controlling for purposes of determining compliance with the statute.” 702 A.2d at 154
(explaining that “the books of a corporation do not necessarily reflect the current values of its
assets and liabilities”; therefore, “[i]t is unrealistic to hold that a corporation is bound by its
balance sheets for purposes of determining compliance with Section 160”).
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20
Commission (the “FCC”). (Id. ¶¶ 149, 240.) As the Trustee explains, the very reason the
transaction was structured as a tender offer to be followed by a cash-out merger was to alleviate
concerns that Tribune’s value would decline during the estimated nine to twelve months
necessary to obtain FCC approval and the merger might not close. (Id. ¶ 149.) To mitigate this
risk, the transaction was structured to include a first step tender offer “as a means of providing a
portion of the cash consideration to Tribune’s stockholders more quickly and with greater
certainty.” (Id. ¶ 150.)
The two-step structure of the transaction did not remove the risk that the FCC might
reject the merger, or that Tribune’s value might decline substantially before FCC approval
occurred, causing the acquiring corporation to exercise its right to terminate the Merger
Agreement in the event of a “Company Material Adverse Event.” (Id. ¶ 196.) Nor did the two-
step structure remove the risk that the LBO lenders might refuse to provide the Step Two
financing. As the Trustee himself alleges, at Step Two the lenders “were seriously considering
backing out of the deal.” (Id. ¶ 303.) Thus, at Step One, it was by no means certain that Step Two
would occur and that Tribune would incur the Step Two debt.
Finally, even if there were any basis in fact for the Trustee’s contention that the Step Two
debt should have been considered at Step One, the Complaint contains no allegations of fact that
the Independent Directors knew this or, more importantly, knew that inclusion of the Step Two
debt at Step One would result in a determination that Tribune’s capital was impaired at Step One.
Indeed, the Trustee’s allegations of fact fail even to support a conclusion that the incurrence of
the Step Two debt rendered Tribune insolvent at Step Two. Plainly, that was not the conclusion
VRC reached when it rendered its Step Two solvency opinion. (Id. ¶ 326.) And although the
Trustee asserts that Morgan Stanley had “concerns” about Tribune’s solvency if Step Two closed,
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21
the Trustee does not allege that Morgan Stanley definitively concluded that Tribune would be
rendered insolvent if Step Two were consummated—let alone allege that Morgan Stanley
communicated such a conclusion to the Independent Directors. To the contrary, the Trustee
acknowledges that Morgan Stanley’s internal financial analyses concluded that Tribune would
be solvent after Step Two under a discounted cash flow analysis based on management’s plan,
but would have negative equity if different assumptions were employed. (Id. ¶ 334.) The Trustee,
furthermore, alleges that Morgan Stanley concealed its internal financial analyses from the Board
and the Special Committee. (Id. ¶ 339.)
In sum, there is no plausible inference that Tribune’s capital was impaired at Step One or
that the Independent Directors acted willfully or were grossly negligent in approving the Step
One tender offer payments. Indeed, the Trustee’s allegations are insufficient even to give rise to
a plausible inference of simple negligence. See Lear, 967 A.2d at 649 (holding that allegations
would be insufficient even to state a claim for simple negligence where Board and Special
Committee met regularly and were advised by two reputable advisors and legal counsel). The
Court, therefore, should dismiss with prejudice the Trustee’s claim against the Independent
Directors for violation of Section 160 of the DGCL. See Klang, 702 A.2d at 156 (affirming
dismissal with prejudice of claim for violation of Section 160 and stating: “In the absence of bad
faith or fraud on the part of the board, courts will not ‘substitute [our] concepts of wisdom for
that of the directors.’” (quoting Morris v. Standard Gas & Electric Co., 63 A. 2d 577, 583 (Del.
Ch. 1949))).
B. The Payment of Cash for Tribune Shares in the Step Two Merger
Was Neither a Dividend Nor a Purchase by Tribune of Its Own
Shares.
Section 173 of the DGCL prohibits a corporation from “pay[ing] dividends except in
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22
accordance with this chapter [Section 170].” 8 Del. C. § 173. Section 170 provides that “[t]he
directors of every corporation . . . may declare and pay dividends upon the shares of its capital
stock either: (1) Out of its surplus, as defined in and computed in accordance with §§ 154 and
244 of this title; or (2) In case there shall be no such surplus, out of its net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year.” 8 Del. C. § 170(a).
The Trustee’s claim against the Independent Directors for violation of Section 173 fails
as a matter of law because the Step Two merger payments were not “dividends upon the shares
of [Tribune’s] capital stock.” Although Section 170 of the DGCL does not define the term
“dividend,” no statutory definition is necessary. The plain meaning of “dividend” is “a
proportionate distribution to stockholders out of earnings and profits which leaves legal
ownership and control of a corporation unchanged.” In re Estate of Lukens, 246 F.2d 403, 405
(3d Cir. 1957) (emphasis added); see also, e.g., C-T of Virginia, Inc. v. Barrett (In re C-T of
Virginia, Inc.), 958 F.2d 606, 611 (4th Cir. 1992) (explaining that statutes that regulate corporate
dividends “apply to situations in which shareholders, after receiving the transfer from the
corporation, retain their status as owners of the corporation.” (emphasis added)). Section 170’s
reference to dividends “upon” the shares of the corporation’s stock reflects this fundamental
principle.
In the Step Two merger, the Tribune shareholders received $34 per share in cash in
exchange for their Tribune shares, and Tribune “became a private company, wholly owned by
the ESOP.” (Compl. ¶¶ 203, 355.)13
Where, as here, “the fundamental fact appears that the
stockholder is surrendering his entire interest, it is a contradiction of terms to characterize the
13
In the Step Two merger, an employee stock ownership plan (the “ESOP”) acquired
ownership of Tribune. (Id. ¶ 226.) The Complaint’s allegations make clear that it was Zell
who employed the ESOP as a takeover vehicle at Step Two. (Compl. ¶ 146.)
Case 1:11-md-02296-RJS Document 5923 Filed 05/23/14 Page 30 of 43
23
transaction as a dividend, which presupposes persisting ownership rights.” In re Estate of Lukens,
246 F.2d at 406.
Nor did the Step Two merger involve a “purchase” by Tribune of its own shares within
the meaning of Section 160 of the DGCL. Rather, in Step Two, the remaining outstanding shares
of Tribune were acquired by EGI-TRB, an entity affiliated with Zell (id. ¶¶ 146, 203), and
following the merger, Tribune “became a private company, wholly owned by the ESOP.”
(Id. ¶ 355.)
In addition, even if there were any merit to the Trustee’s assertion that the merger
consideration was “in substance” a dividend or a stock repurchase payment by Tribune, the
Trustee’s claims against the Independent Directors for alleged violations of Sections 160 and 173
of the DGCL would be barred by Delaware’s “bedrock doctrine of independent legal
significance.” See, e.g., Greenmont Capital Partners I, LP v. Mary’s Gone Crackers, Inc., C.A.
No. 7265-VCP, 2012 WL 4479999, at *9 (Del. Ch. Sept. 28, 2012) (“Our bedrock doctrine of
independent legal significance compels the conclusion that satisfaction of the requirements of
Section 251 is all that is required legally to effectuate a merger.” (quoting Warner Commc’ns,
Inc. v. Chris-Craft Industries, Inc., 583 A.2d 962, 970 (Del. Ch. 1989)).14
As the Delaware Supreme Court repeatedly has stated, it is “[a] well-settled principle of
Delaware Corporation Law that ‘action taken under one section of that law is legally independent,
and its validity is not dependent upon, nor to be tested by the requirements of other unrelated
sections under which the same final result might be attained by different means.’” Rothschild
Int’l Corp. v. Liggett Group, Inc., 474 A.2d 133, 136 (Del. 1984) (quoting Orzeck v. Englehart,
14
Section 251 of the DGCL, 8 Del. C. §251, governs mergers or consolidations of domestic
corporations, such as the Step Two merger here. The merger here was effected pursuant to 8
Del. C. §251(a). See Declaration of Matthew R. Kipp, Ex. B (certificate of merger).
Case 1:11-md-02296-RJS Document 5923 Filed 05/23/14 Page 31 of 43
24
195 A.2d 375, 378 (Del. 1963)). The rationale of the doctrine of independent legal significance
“is that the various provisions of the [DGCL] are of equal dignity, and a corporation may resort
to one section thereof without having to answer for the consequences that would have arisen
from invocation of a different section.” Rauch v. RCA Corp., 861 F.2d 29, 31 (2d Cir. 1988)
(citing Hariton v. Arco Electronics, Inc., 188 A.2d 123, 125 (Del. 1963)).
Applying this doctrine, the United States Court of Appeals for the Second Circuit and the
courts of Delaware consistently have rejected claims that a “conversion of shares to cash . . . in
order to accomplish a merger” authorized by one provision of the DGCL is “in effect” a share
redemption or disposition of corporate assets under other sections of the DGCL, including
Section 160. See id. at 30-31 (applying Delaware law and rejecting contention that Section 251
cash-out merger consideration was “in effect” a “redemption” under Sections 160 and 151 of the
DGCL); Rothschild, 474 A.2d at 136–37 (combined tender offer and reverse cash-out merger
authorized by Section 251 was not “in essence” a “liquidation” of assets under Section 275);
Field v. Allyn, 457 A.2d 1089, 1097-98 (Del. Ch.) (holding that tender offer followed by Section
253 cash-out merger did not “equate[] with” a “sale of assets” governed by Section 271), aff’d
476 A.2d 1274 (Del. 1983).15
The Second Circuit’s decision in Rauch is particulary instructive. There, RCA
Corporation (“RCA”) merged with a wholly-owned subsidiary of General Electric Company.
861 F.2d at 29. Pursuant to the merger agreement, all common and preferred shares of RCA were
converted to cash. Id. Plaintiff, a holder of RCA preferred stock, alleged that the merger was “in
effect” a redemption of RCA preferred stock. Id. at 30. Plaintiff argued that the “redemption”
15
Section 253 of the DGCL authorizes a parent corporation to merge with its subsidiary. 8 Del.
C. § 253.
Case 1:11-md-02296-RJS Document 5923 Filed 05/23/14 Page 32 of 43
25
violated Sections 160(a) and 151(b) of the DGCL because those provisions mandated a higher
premium than she received through the merger. Id. Defendants moved to dismiss the complaint
pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Id.
Affirming the dismissal of the complaint, the Second Circuit held that a “conversion of
shares to cash that is carried out in order to accomplish a merger is legally distinct from a
redemption of shares by a corporation.” Id. Because Section 251 of the DGCL “allows two
corporations to merge into a single corporation by adoption of an agreement that complies with
that section,” and because plaintiff did not contend that the merger agreement failed to comply
with Section 251, the Second Circuit held that the doctrine of independent legal significance
precluded plaintiff’s reliance on the redemption provisions of the DGCL. Id. at 30-31.
Here, the Trustee does not (and cannot) allege that the Step Two merger failed to comply
with Section 251 of the DGCL. Accordingly, the Trustee’s attempt to recharacterize the Step
Two merger payments as dividends or payments by Tribune for the purchase or redemption of its
shares is barred by Delaware’s doctrine of independent legal significance. See id. (“[T]o accept
plaintiff’s argument ‘would render nugatory the conversion provisions within Section 251 of the
Delaware Code.’”).
Even putting aside Delaware’s controlling doctrine of independent legal significance,
there is no plausible inference that the Independent Directors acted willfully or with gross
negligence in approving the Step Two merger payments. As demonstrated above, the Trustee’s
own allegations show that the Independent Directors met multiple times in the months leading up
to the closing of the Step Two merger and, with the assistance of the Board’s and Special
Committee’s financial and legal advisors, carefully considered VRC’s Step Two solvency
analysis and Step Two solvency opinion. See Klang, 702 A.2d at 153–54 (finding directors not
Case 1:11-md-02296-RJS Document 5923 Filed 05/23/14 Page 33 of 43
26
liable for declaring dividend because they reasonably determined that the market value of the
assets of the corporation exceeded their book value); Lear, 967 A.2d 649 (holding allegations
insufficient even to plead simple negligence where directors received advice from reputable
financial advisors and a large law firm).
The Trustee’s claim against the Independent Directors for alleged violation of Section
173 and/or Section 160 of the DGCL in connection with the Step Two merger, therefore, should
be dismissed with prejudice.
III. Count Thirty-One Fails To State an Unjust Enrichment Claim Against the
Independent Directors.
Count Thirty-One of the Complaint alleges that the Independent Directors (and certain
other defendants) “have unjustly retained cash, credit, and other things of value that belong to
Tribune.” (Compl. ¶ 609.) The Trustee seeks “restitution from these defendants and an order of
this Court disgorging all payments, transfers, credit, profits, fees, benefits, incentives, and other
things of value obtained by the defendants as a result of their wrongful conduct and breaches of
fiduciary duties.” (Id. ¶ 611.) These conclusory allegations fail to state a claim for unjust
enrichment against the Independent Directors.
The elements of an unjust enrichment claim are: “(1) an enrichment, (2) an
impoverishment, (3) a relation between the enrichment and impoverishment, (4) the absence of
justification, and (5) the absence of a remedy provided by law.” Nemec v. Shrader, 991 A.2d
1120, 1130 (Del. 2010). Even if the Trustee adequately had alleged any “enrichment” that the
Independent Directors received without “justification” (which he has not), he has not alleged
even the bare conclusion that he lacks an adequate remedy at law. This failure alone mandates
dismissal of the Trustee’s unjust enrichment claim. See id. at 1130-31 (affirming dismissal of
unjust enrichment claim on the ground that the complaint “fails to establish the fifth requirement,
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27
that absent an unjust enrichment claim the plaintiffs will have no remedy to recover the benefit
of which they were wrongfully deprived”).
The dismissal should be with prejudice, moreover, because it is apparent on the face of
the Complaint that the Trustee does have adequate remedies at law. In particular, Count Three,
for alleged breach by the Independent Directors of their fiduciary duties, seeks the identical
remedy that the Trustee seeks in his unjust enrichment claim. (See Compl. ¶ 399 (seeking, in
Count Three, “disgorgement of any amounts paid to the Director Defendants in connection with
the LBO”).) Indeed, the Trustee’s unjust enrichment claim is expressly predicated on the same
alleged conduct that forms the basis of his breach of fiduciary duty claim. (See Compl. ¶ 611
(seeking, in Count Thirty-One, restitution of benefits “obtained by the defendants as a result of
their wrongful conduct and breaches of fiduciary duties” (emphasis added)).) The Trustee’s
allegations, therefore, fail to state an independent claim against the Independent Directors for
unjust enrichment. See, e.g., In re General Motors (Hughes) S’holder Litig., Consolidated, C.A.
No. 20269, 2005 WL 1089021, at *19 (Del. Ch. May 4, 2005) (dismissing unjust enrichment
claim where plaintiffs “failed to allege facts that show the claims arising from the payment of the
special dividend were independent of the fiduciary duty claims”), aff’d, 897 A.2d 162 (Del.
2006).16
To the extent the Trustee is attempting to recover from the Independent Directors the
payments they received for their Tribune shares under an unjust enrichment theory, that attempt
16
Even if it the Trustee lacked an adequate remedy at law, his unjust enrichment claim against
the Independent Directors would fail for the same reasons that his insufficient allegations fail
to state a breach of fiduciary duty claim against the Independent Directors. See, e.g., Frank v.
Elgamal, C.A. No. 6120-VCN, 2014 WL 957550, at *31 (Del. Ch. Mar. 10, 2014) (“[I]f the
Court dismisses a fiduciary duty claim for failure to state a claim, then it very likely also
dismisses a duplicative unjust enrichment claim.”).
Case 1:11-md-02296-RJS Document 5923 Filed 05/23/14 Page 35 of 43
28
also is barred by the Bankruptcy Code. Avoidance claims masquerading as unjust enrichment
claims are preempted by the Bankruptcy Code’s Section 546(e) safe harbor provision where, as
here, those claims seek to recover “settlement payment[s].” See 11 U.S.C. § 546(e); see also
Contemporary Industries Corp. v. Frost, 564 F.3d 981, 988-89 (8th Cir. 2009) (affirming
dismissal of unjust enrichment claim as preempted by Section 546(e) of the Bankruptcy Code);
Official Comm. Of Unsecured Creditors of Hechinger Invest. Co. of Del. Inc. v. Fleet Retail Fin.
Group (In re Hechinger Invest. Co. of Del.), 274 B.R. 71, 97 (D. Del. 2002) (dismissing unjust
enrichment claim on both field (Bankruptcy Code) and conflict (Section 546(e)) preemption
grounds).17
The Court, therefore, should dismiss the Trustee’s unjust enrichment claim against the
Independent Directors with prejudice.
IV. Count Thirty-Three Fails To State a Claim for Equitable Subordination Against the
Independent Directors.
Count Thirty-Three seeks equitable subordination and/or disallowance of the claims filed
by the Independent Directors (and other defendants) in the bankruptcy proceeding. (Compl.
¶ 634.) Count Thirty-Three fails as a matter of law because the Complaint lacks any allegations
of fact that would support a plausible inference that the Independent Directors engaged in any
inequitable conduct that would justify such a remedy.
Section 510(c) of the Bankruptcy Code provides, in relevant part, that the court may
“under principles of equitable subordination, subordinate for purposes of distribution all or part
of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to
17
Section 546(e) of the Bankruptcy Code provides a safe harbor and protects from avoidance as
fraudulent conveyances or preferences “settlement payment[s] . . . made by or to . . . a . . .
stockbroker, financial institution [or] financial participant . . . .” 11 U.S.C. § 546(e).
Case 1:11-md-02296-RJS Document 5923 Filed 05/23/14 Page 36 of 43
29
all or part of another allowed interest.” 11 U.S.C. §510(c)(1). Section 510(c), however, left to the
courts the determination of the substantive standards for equitable subordination. See Shubert v.
Lucent Techs. Inc. (In re Winstar Commc’ns, Inc.), 554 F.3d 382, 411 (3d Cir. 2009). Courts
have held that three conditions must be satisfied before a court will exercise the power of
equitable subordination: “(1) ‘[t]he claimant must have engaged in some type of inequitable
conduct’; (2) ‘[t]he misconduct must have resulted in injury to the creditors of the bankrupt or
conferred an unfair advantage on the claimant;’ and (3) ‘[e]quitable subordination of the claim
must not be inconsistent with the provisions of the Bankruptcy [Code].’” Id. (quoting Benjamin v.
Diamond (In re Mobile Steel Co.), 563 F.2d 692, 699–700 (5th Cir. 1977)). Under the first prong
of this test, “inequitable conduct” encompasses three categories of misconduct: “(1) fraud,
illegality, or breach of fiduciary duties; (2) undercapitalization; or (3) the claimant’s use of the
debtor as a mere instrumentality or alter ego.” Enron Corp. v. Springfield Assocs, L.L.C. (In re
Enron Corp.), 379 B.R. 425, 433 (S.D.N.Y. 2007). No such “inequitable conduct” is alleged here.
As demonstrated in Sections I and III, supra, the Trustee’s allegations fail to state a
breach of fiduciary duty or unjust enrichment claim against the Independent Directors. In Count
Thirty-Three, moreover, the Trustee does not even allege the bare conclusion that the
Independent Directors engaged in actual fraud or illegality, or used Tribune as an instrumentality
or alter ego. As for undercapitalization, it is well settled that “[i]n the absence of adequate
pleadings relating to the types of conduct described under the first and third paradigms . . . ,
undercapitalization alone does not constitute sufficient grounds for an allegation of inequitable
conduct.” Official Comm. of Unsecured Creditors of Hydrogen, L.L.C. v. Blomen (In re
Hydrogen, L.L.C.), 431 B.R. 337, 362 (Bankr. S.D.N.Y. 2010). Rather, “[a]n adequately alleged
claim for equitable subordination requires well-pled allegations of ‘suspicious, inequitable
Case 1:11-md-02296-RJS Document 5923 Filed 05/23/14 Page 37 of 43
30
conduct’ beyond mere undercapitalization.” Id. (quoting Drake v. Franklin Equip. Co. (In re
Franklin Equip. Co.), 416 B.R. 483, 514 n.34 (Bankr. E.D. Va. 2009)). The Complaint contains
no such allegations.
Thus, “[g]iven the insufficiency of undercapitalization as an independent basis for
pleading inequitable conduct and given the deficient or entirely absent pleadings with respect to
other types of inequitable conduct,” In re Hydrogen, 431 B.R. at 362, the Court should dismiss
with prejudice the Trustee’s claim against the Independent Directors for equitable subordination.
V. Count Thirty-Six Fails To State a Claim for Avoidance of Tribune’s
Indemnification Obligations to the Independent Directors.
In Count Thirty-Six, the Trustee seeks to avoid Tribune’s indemnification obligations to
the Independent Directors as actually or constructively fraudulent under Section 548(a)(1) of the
Bankruptcy Code, 11 U.S.C. § 548(a)(1). (Compl. ¶¶ 651, 653.) The Trustee’s avoidance claim
against the Independent Directors fails at the outset because Tribune’s indemnification
obligations were incurred more than two years before Tribune filed its bankruptcy petition. See
11 U.S.C. §548(a)(1). And even if that were not the case, the Trustee’s allegations fail to give
rise to any plausible inference that Tribune incurred the indemnification obligations with “actual
intent to hinder, delay, or defraud” its creditors, 11 U.S.C. §548(a)(1)(A), or “received less than a
reasonably equivalent value in exchange for” the indemnification obligations and was insolvent
on the date that the indemnification obligations were incurred, or became insolvent as a result of
the indemnification obligations. 11 U.S.C. §548(a)(1)(B).18
18
Section 548(a)(1) of the Bankruptcy Code allows a trustee to avoid a transfer made or
obligation incurred by the debtor “that was made or incurred on or within 2 years before the
date of the filing of the petition, if the debtor voluntarily or involuntarily—(A) made such
transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity
to which the debtor was or became, on or after the date that such transfer was made or such (cont'd)
Case 1:11-md-02296-RJS Document 5923 Filed 05/23/14 Page 38 of 43
31
During the period at issue, Tribune’s indemnification obligations to the Independent
Directors were set forth first in Article Twelfth of Tribune’s Amended and Restated Certificate
of Incorporation, dated June 12, 2000, and subsequently in Article Eighth of Tribune’s Amended
and Restated Certificate of Incorporation, effective December 20, 2007. (See Declaration of
Matthew R. Kipp, Exs. A and B.) Thus, it is apparent that Tribune’s indemnification obligations
to the Independent Directors were incurred when the Independent Directors began their service
as Tribune directors, and, in any event, no later than June 12, 2000—more than eight years
before Tribune filed its bankruptcy petition on December 8, 2008. (Compl. ¶ 359.) Because the
Trustee’s avoidance claim against the Independent Directors is outside the two-year reach-back
period prescribed by Section 548(a) of the Bankruptcy Code, it must be dismissed.
The Trustee seeks to avoid this result by implying that the Merger Agreement created
new indemnification obligations to the Independent Directors. (Id. ¶ 650.) To the contrary, as a
result of the Step Two merger, Tribune’s pre-existing indemnification obligations to the
Independent Directors vested in the surviving corporation by operation of law, pursuant to ________________________
(cont'd from previous page) obligation was incurred, indebted; or (B)(i) received less than a reasonably equivalent value
in exchange for such transfer or obligation; and
(ii) (I) was insolvent on the date that such transfer was made or such obligation was
incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business
or a transaction, for which any property remaining with the debtor was an
unreasonably small capital;
(III) intended to incur, or believed that the debtor would incur, debts that would
be beyond the debtor's ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such
obligation to or for the benefit of an insider, under an employment contract and not in
the ordinary course of business.
11 U.S.C. §548.
Case 1:11-md-02296-RJS Document 5923 Filed 05/23/14 Page 39 of 43
32
Sections 145(h) and 259(a) of the DGCL.19
The Merger Agreement simply reflected this vesting
by operation of law. See, e.g., Tourangeau v. Uniroyal, Inc., 138 F. Supp. 2d 259, 268 (D. Conn.
2001) (“Indeed, even if the obligation had not been expressly assumed, under Delaware law,
which governed the merger, the surviving company would assume by operation of law all debts,
liabilities and duties of the merging companies to the same extent as if it had incurred them
itself.” (citing 8 Del. C. §259)). The Trustee’s reliance on the Merger Agreement, therefore,
cannot save his avoidance claim from dismissal.
The Trustee’s allegations, furthermore, would fail to state an avoidance claim against the
Independent Directors even if Tribune’s indemnification obligations had been incurred within
two years of the date on which it filed for bankruptcy. “[I]ndemnification commitments, whether
in by-laws or by separate agreements, are almost universal for commercial corporate
enterprises.” Miller v. McDonald (In re World Health Alternatives, Inc.), 385 B.R. 576, 596
(Bankr. D. Del. 2008). The Trustee makes no plausible claim that the indemnification obligations
at issue here were anything other than such universally accepted protections, afforded to the
19
Under Section 145 of the DGCL, a corporation has the power to indemnify its officers,
directors, employees, and agents. 8 Del. C. §145. Subsection (h) of Section 145 provides:
For purposes of this section, references to “the corporation” shall include, in addition
to the resulting corporation, any constituent corporation . . . absorbed in a
consolidation or merger which, if its separate existence had continued, would have
had power and authority to indemnify its directors, officers, and employees or agents,
so that any person who is or was a director, officer, employee or agent of such
constituent corporation . . . shall stand in the same position under this section with
respect to the resulting or surviving corporation as such person would have with
respect to such constituent corporation if its separate existence had continued.
8 Del. C. § 145(h). Section 259(a) of the DGCL provides, that upon a merger, “all debts,
liabilities and duties of the respective constituent corporations shall thenceforth attach to said
surviving or resulting corporation, and may be enforced against it to the same extent as if
said debts, liabilities and duties had been incurred or contracted by it.” 8 Del. C. §259(a).
Case 1:11-md-02296-RJS Document 5923 Filed 05/23/14 Page 40 of 43
33
Independent Directors in exchange for their service to Tribune. See Chamison v. HealthTrust,
Inc., 735 A.2d 912, 922 (Del. Ch. 1999), aff’d sub nom. HealthTrust, Inc. v. Chamison, 748 A.2d
407 (Del. 2000) (explaining that the purpose of Section 145 of the DGCL is “to enable Delaware
companies to attract competent directors by offering them indemnification for suits arising from
their service to the company”).
There are no well-pleaded allegations of fact in the Complaint that would support a
conclusion that, when Tribune agreed to indemnify the Independent Directors in 2000 (or earlier),
it did so with “actual intent to hinder, delay, or defraud” Tribune’s creditors, as required to state
an avoidance claim under Section 548(a)(1)(A) of the Bankruptcy Code. Nor are the Trustee’s
allegations sufficient to allege constructive fraud under Section 548(a)(1)(B) of the Bankruptcy
Code. “Even though pleading a constructive fraudulent conveyance does not need to reach the
same level of stringency as that for fraud, a mere recitation of the statute is not enough.” Miller,
385 B.R. at 595 (emphasis added); see also, e.g., Global Link Liquidating Trust v. Avantel (In re
Global Link Telecom Corp.), 327 B.R. 711, 718 (Bankr. D. Del. 2005) (dismissing claim for
constructive fraud where complaint “simply alleges the statutory elements of a constructive fraud
action”). That is all that the Trustee has done. (Compl. ¶ 651.) The Trustee has failed to allege
any facts that would support a conclusion that Tribune did not receive “reasonably equivalent
value” in exchange for indemnifying the Independent Directors, or that Tribune was insolvent at
the time of, or was rendered insolvent as a result of, these indemnification obligations.
The Trustee’s avoidance claim against the Independent Directors, therefore, should be
dismissed with prejudice.
Case 1:11-md-02296-RJS Document 5923 Filed 05/23/14 Page 41 of 43
CONCLUSION
For the reasons set forth herein, the Court should dismiss with prejudice all claims
asserted by the Trustee against the Independent Directors.
Dated: May 23, 2014
Respectfully submitted,
/s/ Matthew R. Kipp
Matthew R. Kipp
Donna L. McDevitt
Jason T. Manning
SKADDEN, ARPS, SLATE, MEAGHER
& FLOM LLP
155 North Wacker Drive
Chicago, Illinois 60606
(312) 407-0700
Counsel for the Independent Directors
Case 1:11-md-02296-RJS Document 5923 Filed 05/23/14 Page 42 of 43
CERTIFICATE OF SERVICE
Matthew R. Kipp, an attorney, hereby certifies that on May 23, 2014, he caused true and
correct copies of the foregoing Memorandum of Law in Support of the Independent Directors
Motion to Dismiss to be served on all counsel of record in this matter via the Court’s ECF
system.
/s/ Matthew R. Kipp
Case 1:11-md-02296-RJS Document 5923 Filed 05/23/14 Page 43 of 43
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
In re:
TRIBUNE COMPANY FRAUDULENT CONVEYANCE LITIGATION
MARC S. KIRSCHNER, AS LITIGATION TRUSTEE FOR THE TRIBUNE LITIGATION TRUST
Plaintiff,
v.
DENNIS J. FITZSIMONS, et al.
Defendants.
))))))))))))))))))
Consolidated Multidistrict Action No. 11-md-02296-RJS No. 12-mc-02296-RJS
No. 12-CV-02652-RJS
MEMORANDUM IN SUPPORT OF MOTION TO DISMISS FILED BY SAMUEL ZELL, EQUITY GROUP INVESTMENTS, LLC,
EGI-TRB, LLC AND SAM INVESTMENT TRUST
Case 1:11-md-02296-RJS Document 5947 Filed 05/23/14 Page 1 of 37
i
TABLE OF CONTENTS
Introduction ................................................................................................................................ 1
Background ................................................................................................................................. 4
A. The Transaction. .................................................................................................. 4
B. Tribune’s Confirmed Bankruptcy Plan. ................................................................ 6
Argument .................................................................................................................................... 6
I. Count Six, For Aiding And Abetting Breach Of Fiduciary Duty, Should Be Dismissed. ....................................................................................................................... 6
A. Arm’s-Length Negotiations Do Not Support Aiding-And-Abetting Liability. .............................................................................................................. 7
B. The Trustee Does Not State A Claim Under The “Side Payment” or “Exploitation” Exceptions. ................................................................................... 9
C. The Trustee Does Not Plausibly Allege Actual Knowledge Of Any Breach................................................................................................................ 11
D. The Trustee’s New Theory That Mr. Zell Aided And Abetted A Breach Of Fiduciary Duty By “Controlling Shareholders” Is Baseless. ............................... 13
II. The Claims Against Mr. Zell For Breach Of Fiduciary Duty And Violation Of A Related Delaware Statute Should Be Dismissed. ............................................................ 14
III. Count Eight, An Alter Ego Theory, Should Be Dismissed. ............................................. 16
IV. Count Thirty-One, For Unjust Enrichment, Should Be Dismissed. ................................. 19
V. The Avoidance Claims (Counts Seven, Nine, Ten and Eleven) Fail. .............................. 20
A. Counts Seven and Nine Challenge Setoffs That Are Not Avoidable. .................. 21
B. Counts Seven, Nine, Ten, And Eleven Fail Because They Challenge Settlement Payments. ......................................................................................... 22
C. The Court Should Dismiss Count Nine Pursuant To 11 U.S.C. § 547(c). ............ 24
VI. Counts Thirty-Two, Thirty-Three And Thirty-Six Should Be Dismissed. ....................... 26
VII. These Claims Should Be Dismissed With Prejudice. ...................................................... 27
Case 1:11-md-02296-RJS Document 5947 Filed 05/23/14 Page 2 of 37
ii
Conclusion ................................................................................................................................ 28
Case 1:11-md-02296-RJS Document 5947 Filed 05/23/14 Page 3 of 37
iii
TABLE OF AUTHORITIES
Page(s) CASES
AP Servs. v. Silva,483 B.R. 63 (S.D.N.Y. 2012) ...............................................................................................23
Ashcroft v. Iqbal,556 U.S. 662 (2009) ........................................................................................................6, 13
Bell Atlantic Corp. v. Twombly,550 U.S. 544 (2007) .............................................................................................................. 6
Bevill, Bresler & Schulman Asset Mgmt. Corp. v. Spencer Sav. & Loan Ass’n,878 F.2d 742 (3d Cir. 1989) ................................................................................................ 24
Boccardi Capital Sys., Inc. v. D.E. Shaw Laminar Portfolios, L.L.C.,355 Fed. App’x 516 (2d Cir. 2009) ......................................................................................20
Capmark Fin. Group Inc. v. Goldman Sachs Credit L.P.,491 B.R. 335 (S.D.N.Y. 2013) ....................................................................................... 17, 19
Citron v. E.I. Du Pont de Nemours & Co.,584 A.2d 490 (Del. Ch. 1990)........................................................................................ 15, 16
EBG Holdings LLC v. Vredezicht’s Gravenhage,2008 WL 4057745 (Del. Ch. Sept. 2, 2008) ......................................................................... 18
Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V.,651 F.3d 329 (2d Cir. 2011) ................................................................................................ 23
Frank v. Elgamal,2012 WL 1096090 (Del. Ch. Mar. 30, 2012) ....................................................................... 13
Freedman v. Rest. Assocs. Indus., Inc.,1987 WL 14323 (Del. Ch. Oct. 16, 1987) ...................................................................... 11, 14
Glidepath Holding B.V. v. Spherion Corp.,2010 WL 1372553 (S.D.N.Y. Mar. 26, 2010) ................................................................ 11, 12
Golaine v. Edwards,1999 WL 1271882 (Del. Ch. Dec. 21, 1999) ........................................................................ 10
Grant v. Cnty. of Erie,542 F. App’x 21 (2d Cir. 2013) ...........................................................................................13
Case 1:11-md-02296-RJS Document 5947 Filed 05/23/14 Page 4 of 37
iv
In re Acequia, Inc.,34 F.3d 800 (9th Cir. 1994) ................................................................................................. 22
In re Alloy,2011 WL 4863716 (Del Ch. Oct. 13, 2011) ......................................................................... 10
In re Am. Int’l Group, Inc.,965 A.2d 763 (Del. Ch. 2009)................................................................................................ 7
In re Am. Remanufacturers,2008 WL 2909871 (Bankr. D. Del. July 25, 2008) ...............................................................22
In re BJ’s Wholesale Club, Inc. S’holders Litig.,2013 WL 396202 (Del. Ch. Jan. 31, 2013) ....................................................................... 8, 12
In re BOUSA Inc.,2006 WL 2864964 (Bankr. S.D.N.Y. Sept. 29, 2006) ..........................................................21
In re Bridgeport Holdings, Inc.,388 B.R. 548 (Bankr. D. Del. 2008) ....................................................................................14
In re Damas,504 B.R. 290 (Bankr. D. Mass. 2014) ............................................................................ 21, 22
In re Dreier LLP, 453 B.R. 499 (Bankr. S.D.N.Y. 2011) ........................................................................... 24, 25
In re Frederick’s of Hollywood S’holders Litig.,1998 WL 398244 (Del. Ch. July 9, 1998) ........................................................................ 7, 12
In re Gen. Motors (Hughes) S’holder Litig.,2005 WL 1089021 (Del. Ch. May 4, 2005) ...................................................................... 8, 12
In re Holyoke Nursing Home Inc.,273 B.R. 305 (Bankr. D. Mass. 2002) ..................................................................................22
In re Int’l Mgmt. Assoc.,399 F.3d 1288 (11th Cir. 2005)............................................................................................22
In re Lear Corp.,967 A.2d 640 (Del. Ch. 2008)..............................................................................................12
In re Lukens S’holders Litig., 757 A.2d 720 (Del. Ch. 1999)................................................................................................ 9
In re Novell, Inc. S’holder Litig.,2013 WL 322560 (Del. Ch. Jan. 3, 2013)......................................................................... 9, 11
Case 1:11-md-02296-RJS Document 5947 Filed 05/23/14 Page 5 of 37
v
In re NYMEX S’holder Litig.,2009 WL 3206051 (Del. Ch. Sept. 30, 2009) ................................................................... 7, 12
In re Plassein Int’l Corp.,590 F.3d 252 (3d Cir. 2009) .......................................................................................... 23, 24
In re Pro Page Partners, LLC,151 Fed. App’x 366 (6th Cir. 2005) .....................................................................................25
In re QSI Holdings, Inc.,571 F.3d 545 (6th Cir. 2009) ............................................................................................... 23
In re Refco, Inc. Sec. Litig.,2009 WL 7242548 (S.D.N.Y. Nov. 13, 2009), aff’d 2010 WL 5129072 (S.D.N.Y. Jan. 12, 2010) ....................................................................................................................... 20, 24
In re Resorts Int’l, Inc.,181 F.3d 505 (3d Cir. 1999) ................................................................................................ 23
In re Sunstates Corp. S’holder Litig.,788 A.2d 530 (Del. Ch. 2001)..............................................................................................18
In re Synthes, Inc. S’holder Litig.,50 A.3d 1022 (Del. Ch. 2012)........................................................................................ 11, 14
In re Tri-Star Pictures, Inc., Litig.,1995 WL 106520 (Del. Ch. Mar. 9, 1995) ........................................................................... 15
In re Tribune Co.,464 B.R. 126 (Bankr. D. Del. 2011) ...................................................................................... 4
In re Wild Bills, Inc.,206 B.R. 8 (Bankr. D. Conn. 1997)......................................................................................22
Kaiser Steel Corp. v. Charles Schwab & Co., Inc.,913 F.2d 846 (10th Cir. 1990) ............................................................................................. 23
Kalin v. Xanboo, Inc.,2009 WL 928279 (S.D.N.Y. Mar. 30, 2009) ........................................................................ 17
Kaye v. Carlisle Tire & Wheel Co.,2008 WL 821521 (M.D. Tenn. Mar. 27, 2008) .................................................................... 21
Kipperman v. Onex Corp.,411 B.R. 805 (N.D. Ga. 2009) ............................................................................................. 20
La Chemise Lacoste v. Gen. Mills, Inc.,53 F.R.D. 596 (D. Del. 1971) ..............................................................................................19
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vi
Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC,2013 WL 1294668 (S.D.N.Y. Mar. 28, 2013) ...................................................................... 20
Malpiede v. Townson,780 A.2d 1075 (Del. 2001) ........................................................................................... passim
Mason v. Network of Wilmington, Inc.,2005 WL 1653954 (Del. Ch. July 1, 2005) .......................................................................... 17
McGowan v. Ferro,2002 WL 77712 (Del. Ch. Jan. 11, 2002)............................................................................... 8
Medi-Tec of Egypt Corp. v. Bausch & Lomb Surgical,2004 WL 415251 (Del. Ch. Mar. 4, 2004) ........................................................................... 18
Menowitz v. Brown,991 F.2d 36 (2d Cir. 1993) .................................................................................................... 6
Mobil Oil Corp. v. Linear Films, Inc.,718 F. Supp. 260 (D. Del. 1989) .................................................................................... 17, 18
Morgan v. Cash,2010 WL 2803746 (Del. Ch. July 16, 2010) .......................................................... 8, 9, 11, 14
Network Enters., Inc. v. Reality Racing, Inc.,2010 WL 3529237 (S.D.N.Y. Aug. 24, 2010) ......................................................................17
Official Comm. of the Unsecured Creditors of Color Tile, Inc. v. Coopers & Lybrand, LLP,322 F.3d 147 (2d Cir. 2003) ................................................................................................ 24
Outokumpu Eng’g Enters., Inc. v. Kvaerner EnviroPower, Inc.,685 A.2d 724 (Del. Super. 1996) ......................................................................................... 17
Pereira v. Summit Bank,2001 WL 563730 (S.D.N.Y. May 23, 2001) ........................................................................22
Plymouth Cnty. Retirement Assoc. v. Brookfield Homes Corp., et al.,No. 6062-CS (Del. Ch. Oct. 12, 2012) ................................................................................. 15
Propp v. Sadacca,175 A.2d 33 (Del. Ch. 1961), aff’d in part, rev’d in part sub nom. Bennet v. Propp,187 A.2d 405 (Del. 1962) .................................................................................................... 16
Shandler v. DLJ Merch. Banking, Inc.,2010 WL 2929654 (Del. Ch. July 26, 2010) ........................................................................ 12
Trans Union LLC v. Credit Research Inc.,2001 WL 648953 (N.D. Ill. June 1, 2001) ............................................................................ 19
Case 1:11-md-02296-RJS Document 5947 Filed 05/23/14 Page 7 of 37
vii
Unocal Corp. v. Mesa Petroleum Co.,493 A.2d 946 (Del. 1985) .................................................................................................... 10
STATUTES
11 U.S.C. § 101(54) .................................................................................................................. 21
11 U.S.C. § 546(e) ............................................................................................................. passim
11 U.S.C. § 547(a)(2) ................................................................................................................ 25
11 U.S.C. §§ 547(b) ................................................................................................................. 21
11 U.S.C. § 547(c)(1) .......................................................................................................... 24, 25
11 U.S.C. § 547(c)(4) .......................................................................................................... 24, 26
11 U.S.C. § 548(a) .................................................................................................................... 21
11 U.S.C. § 550 ......................................................................................................................... 22
11 U.S.C. § 741(8) .................................................................................................................... 23
Del. Code Title 8 § 160 ............................................................................................................ 16
Del. Code Title 8 § 173 ............................................................................................................. 16
Del. Code Title 8 § 174 ............................................................................................................. 16
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Samuel Zell, Equity Group Investments, LLC (“EGI”), EGI-TRB, LLC (“EGI-TRB”),
and Sam Investment Trust (“SIT”) (collectively “Movants”) respectfully submit this
memorandum in support of their motion to dismiss the Fifth Amended Complaint (“Complaint”).
Introduction
The Complaint tells a story of Tribune’s insiders and investors “cashing out” of the
company while its business faltered, while management concealed the company’s worsening
condition, and while banks and advisors walked away with large fees. Unique among the
defendants, however, Mr. Zell, EGI, and EGI-TRB were arm’s-length investors who bargained
to put money into Tribune in the 2007 going-private transaction (the “Transaction”) and received
virtually nothing in return. Those investments—some $315 million in total—could pay off only
if Tribune succeeded. Mr. Zell was a stranger to Tribune when Tribune committed itself to the
Transaction. The Trustee alleges that Mr. Zell did not become a Tribune director until after
Tribune’s board contractually committed Tribune to the Transaction and “approved both Step
One and Step Two.” (Compl. ¶¶ 76, 238.)
The Trustee does not plausibly allege why an outsider bargaining to invest hundreds of
millions of dollars in Tribune’s long-term success would participate in a scheme by insiders to
strip the company of its value and conceal its deteriorating prospects, all of which would harm
any new investor. Rather, the portrait of Mr. Zell that emerges from the Complaint is one of an
outside investor who staked his money and his reputation on a business that he believed would
succeed. Tribune was ultimately unsuccessful, but hindsight does not state a claim. As further
detailed below, each count asserted against Mr. Zell and the companies affiliated with him fails.
The Trustee also attempts to allege a secondary route to liability against Mr. Zell via
avoidance claims directed at EGI-TRB, the corporate affiliate that made the $315 million
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2
investment in Tribune, and a claim that EGI-TRB is Mr. Zell’s alter ego. This theory depends
entirely on ignoring the legal concept of a setoff and the economic realities of the transactions.
EGI-TRB made its investment in Tribune in two steps, with the funds invested in the first step
treated as a credit toward the larger total investment in the second step. The Trustee seeks to
recover the value of the credit from the first step (more than $250 million) though the Complaint
itself establishes that EGI-TRB did not receive any cash or other net economic benefit from that
credit and only increased the sums it invested into Tribune (and ultimately lost). The Trustee
then attempts to pin EGI-TRB’s alleged liabilities on Mr. Zell personally, without any factual
allegations of the type necessary to support an alter-ego theory. This theory too must be rejected.
All of the Trustee’s claims against Mr. Zell and these Movants should be dismissed as a
matter of law:
Count Six: Aiding and Abetting Breach of Fiduciary Duty. The Trustee asserts that
Mr. Zell and his affiliates aided and abetted breaches by Tribune’s fiduciaries by proposing and
negotiating for the Transaction before Mr. Zell became a Tribune director. The law is clear,
however, that an outsider negotiating at arm’s-length cannot be held liable for alleged breaches
by counterparties across the table. Narrow exceptions to that rule, involving improper side
payments to fiduciaries or the exploitation of a breach to obtain a bargaining advantage, do not
apply on the facts alleged. Moreover, there was no underlying breach by actual decision makers,
as shown by the Independent Directors’ memorandum in support of their motion to dismiss.
(Argument § I.)
Counts Two and Five: Breach of Delaware Statute and Fiduciary Duty. The Trustee
alleges that Mr. Zell violated sections of the Delaware General Corporation Law and also
breached his fiduciary duties after becoming a Tribune director by “advocating for” and
“furthering” the Transaction. The Trustee’s pleaded theory, however, is that Tribune’s board had
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already contractually committed the company to the Transaction before Mr. Zell joined the
board. The Trustee does not allege that there was anything Mr. Zell, who abstained from all
board decisions relating to the Transaction, could have or should have done to halt the
Transaction after that time. Separately, these claims fail for the reasons set forth in the
Independent Directors’ memorandum. (Argument § II.)
Count Eight: Alter Ego. The Trustee claims that Mr. Zell, EGI, and SIT are the alter egos
of EGI-TRB and therefore are responsible for its alleged liabilities. The Trustee, however, has
failed to plead any facts to support an alter-ego theory under Delaware’s rigorous standards. The
Trustee does not plausibly allege that EGI-TRB, which invested more than $300 million in
Tribune, was created for the sole purpose of a fraud related to its corporate form. Nor does the
Trustee sufficiently plead that EGI-TRB’s corporate form was disregarded. (Argument § III.)
Count Thirty-One: Unjust Enrichment. The Trustee attempts to allege an unjust
enrichment claim against all Movants, but the Complaint does not allege that the Movants were
“enriched” in any way; in fact, the opposite is true. Moreover, because EGI-TRB’s participation
in the Transaction was undertaken pursuant to contracts, quasi-contract theories are barred as a
matter of law. Movants also incorporate the argument made by other defendants that the Trustee
fails to allege inequitable conduct and 11 U.S.C. § 546(e) preempts this claim. (Argument § IV.)
Counts Seven, Nine, Ten, Eleven, Thirty-Two, Thirty-Three and Thirty-Six: Bankruptcy-
Related Claims. The Trustee alleges a series of avoidance claims against EGI-TRB, by
characterizing the setoff it received for its first step investment as a transfer. The transactions the
Trustee attacks, however, were not avoidable “transfers” as a matter of law. Rather, the
Complaint establishes that the transactions were classic pre-petition setoffs or “settlement
payments” or are otherwise subject to Bankruptcy Code defenses. (Argument § V.) The
Trustee’s Counts Thirty-Two, Thirty-Three and Thirty-Six for recharacterization, equitable
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subordination and avoidance, should be dismissed because the Trustee is precluded from
bringing them and fails to allege improper or inequitable conduct necessary to state those claims.
(Argument § VI.)1
Background2
A. The Transaction.
Approval. In February 2007, Mr. Zell, on behalf of corporate affiliates, began
negotiating at Tribune’s invitation with the company’s Special Committee of its Independent
Directors regarding a possible investment. (Compl. ¶¶ 145-46.) On April 1, 2007, Tribune’s
Special Committee accepted a proposal pursuant to which an ESOP would acquire Tribune for
$34 per share and EGI-TRB would invest in support of the transaction. (Id. ¶ 211.) Due to a
need to obtain regulatory approval, the Transaction was structured in two steps: the first began in
April 2007 and ended in June 2007 (“Step One”), and the second occurred in December 2007
(“Step Two”). (Id. ¶¶ 211, 287, 353.) According to the Trustee, however, Tribune committed to
both steps on April 1, 2007, when Tribune’s board and Special Committee approved the ESOP
purchase as a “single, unitary transaction.” (Id. ¶ 238.) Mr. Zell had no position and no
affiliation with Tribune when he made the EGI-TRB proposal, when he negotiated it with the
Special Committee and Tribune’s board, or when Tribune committed to the Transaction. (E.g.,
id. ¶ 76.) Mr. Zell joined Tribune’s board on May 9, 2007. (Id.) 1 Mr. Zell also has been sued in Count One to avoid a $77,452 payment he received in connection with the sale of stock he personally received as director compensation. (Compl. ¶¶ 76, 94, 381.) He adopts the arguments the Shareholder Defendants make to dismiss Count One. Movants understand that Mr. Zell is the only Movant named in Count One.
2 The general factual background for this case is recounted in the Bankruptcy Court’s confirmation decision. In re Tribune Co., 464 B.R. 126 (Bankr. D. Del. 2011). The following factual discussion is based on the allegations of the Complaint, which are assumed to be true only for purposes of this Motion. Movants have separately sought to challenge the Trustee’s allegations that lack evidentiary support under Rule 11.
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5
Step One. In Step One, EGI-TRB invested $250 million in Tribune by lending $200
million to Tribune in exchange for a promissory note (“Step One Note”) and by purchasing $50
million in newly-issued Tribune stock at $34 per share. (Id. ¶ 228.) Tribune also made a cash
tender offer to the public to repurchase up to 126 million (or about 50%) of its publically-traded
shares for $34 per share. (Id. ¶ 287.) The tender offer closed on June 4, 2007. (Id.)
Step Two. On December 20, 2007, after receiving the necessary regulatory approvals,
Tribune’s board (with Mr. Zell abstaining) accepted a solvency opinion and proceeded with Step
Two. (Id. ¶¶ 240, 326, 353.) In Step Two, Tribune cancelled all of its remaining outstanding
shares, including those that EGI-TRB purchased as part of Step One, and converted them into the
right to receive cash at $34 per share. (Id. ¶¶ 353-54.) Tribune then became a private company,
wholly owned by the ESOP. (Id. ¶ 355.) The Trustee also alleges that, as part of Step Two:
• EGI-TRB lent $225 million to Tribune in exchange for a new promissory note (“Step Two Note”) (id. ¶ 354);
• EGI-TRB purchased a 15-year warrant (“Warrant”) for $90 million, which gave EGI-TRB the right to invest more money in the Tribune in the future by acquiring Tribune common stock (id.); and
• Tribune set off all amounts due to EGI-TRB from Step One by crediting or “nett[ing]” those amounts against the new Step Two investment, specifically: Tribune set off the $206,418,859 due to EGI-TRB on the Step One Note, the $50 million due to EGI-TRB for its shares of cancelled Tribune stock, and the $2.5 million owed to EGI-TRB under the merger agreement for reimbursement of its fees and expenses against the new $225 million loan from EGI-TRB under the Step Two Note and the $90 million due from EGI-TRB for the Warrant (id. ¶¶ 77, 79, 80, 81, 203, 354).
After those setoffs, approximately $56 million remained due to Tribune, which EGI-TRB
paid Tribune in cash. (Id. ¶ 81.) The Trustee refers to those netting transactions as the “EGI-
TRB Transfers.” (Id. ¶ 436.) The net effect of those transactions was to bring EGI-TRB’s total
investment in Tribune to $315 million. (Id. ¶¶ 81, 203.) EGI-TRB subsequently assigned part of
its interest in the Step Two Note to the Tower Defendants. (Id. ¶ 85.)
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6
B. Tribune’s Confirmed Bankruptcy Plan.
Pursuant to the confirmed Bankruptcy Court Plan, EGI-TRB’s Warrant was canceled and
the claims of EGI-TRB and the Tower Defendants under the Step Two Note were held
contractually subordinated to the claims of all other creditors. (Bankr. Dkt. 12072 at §§ 1.1.80,
1.1.235, 3.1.12, Attachment B at 6.) EGI-TRB appealed that aspect of the Confirmation Order,
and that appeal is pending in the District Court of Delaware. (Case No. 12-128.)
Argument
The claims pleaded against Mr. Zell and the companies affiliated with him fail under the
familiar standards of Rule 12(b)(6). See Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007);
Ashcroft v. Iqbal, 556 U.S. 662 (2009).3
I. Count Six, For Aiding And Abetting Breach Of Fiduciary Duty, Should Be Dismissed.
As a chronological matter, the Trustee’s claims against Mr. Zell and the other Movants
begin with Count Six, for allegedly aiding and abetting breach of fiduciary duty. (Compl.
¶¶ 158-63, 423-34.) The focus of this claim is on the period before the Tribune board committed
the company to the Transaction, when Mr. Zell was negotiating as an outside investor.4 The
claim fails for four reasons. First, arm’s-length negotiations may not give rise to aiding-and-
abetting liability under Delaware law.5 Second, the only exceptions to the privilege for arm’s-
3 Movants incorporate by reference the pleading standard discussion set forth in Section I.B of the Shareholder Defendants’ Memorandum.
4 As set forth in Section VI.C of the Memorandum filed by Messrs. Chandler, Goodan and Stinehart (the “Chandler Representatives”), under Delaware law, the Trustee can only assert alleged aiding and abetting claims against non-fiduciaries.
5 Because the Trustee’s aiding and abetting claim is governed by state law, the MDL court applies the substantive law of the jurisdiction in which the Trustee’s action was filed, including its choice-of-law rules. Menowitz v. Brown, 991 F.2d 36, 40 (2d Cir. 1993). Delaware courts
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7
length bargaining—the offer of improper “side payments” to a decision-making fiduciary or the
“exploitation” of a conflict of interest for the purpose of gaining a bargaining advantage—are not
pleaded in the Complaint. Third, the Complaint fails to allege with plausibility that Mr. Zell had
“actual knowledge” of any alleged breach, as required by Delaware law. Fourth, the Trustee’s
contention that Mr. Zell aided and abetted breaches of duty by the so-called “Controlling
Shareholders” fails for all of the same reasons.
Count Six likewise fails with respect to the other Movant for those reasons and more.
There is no allegation in the complaint that EGI-TRB or SIT undertook any action to aid or abet
any breach. As to EGI, the only alleged conduct attributed to it is through improper group
pleading. Count Six should be dismissed out of hand as to those parties.
A. Arm’s-Length Negotiations Do Not Support Aiding-And-Abetting Liability.
The main thrust of Count Six is to fault Mr. Zell for “proposing,” “negotiating,”
“modifying,” and “agreeing to” the Transaction when he was negotiating as an outside investor,
bargaining “across the table” from Tribune’s fiduciaries. (E.g., Compl. ¶¶ 428, 430.) That claim
is foreclosed by Delaware law, which holds that “arm’s-length negotiations cannot give rise to
liability for aiding and abetting” a breach of duty by a fiduciary sitting across the table.
Malpiede v. Townson, 780 A.2d 1075, 1097 (Del. 2001); see also In re Frederick’s of Hollywood
S’holders Litig., 1998 WL 398244, at *4 (Del. Ch. July 9, 1998) (“[A]n offeror who conducts
arm’s-length negotiations leading to an acquisition agreement cannot be said to be knowingly
participating in an alleged breach of fiduciary duty by the target board.”).6
apply Delaware law to claims that a party aided and abetted breaches by fiduciaries of a Delaware corporation. See In re Am. Int’l Group, Inc., 965 A.2d 763, 822 (Del. Ch. 2009).
6 See also In re NYMEX S’holder Litig., 2009 WL 3206051, at *13 n.116 (Del. Ch. Sept. 30, 2009) (Delaware Chancery Court has “consistently held” that evidence of arm’s-length
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8
Delaware law is clear that, even if a transaction is allegedly unfavorable to one company
and thus is alleged to represent a breach by that company’s fiduciaries, the counterparty to the
transaction does not “aid or abet” that breach by negotiating for its own interests on the other
side of the transaction. Indeed, an investor proposing an acquisition is “entitled to bargain to
obtain the best price for itself” and “breache[s] no duty by doing so,” even if the resulting
transaction is allegedly “unfair[]” to the other company. McGowan v. Ferro, 2002 WL 77712,
at *4 (Del. Ch. Jan. 11, 2002) (dismissing aiding and abetting claim, emphasis added); see also
In re BJ’s Wholesale Club, Inc. S’holders Litig., 2013 WL 396202, at *14-15 (Del. Ch. Jan. 31,
2013) (no aiding and abetting where bidder allegedly knew that company “was worth
substantially more” than its accepted bid). This rule “helps to safeguard the market for corporate
control by facilitating the bargaining that is central to the American model of capitalism.”
Morgan, 2010 WL 2803746, at *8.
The contentions the Trustee makes in support of Count Six run directly contrary to those
principles. The gravamen of the Trustee’s claim is that Mr. Zell, while an outsider to the
Tribune, negotiated a transaction that was unfavorable to Tribune’s fiduciary constituents. While
the Trustee contends that the transaction was unfair from the perspective of creditors (including
because it overvalued equity) (Compl. ¶ 430(a)), that theory is legally indistinguishable from a
claim that an acquiror aided and abetted a breach by negotiating a transaction that was unfair
from the perspective of equity-holders (because it undervalued equity). The Delaware courts
have firmly rejected aiding-and-abetting liability in those circumstances. E.g., Malpiede, 780
negotiation with fiduciaries negates aiding and abetting claim); Morgan v. Cash, 2010 WL 2803746, at *8 (Del. Ch. July 16, 2010) (“[T]he long-standing rule [is] that arm’s length bargaining is privileged”); In re Gen. Motors (Hughes) S’holder Litig., 2005 WL 1089021, at *26 (Del. Ch. May 4, 2005) (same).
Case 1:11-md-02296-RJS Document 5947 Filed 05/23/14 Page 16 of 37
9
A.2d at 1097; In re Lukens S’holders Litig., 757 A.2d 720, 735 (Del. Ch. 1999). The same
analysis requires dismissal here.
B. The Trustee Does Not State A Claim Under The “Side Payment” or “Exploitation” Exceptions.
There are two narrow exceptions to the privilege for self-interested bargaining under
Delaware law, but the Trustee has not pleaded facts supporting either one.
First, a party negotiating a transaction may aid and abet a breach of fiduciary duty where
it offers inducements such as “side payments” for the purpose of causing “fiduciaries to ignore
their duties.” In re Novell, Inc. S’holder Litig., 2013 WL 322560, at *17 (Del. Ch. Jan. 3, 2013);
see also Morgan, 2010 WL 2803746, at *8. Critically, however, any such inducement must be
directed at the actual decision-makers. For example, in Morgan, the plaintiff alleged that a board
breached its duties in accepting an acquisition proposal and further alleged that the acquiror
aided and abetted that breach by offering post-transaction employment to the acquired
company’s CEO and CFO. 2010 WL 2803746, at *5 & n.44. The court dismissed the claim
because the officers were not alleged to have participated in the board’s consideration of the
transaction and “there is no reason in the complaint to believe that [the job offers] mattered in a
material way to the [company’s] board.” Id. (emphasis added). Likewise, in In re Lukens, the
court dismissed an aiding and abetting claim based upon the payment of a “golden parachute” to
a single board member because the other directors received no such benefit, leaving no “question
as to the Director Defendants’ self-interest.” 757 A.2d at 730, 735.7
Those holdings are consistent with the Delaware law principle that an alleged “side-
benefit” paid to one or more fiduciaries does not support a challenge to a transaction if the
7 See also Malpiede, 780 A.2d at 1098 (dismissing aiding and abetting claim where “only one of the [company’s four] directors who approved the merger had a conflict of interest”).
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10
transaction was approved by a majority of directors receiving no such benefit. E.g., Golaine v.
Edwards, 1999 WL 1271882, at *10 (Del. Ch. Dec. 21, 1999) (dismissing claim where alleged
“side-benefit” did not affect majority of board); In re Alloy, 2011 WL 4863716, at *9 (Del Ch.
Oct. 13, 2011) (same).
Here, the Trustee does not allege that Mr. Zell or any company affiliated with him
offered any inducement to the actual decision-makers, Tribune’s seven-director Special
Committee of Independent Directors, which formed a majority of Tribune’s board. (Compl.
¶¶ 27-40, 136, 211-12.) The Trustee does not allege that Movants promised any Special
Committee member a “side payment,” let alone a majority of its members, or that any individual
that did receive an alleged benefit dominated or controlled the directors on the Special
Committee. The only benefit that the Special Committee directors allegedly received was
payment for their pre-existing stock holdings at the same $34-per-share price as all other
shareholders. (Id. ¶ 39.) Delaware courts have long recognized that directors’ pre-existing
shareholdings do not create a “disqualifying personal pecuniary interest.” Unocal Corp. v. Mesa
Petroleum Co., 493 A.2d 946, 958 (Del. 1985). With no other alleged “inducement” offered to
the Special Committee or the majority of Tribune’s board, the “side-payment” exception cannot
apply.8
8 The Trustee alleges that Mr. Zell made special inducements to officers (but not directors) of Tribune. (Compl. ¶¶ 158-63.) Those allegations lack evidentiary support and violate Rule 11. But even if taken as true, the Trustee fails to plead the “side-payment” or “exploitation” exception because there is no allegation that the actual decision-makers, Tribune’s Special Committee and board, were so induced or exploited. As discussed in Argument Section VII, below, the Tribune Bankruptcy Examiner found, among other things, that the “most significant monetary incentives received” by Tribune’s fiduciaries in the Transaction flowed from plans “already in place before the EGI proposal was considered.” (Bankr. Dkt. 5247, Examiner Report Vol. I at 397-98, emphasis added.) See also Shareholder Defendants’ Mem. at Section II.C and the Independent Directors’ Mem. at Section I.B.
Case 1:11-md-02296-RJS Document 5947 Filed 05/23/14 Page 18 of 37
11
A second exception to the privilege for self-interested bargaining applies where a party
“exploit[s] conflicts of interest within the [target] board” in order to “further the bidder’s aims.”
Morgan, 2010 WL 2803746, at *6. In this scenario, the alleged aider-and-abettor uses
“knowledge of [the fiduciary’s] breach to gain a bargaining advantage in the negotiations.” In re
Novell, Inc. S’holder Litig., 2013 WL 322560, at *17. Here, however, the only alleged “conflict”
that the Trustee identifies for the Special Committee directors is their pre-existing ownership of
Tribune stock, (Compl. ¶ 39), which, as discussed, does not give rise to a conflict. E.g.,
Freedman v. Rest. Assocs. Indus., Inc., 1987 WL 14323, at *10 (Del. Ch. Oct. 16, 1987)
(“interest as a stockholder will not conflict with a director’s duty of office”); In re Synthes, Inc.
S’holder Litig., 50 A.3d 1022, 1035 (Del. Ch. 2012) (“a fiduciary’s financial interest in a
transaction as a stockholder (such as receiving liquidity value for her shares) does not establish a
disabling conflict of interest when the transaction treats all stockholders equally”).
Moreover, the Trustee fails to allege any benefit or advantage that Mr. Zell improperly
obtained. Indeed, the Trustee alleges the opposite—the Transaction supposedly overvalued the
Tribune, unduly favored those that “cashed-out,” and disfavored those, like Mr. Zell, that
remained with a post-Transaction stake in the company.
C. The Trustee Does Not Plausibly Allege Actual Knowledge Of Any Breach.
As an independent matter, Count Six fails because there is no plausible allegation that
Mr. Zell or the other Movants had actual knowledge of any alleged fiduciary breach. The central
element of a claim for aiding and abetting under Delaware law is “knowing participation,” which
requires “actual knowledge” of the fiduciary’s breach. Glidepath Holding B.V. v. Spherion
Corp., 2010 WL 1372553, at *12 (S.D.N.Y. Mar. 26, 2010) (Sullivan, J.); see also Malpiede,
780 A.2d at 1096-97 (“Knowing participation . . . requires that the third party act with the
knowledge that the conduct advocated or assisted constitutes such a breach.”). Courts routinely
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dismiss aiding and abetting claims where a plaintiff fails to allege “knowing participation.” E.g.,
Malpiede, at 1096-98; see also In re NYMEX, 2009 WL 3206051, at *13.9
The Trustee’s core theory is that Tribune’s fiduciaries breached their duties because it
was foreseeable to them that the Transaction would render Tribune insolvent or because they
concealed Tribune’s worsening condition. (Compl. ¶ 390.) The Trustee’s own allegations,
however, establish that it is implausible that Mr. Zell or anyone affiliated with him had “actual
knowledge” of those breaches, yet decided to invest hundreds of millions of dollars in a company
whose fiduciaries believed would fail. Mr. Zell put his money and his reputation on the line for a
transaction that only had value if Tribune was solvent and prospered following the Transaction.
(Compl. ¶¶ 354, 616.) As the Bankruptcy Examiner concluded: “Why would Mr. Zell pay
anything for nothing?” (Bankr. Dkt. 5248, Examiner Report Vol. II at 75).10 Additionally, the
Trustee does not allege that Mr. Zell or his associates had access to the Special Committee’s or
board’s deliberative process, let alone that they were privy to any information showing that
insolvency was foreseeable.11 The Court may appropriately draw on its “judicial experience and
9 See also In re Lear Corp., 967 A.2d 640, 657 (Del. Ch. 2008); In re Gen. Motors (Hughes),2005 WL 1089021, at *24-29; In re Frederick’s of Hollywood, 1998 WL 398244, at *3-4; Chandler Representatives’ Mem. at Section VI.B, reciting case law.
10 See also Shandler v. DLJ Merch. Banking, Inc., 2010 WL 2929654, at *14 (Del. Ch. July 26, 2010) (dismissing claim as implausible because among other reasons, complaint pled “no rational inference why [defendant] would . . . put another $15 million at risk on top of what it already had at risk if it knew that [the company’s] performance and value would deteriorate”);Glidepath Holding B.V., 2010 WL 1372553, at *12 (summary judgment to defendant on aiding and abetting claim where fiduciary “sincerely believed in the accuracy of his projections and the feasibility of the business plan” even though venture ultimately failed).
11 The Complaint alleges that Mr. Zell was “reckless” in not knowing that Tribune could not meet its February 2007 projections (Compl. ¶ 263), but offers no factual basis for that conclusion. The Complaint otherwise admits that, after February 2007, Tribune executives told EGI-TRB that they “aren’t [sic] changing” their allegedly overly optimistic projections (id.), and that even as of June 8, 2007, long after the Transaction was approved on April 1, 2007, Tribune had not provided new projections to EGI-TRB (id. ¶ 267). See In re BJ’s Wholesale Club, 2013
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common sense,” Iqbal, 556 U.S. at 679, and reject the Trustee’s theory as fundamentally
implausible and inconsistent.
D. The Trustee’s New Theory That Mr. Zell Aided And Abetted A Breach Of Fiduciary Duty By “Controlling Shareholders” Is Baseless.
The Trustee also advances a new theory for Count Six that was not pleaded in any prior
version of the Complaint: that Mr. Zell or companies affiliated with him aided and abetted a
breach of fiduciary duty by “Controlling Shareholders.” The Complaint, however, alleges no
non-conclusory basis for asserting that the so-called “Controlling Shareholders” controlled
Tribune or owed fiduciary duties to Tribune in their capacity as shareholders.12 Nor does the
Complaint allege that Mr. Zell or companies affiliated with him dealt with the Tribune’s
shareholders on anything but an arm’s-length basis, which, as discussed, forecloses an aiding and
abetting claim. See Frank v. Elgamal, 2012 WL 1096090, at *12 (Del. Ch. Mar. 30, 2012)
(dismissing aiding and abetting claim concerning arm’s-length bargaining with controlling
shareholders). The Trustee also does not allege any “side payment” or special benefit offered to
the alleged Controlling Shareholders—they received the same $34 price as any other
WL 396202, at *5 (explaining that the court “will not credit conclusory allegations or draw unreasonable inferences in favor of the Plaintiffs,” and, “[i]f the complaint states facts that could explain otherwise inexplicable bad faith conduct, the Court will not ignore those reasonable explanations”). This Court also need not accept inconsistent allegations as true. Grant v. Cnty. of Erie, 542 F. App’x 21, 23 (2d Cir. 2013). See Shareholders Defendants’ Mem. at Section II.D, citing additional cases.
Movants incorporate by reference the arguments made by the Independent Directors that the Complaint fails to adequately allege that the Independent Directors breached any fiduciary duty. See Independent Directors’ Mem. at Section I.
12 Movants incorporate by reference the arguments made by the Chandler Trusts, the McCormick Foundation, and the Cantigny Foundation in their Memorandum in Support of Their Joint Motion to Dismiss Counts 14, 15 and 31, in which they argue in Section V that the Trustee’s breach of fiduciary duty claims against them fail because they were not “controlling shareholders” and owed no fiduciary duties to Tribune.
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shareholder. (See Compl. ¶¶ 6, 119.) The Trustee thus does not, and cannot, state a claim for
aiding and abetting any alleged breach by “Controlling Shareholders.” See Morgan, 2010 WL
2803746; In re Synthes, Inc., 50 A.3d 1022; Freedman, 1987 WL 14323.13 For each reason, the
Court should dismiss Count Six.
II. The Claims Against Mr. Zell For Breach Of Fiduciary Duty And Violation Of A Related Delaware Statute Should Be Dismissed.
The Trustee next asserts in Counts Two and Five that Mr. Zell breached his duties to
Tribune in relation to the Transaction after he became a director of the company. These claims
share a fundamental defect: under the Trustee’s own theory, Mr. Zell was not a Tribune fiduciary
at the time the board committed Tribune to the Transaction. The Trustee alleges that “[t]he
Tribune Board approved both Step One and Step Two on April 1, 2007,” with a “unitary
approval” and with both steps designed “as part of a single, unitary transaction.” (Compl. ¶ 238.)
The Trustee further alleges that upon the Board’s April 1, 2007 approval, the agreements
between the parties to the Transaction required Tribune to proceed towards closing both steps of
the transaction. (Id. ¶ 240.) Mr. Zell, however, did not become a Tribune director until May 9,
2007. (Compl. ¶ 227.) The Complaint does not allege that there was anything that Mr. Zell, who
abstained from all board actions relating to the Transaction, could have done to stop the
Transaction to which Tribune was already committed.
“Delaware law clearly prescribes that a director who plays no role in the process of
deciding whether to approve a challenged transaction cannot be held liable on a claim that the
board’s decision to approve that transaction was wrongful.” In re Bridgeport Holdings, Inc., 388
B.R. 548, 566 (Bankr. D. Del. 2008) (dismissing counts against director who played no role in 13 As an independent matter, any allegation by the Trustee that there were improper communications between Mr. Zell or the other Movants and the “Controlling Shareholders” is without evidentiary basis and violates Rule 11.
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approving challenged transaction). That is, there is no liability for directors who “deliberately
removed themselves from the decision-making process.” In re Tri-Star Pictures, Inc., Litig.,
1995 WL 106520, at *2 (Del. Ch. Mar. 9, 1995).14 In fact, Delaware law will not impose
liability even when a director facilitates a transaction, when he or she was not a decision-maker
for the company. Citron v. E.I. Du Pont de Nemours & Co., 584 A.2d 490, 499 (Del. Ch. 1990).
Those principles apply with particular force here. The Trustee directs all of his factual
allegations purportedly supporting the breach of fiduciary claims against the Special Committee
and the other Tribune directors, not Mr. Zell. (See, e.g., Compl. ¶¶ 280-81, 326-27.)15 Count
Five itself does not contain any allegations about a specific breaching action Mr. Zell supposedly
undertook after becoming a member of the board. (Id. ¶¶ 412-18.) And although Mr. Zell was a
member of the board at the time Steps One and Two closed (id. ¶¶ 280 n.5, 326 n.7), the Trustee
does not allege that Mr. Zell participated in any board decisions relating to the Transaction. In
fact, the board’s meeting minutes, which the Complaint incorporates by reference (id. ¶¶ 280,
327), show that Mr. Zell abstained from the only Transaction-related decision made by the board
when he was a member—a December 18, 2007 vote on accepting the VRC solvency opinion
based on the Special Committee’s recommendation. (Bankr. Dkt. 5247, Examiner Report, Vol. I
at 441-42.)
The remainder of the Trustee’s allegations regarding Mr. Zell’s conduct after being
elected to the board are not related to the board’s approval of the deal and at most amount to 14 See also the Chandler Representatives’ discussion of Citron and the court’s ruling on a motion to dismiss in Plymouth Cnty. Retirement Assoc. v. Brookfield Homes Corp., et al., No. 6062-CS (Del. Ch. Oct. 12, 2012), and other supporting authority at Section V of their Memorandum.
15 Those allegations fail to overcome Delaware’s business judgment rule or the exculpating provisions in the Tribune charter documents in order to state a claim for breach of fiduciary duty against any of the directors for the reasons set forth in the Independent Directors’ Memorandum at Section I, which Mr. Zell incorporates by reference.
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allegations that Mr. Zell brought parties to the table as in Citron. (See, e.g., Compl. ¶ 349,
alleging that Mr. Zell “capitalized on his influence over JPMorgan.”).
The lack of any connection between the board’s approval of the Transaction and Mr.
Zell’s subsequent role as a Tribune director is all the more important because Tribune’s
corporate charter exculpates its directors from damages lawsuits based on the duty of care, as
explained by the Independent Directors. To the extent the Trustee is contending that the duty of
care compelled Mr. Zell to attempt to stop the already-approved Transaction, such a claim would
be foreclosed by the exculpatory provision. To the extent the Trustee instead attacks Mr. Zell on
duty of loyalty grounds, the Trustee can hardly fault Mr. Zell from abstaining from decision-
making, which is exactly what Delaware law requires. E.g., Citron, 584 A.2d at 504 (rejecting
fiduciary duty claims where allegedly conflicted directors abstained from consideration of
transaction); see Independent Directors’ Mem. at V.C.
For the same reasons, Mr. Zell can have no liability under Delaware General Corporate
Law Sections 160 and 173 (Count Two). See Del. Code tit. 8, § 174 (liability applies only to
directors “under whose administration” violations occur); see also Propp v. Sadacca, 175 A.2d
33, 39 (Del. Ch. 1961) (director who abstained in good faith due to conflict of interest was “not
legally responsible for the transaction under attack”), aff’d in part, rev’d in part sub nom. Bennet
v. Propp, 187 A.2d 405 (Del. 1962). In addition, Mr. Zell cannot be liable under those sections
for the separate reasons established by the Independent Directors in their memorandum at
Section II, adopted here. For each reason, the Trustee’s Counts Two and Five should be
dismissed.
III. Count Eight, An Alter Ego Theory, Should Be Dismissed.
In Count Eight, the Trustee alleges that Mr. Zell, EGI, and SIT are each an alter ego of
EGI-TRB and should therefore be responsible for EGI-TRB’s alleged liabilities related to the
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credit it received for its Step One investment. (Compl. ¶¶ 441-53.) This count fails to allege
facts meeting the “heavy burden” and “extraordinary circumstances” required under Delaware
law for disregarding the corporate form of EGI-TRB. Capmark Fin. Group Inc. v. Goldman
Sachs Credit L.P., 491 B.R. 335, 347 (S.D.N.Y. 2013); Mobil Oil Corp. v. Linear Films, Inc.,
718 F. Supp. 260, 270 (D. Del. 1989) (“Disregard of the corporate entity is appropriate only in
exceptional circumstances.”); see also Network Enters., Inc. v. Reality Racing, Inc., 2010 WL
3529237, at *4 (S.D.N.Y. Aug. 24, 2010) (Sullivan, J.) (New York “case law is clear that
Plaintiff faces a ‘heavy burden’ in seeking” alter ego liability).
To meet its burden, the Trustee must allege facts establishing that: (a) EGI-TRB was “a
sham and exist[ed] for no other purpose than as a vehicle for fraud,” Mason v. Network of
Wilmington, Inc., 2005 WL 1653954, at *3-4 (Del. Ch. July 1, 2005); and (b) EGI-TRB’s parent
“exercised ‘complete domination and control . . . such that [it] had no ‘legal or independent
significance of [its] own.’” Capmark, 491 B.R. at 347.16 The Complaint’s allegations—which
simply describe typical parent-subsidiary relationships and provide no basis for concluding that
EGI-TRB was a sham entity—are insufficient to satisfy either factor.
No factual allegations that EGI-TRB’s form was a sham. The Trustee does not, and
cannot, allege that EGI-TRB’s corporate form itself was a sham or had no purpose other than
fraud. Delaware law is clear that “the alter ego theory requires that the corporate structure cause
fraud or similar injustice.” Outokumpu Eng’g Enters., Inc. v. Kvaerner EnviroPower, Inc., 685
A.2d 724, 729 (Del. Super. 1996). Effectively, “the corporation must be a sham and exist for no
16 See also Kalin v. Xanboo, Inc., 2009 WL 928279, at *11 (S.D.N.Y. Mar. 30, 2009) (Sullivan, J.) (alter ego liability requires “a two-part showing: (i) that the owner exercised complete domination over the corporation with respect to the transaction at issue; and (ii) that such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil”).
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other purpose than as a vehicle for fraud.” In re Sunstates Corp. S’holder Litig., 788 A.2d 530,
534 (Del. Ch. 2001). It is not enough to allege that the corporation, or those associated with it,
engaged in alleged misconduct. Under Delaware law, “the fraud or injustice [must] be found in
the defendants’ use of the corporate form,” not in the “underlying cause of action” alleged.
Mobil Oil Corp., 718 F. Supp. at 268-69; see also Medi-Tec of Egypt Corp. v. Bausch & Lomb
Surgical, 2004 WL 415251, at *4 (Del. Ch. Mar. 4, 2004) (rejecting claim where plaintiff had
“not alleged that the corporate form in and of itself operates to serve some fraud or injustice,
distinct from the alleged wrongs of [the defendant]”) (emphasis added).
Here, the Trustee’s sole allegation related to any claimed fraudulent nature of EGI-TRB’s
corporate form is that the company was “used as an instrument of fraud” to insulate Mr. Zell,
EGI, and SIT from liability. (Compl. ¶ 449.) This conclusory allegation is plainly insufficient.17
The Complaint then compounds that defect by pleading allegations that are inconsistent with any
claim that EGI-TRB’s sole purpose was fraud. It alleges that EGI-TRB was formed as an
investment vehicle, to “engage in any activities which pertain to acquiring, owning, operating,
managing, financing, selling and otherwise dealing with” Tribune. (Compl. ¶ 78.) It further
alleges that EGI-TRB fulfilled those purposes by investing over $300 million in Tribune.
(Id. ¶ 203.) The Complaint itself thus establishes that EGI-TRB was formed for a legitimate
business purpose, making a substantial investment in Tribune. Count Eight fails for those
reasons alone.
No factual allegations of complete domination and control. Count Eight fails for the
independent reason that the Trustee does not allege any facts establishing that Mr. Zell, EGI, or
17 E.g., EBG Holdings LLC v. Vredezicht’s Gravenhage, 2008 WL 4057745, at *13 (Del. Ch. Sept. 2, 2008) (dismissing alter ego claim where similar allegations were “wholly conclusory and otherwise unsupported by any specific facts in the Complaint”).
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SIT exercised complete domination and control over EGI-TRB. To evaluate this element, courts
look to whether “actual control was or is exercised.” La Chemise Lacoste v. Gen. Mills, Inc., 53
F.R.D. 596, 603 (D. Del. 1971). The plaintiff must plead specific facts that show the subsidiary
was completely “dominated and controlled” to such an extent that the it had no “legal or
independent significance of its own.” Capmark Fin. Group Inc., 491 B.R. at 347 (emphasis
added). Allegations that merely describe typical relationships between a subsidiary and its
parent corporation are insufficient as a “matter of law.” Id. at 349-50.
Here, the Trustee’s allegations in support of Count Eight are either conclusory or merely
suggest a typical relationship between a parent and its subsidiaries; none come close to
establishing “domination and control.” For example, the Trustee simply asserts that EGI-TRB is
and was “completely dominated by Zell, directly and indirectly through SIT and EGI and its
employees, each of which Zell controls,” (Compl. ¶ 448) and “EGI-TRB lacked sufficient capital
to meet any liabilities.” (Id. ¶ 451.) Those allegations, “even at the motion to dismiss stage,” do
not support a veil-piercing theory because they fail to go beyond mere conclusions. See Trans
Union LLC v. Credit Research Inc., 2001 WL 648953, at *8 (N.D. Ill. June 1, 2001); see also
Capmark, 491 B.R. at 347. For this reason also, Count Eight should be dismissed.
IV. Count Thirty-One, For Unjust Enrichment, Should Be Dismissed.
In Count Thirty-One, the Trustee asserts a general unjust enrichment claim against
Movants based on “wrongful receipt of payments and distributions from Tribune” in connection
with the Transaction. (Compl. ¶ 609.) This claim is frivolous because there is no allegation that
Movants received any “enrichment” from the Transaction, aside from $77,452 paid to Mr. Zell
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as director compensation shares. (Id. ¶ 76).18 The elements of unjust enrichment, including that
“the other party was enriched” and that it is “against equity and good conscience to permit the
other party to retain what is sought” are simply not pleaded Loreley Fin. (Jersey) No. 3 Ltd. v.
Wells Fargo Sec., LLC, 2013 WL 1294668, at *16 (S.D.N.Y. Mar. 28, 2013) (Sullivan, J).19
Additionally, the existence of express contracts governing the subject matter at issue
precludes quasi-contractual claims, including unjust enrichment. Boccardi Capital Sys., Inc. v.
D.E. Shaw Laminar Portfolios, L.L.C., 355 Fed. App’x 516, 519-20 (2d Cir. 2009); Loreley
Fin., 2013 WL 1294668, at *16 (“[w]here contract governs, unjust enrichment will not lie”).
This principle has been applied to claims arising from similar transactions, including LBOs and
stock acquisitions. See In re Refco, Inc. Sec. Litig., 2009 WL 7242548, at *2 (S.D.N.Y. Nov. 13,
2009), aff’d 2010 WL 5129072 (S.D.N.Y. Jan. 12, 2010) (dismissing unjust enrichment claim
where a contract governed tender offer); Kipperman v. Onex Corp., 411 B.R. 805, 872 (N.D. Ga.
2009) (dismissing unjust enrichment count where all alleged “benefits conferred were triggered
by a provision in contracts”). Accordingly, Count Thirty-One should be dismissed.
V. The Avoidance Claims (Counts Seven, Nine, Ten and Eleven) Fail.
Counts Seven and Nine seek to plead fraudulent transfer claims and Counts Nine and Ten
seek to plead preference claims. All of these avoidance theories fail.
18 The Complaint misleadingly includes Movants in a list of defendants who collectively received at least “25% of the payouts to shareholders in the LBO” (Compl. ¶ 118), but does not specify any value paid to them.
19 Movants incorporate by reference the arguments made by the Independent Directors that the Trustee’s unjust enrichment claims fail because the Trustee has an adequate remedy at law and they are preempted by Bankruptcy Code Section 546(e). See Independent Directors’ Mem. at Section III.
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A. Counts Seven and Nine Challenge Setoffs That Are Not Avoidable.
In Counts Seven and Nine, the Trustee seeks to avoid what he calls the “EGI-TRB
Transfers” as fraudulent transfers or preferences. The “EGI-TRB Transfers” are defined to mean
Tribune’s crediting of amounts due to EGI-TRB in relation to Step One of the Transaction
against the larger amount EGI-TRB was to invest at Step Two. (Compl. ¶¶ 79-81.) Both claims
fail because the Trustee’s own allegations establish that there was no avoidable “transfer” of
property to Mr. Zell or EGI-TRB in the challenged transactions. See 11 U.S.C. §§ 547(b),
548(a). Rather, what the Trustee has alleged is a classic pre-petition setoff, which may not be
avoided as a fraudulent transfer or preference.
The Complaint alleges that, on December 20, 2007: (1) Tribune owed EGI-TRB
approximately $259 million for amounts then due under the Step One Note, for stock that EGI-
TRB owned that had been converted to cash, and for fees and expenses that Tribune was legally
obligated to reimburse under the parties’ agreements (Compl. ¶¶ 77, 79-81, 228, 354); (2) EGI-
TRB had agreed to provide a new $315 million to Tribune in the form of the $225 million Step
Two Note and the $90 million payment for the Warrant (id. ¶¶ 81, 354); (3) EGI-TRB set off
what Tribune owed EGI-TRB and funded the difference—an additional $56 million in cash to
Tribune (id. ¶¶ 81, 203, 354); (4) the parties played the same role in both transactions (id. ¶¶ 81,
228, 354); and (5) the setoff occurred prepetition (id. ¶¶ 81, 222, 353-54, 359).
Those allegations establish a valid setoff under controlling law. See In re BOUSA Inc.,
2006 WL 2864964, at *3 (Bankr. S.D.N.Y. Sept. 29, 2006) (setting forth elements of setoff).
That conclusion precludes the Litigation Trustee from avoiding any of the EGI-TRB Transfers as
fraudulent or preferential transfers because a setoff is not a transfer within the meaning of 11
U.S.C. § 101(54). See, e.g., In re Damas, 504 B.R. 290, 296 (Bankr. D. Mass. 2014) (collecting
cases); Kaye v. Carlisle Tire & Wheel Co., 2008 WL 821521, at *3-4 (M.D. Tenn. Mar. 27,
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2008) (dismissing claims asserting that a setoff should be avoided as a preference or fraudulent
transfer); In re Am. Remanufacturers, 2008 WL 2909871, at *3 (Bankr. D. Del. July 25, 2008)
(same).20 Because the Bankruptcy Code’s definition of a “transfer” does not include “set-offs”,
and in fact the Code establishes a special provision—Section 553—to avoid setoffs in very
limited circumstances, none of which are alleged or present here, Counts Seven and Nine against
Mr. Zell and EGI-TRB must be dismissed. Pereira v. Summit Bank, 2001 WL 563730, at *11
(S.D.N.Y. May 23, 2001); In re Damas, 504 B.R. 290. Accordingly, the Court should dismiss
Counts Seven and Nine against Mr. Zell and EGI-TRB.21
B. Counts Seven, Nine, Ten, And Eleven Fail Because They Challenge Settlement Payments.
Counts Seven and Nine, also pertaining to the “EGI-TRB Transfers,” fail for the
independent reason that they seek to avoid “settlement payments,” which are protected under 11
U.S.C. § 546(e). Counts Ten and Eleven, which seek to avoid the so-called “EGI
Reimbursements,” fail for the same reason. The Trustee defines the “EGI Reimbursements” as
“not less than $586,759” in payments made to EGI-TRB for expenses “incurred in connection 20 See also In re Holyoke Nursing Home Inc., 273 B.R. 305, 309 (Bankr. D. Mass. 2002) (“it is well settled that offsets are not transfers avoidable pursuant to § 547(b)”); In re Wild Bills, Inc.,206 B.R. 8, 12-13 (Bankr. D. Conn. 1997) (collecting cases holding that prepetition setoffs may not be avoided under 11 U.S.C. § 547).
21 Count Nine purports to include Mr. Zell as a defendant, but even assuming that the Trustee had pled that a transfer occurred, because Mr. Zell was not an initial or subsequent transferee or the party for whose benefit the alleged transfers were made, the Trustee has failed to state a claim for recovery against him under 11 U.S.C. § 550, which is the only means of recovering a preference or fraudulent transfer. In re Acequia, Inc., 34 F.3d 800, 809 (9th Cir. 1994) (“Section 550(a) governs the extent to which the trustee may exercise [his avoidance powers].”) The Complaint contains no allegations that Mr. Zell ever received the EGI-TRB Transfers or any allegations that Mr. Zell received a “tangible or a quantifiable benefit” from the EGI-TRB Transfers, which is required to show that a defendant was the entity for whose benefit a transfer was made. In re Int’l Mgmt. Assoc., 399 F.3d 1288, 1292-93 (11th Cir. 2005) (holding that the “paradigm case of a benefit under § 550(a) is the benefit to a guarantor by the payment of the underlying debt of the debtor”).
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with the LBO” (Compl. ¶ 77), and alleges that the EGI-TRB Transfers were also made “in
connection with” the LBO (id. ¶¶ 78-81).
All of the challenged payments are “settlement payments” under Section 546(e) of the
Bankruptcy Code. Section 546(e) provides, in relevant part: “the trustee may not avoid a transfer
that is a . . . settlement payment . . . made by or to (or for the benefit of) a . . . stockbroker,
financial institution, [or] financial participant . . . .” 11 U.S.C. § 546(e). In other words, a
transfer is not avoidable if: (1) the transfer constitutes a “settlement payment”; and (2) the
transfer was made by, to, or for the benefit of an enumerated protected party.
The Bankruptcy Code defines a “settlement payment” as “a preliminary settlement
payment, a partial settlement payment, an interim settlement payment, a settlement payment on
account, a final settlement payment, or any other similar payment commonly used in the
securities trade.” 11 U.S.C. § 741(8). The Second Circuit has held that a “settlement payment”
is simply “an exchange of money or securities that completes a securities transaction.” Enron
Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329, 337 (2d Cir. 2011). As multiple
courts have held, transfers made in connection with a leveraged buyout constitute protected
“settlement payments.” See, e.g., In re Plassein Int’l Corp., 590 F.3d 252, 258-59 (3d Cir.
2009); In re QSI Holdings, Inc., 571 F.3d 545, 549-51 (6th Cir. 2009); In re Resorts Int’l, Inc.,
181 F.3d 505, 515-16 (3d Cir. 1999); Kaiser Steel Corp. v. Charles Schwab & Co., Inc., 913
F.2d 846, 849 (10th Cir. 1990); AP Servs. v. Silva, 483 B.R. 63, 69 (S.D.N.Y. 2012).
Here, the Complaint alleges every fact necessary to establish that the payments are
protected settlement payments. Specifically, the Complaint alleges: (1) the EGI-TRB Transfers
and EGI Reimbursements were transfers of Tribune’s property (Compl. ¶¶ 436, 438, 440, 461);
(2) those transfers were made in connection with the Transaction (id. ¶¶ 76-80, 436); (3) the
Transaction was “a single, unitary transaction” (id. ¶¶ 119, 238-43); and (4) the Transaction
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involved transfers made by, to, or for the benefit of financial institutions, financial participants,
and stockbrokers (id. ¶¶ 14-16, 94, 120, 211, 225, 229-37, 287, 353-54, 539-46).
Courts routinely dismiss complaints containing similar allegations because Section
546(e) supplies an absolute defense. See, e.g., In re Plassein Int’l Corp., 590 F.3d at 259
(affirming dismissal where transfers made in connection with LBO constituted settlement
payments); Bevill, Bresler & Schulman Asset Mgmt. Corp. v. Spencer Sav. & Loan Ass’n, 878
F.2d 742, 747, 753 (3d Cir. 1989) (reversing denial of motion to dismiss based on applicability
of Section 546(e) and remanding case with instructions to grant motion to dismiss); In re Refco,
Inc. Secur. Litig., 2009 WL 7242548, at *19 (recommending dismissal because Section 546(e)
precluded claims), aff’d, 2010 WL 5129072. This Court should likewise dismiss Counts Seven,
Nine, Ten, and Eleven.22
C. The Court Should Dismiss Count Nine Pursuant To 11 U.S.C. § 547(c).
Count Nine’s preference theory fails for the independent reason that the Complaint itself
establishes a “contemporaneous exchange for new value” defense under 11 U.S.C. § 547(c)(1)
and a “new value” defense under 11 U.S.C. § 547(c)(4). Where the predicate establishing both
defenses “appears on the face of the complaint,” courts do not hesitate to dismiss a preference
claim. Official Comm. of the Unsecured Creditors of Color Tile, Inc. v. Coopers & Lybrand,
LLP, 322 F.3d 147, 158 (2d Cir. 2003) (internal quotations omitted); accord In re Dreier LLP,
453 B.R. 499, 515-16 (Bankr. S.D.N.Y. 2011) (dismissing preference claim where complaint
conclusively established a § 547(c)(1) defense).
22 In addition, Movants adopt the Shareholder Defendants’ argument that the Trustee has failed to adequately plead an actual fraudulent transfer claim, and accordingly to the extent that Counts Seven and Eleven purport to state actual fraudulent transfer claims, these Counts should be dismissed.
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25
Section 547(c)(1) provides that an otherwise avoidable preferential transfer may not be
avoided to the extent that: (1) it was intended by the debtor and the creditor to be a
contemporaneous exchange for new value given to the debtor; and (2) the transfer was in fact a
substantially contemporaneous exchange for new value given to the debtor. 11 U.S.C. §
547(c)(1). “New value” is defined to include “money or money’s worth in goods, services, or
new credit.” 11 U.S.C. § 547(a)(2).
The Complaint alleges facts establishing each element of this defense. First, the
Complaint establishes that Tribune and EGI-TRB intended that the challenged “Exchange Note
Transfers” and “EGI-TRB Fee Transfers” would be contemporaneous with EGI-TRB’s transfer
of $315 million of new value to Tribune. According to the Complaint, all of these payments
were part of a “single, unitary transaction” that were “netted” against one another on the same
day. (Compl. ¶¶ 81, 119, 238, 240-41.) Similarly, in In re Dreier LLP, the court dismissed a
preference claim where on the same day, the defendant provided new credit to the debtor in
exchange for a security interest. 453 B.R. at 515-16. The same circumstances are alleged here.
The Complaint also admits that EGI-TRB advanced “new value” to Tribune within the
meaning of Section 547(a)(2) in exchange for the challenged transfers. The Complaint alleges
that EGI-TRB agreed to and in fact made new loans and investments in Tribune totaling $315
million. (Compl. ¶¶ 81, 203, 354.) Extending new credit and investing money in the debtor
constitute new value. See, e.g., In re Dreier LLP, 453 B.R. at 515 (holding that defendant
provided new value to debtor when it provided pre-petition credit to debtor); In re Pro Page
Partners, LLC, 151 Fed. App’x 366, 368 (6th Cir. 2005) (holding that providing money to a
debtor in any form constitutes new value). Because the amount of the new value—$315
million—exceeds the $209 million in alleged preferential transfers, EGI-TRB has a complete
defense to Count Nine, and the Court should dismiss it.
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26
Separately, Section 547(c)(4) provides that an otherwise avoidable preferential transfer
may not be avoided to the extent that: (1) after such transfer, the creditor gave new value to the
debtor; and (2) such new value was not secured by an otherwise unavoidable security interest
and on account of such new value the debtor did not make an otherwise unavoidable transfer to
the transferee. 11 U.S.C. § 547(c)(4).
Again, the Complaint’s allegations establish this defense. As explained, EGI-TRB’s
investment of $315 million in Tribune constituted new value. The Complaint also alleges: that
EGI-TRB’s $315 million investment occurred after the Exchangeable Note Transfer and EGI-
TRB Fee Transfer (Compl. ¶¶ 81, 203, 354); that all of EGI-TRB’s interests in Tribune are
“subordinate and junior to all obligations, indebtedness, and other liabilities of Tribune with
certain inapplicable exceptions” and thus, could not have been secured (id. ¶ 81); and that all of
the transfers to EGI-TRB are avoidable and therefore satisfy the final requirement of Section
547(c)(4) that Tribune did not make an unavoidable transfer to EGI-TRB after the new value was
given (see Counts One, Seven, Nine, Ten, Eleven). Consequently, the Complaint affirmatively
establishes a “new value” defense under Section 547(c)(4), and Count Nine should be dismissed.
VI. Counts Thirty-Two, Thirty-Three And Thirty-Six Should Be Dismissed.
In Counts Thirty-Two and Thirty-Three, the Litigation Trustee seeks to subordinate EGI-
TRB’s bankruptcy claims to those of other creditors. In Count Thirty-Six, he seeks to avoid
director indemnification obligations owed to Mr. Zell. As shown, the Complaint fails to state
any claim of inequitable conduct against these defendants, so there is no basis for subordination
or avoidance.23 Additionally, the Tribune Bankruptcy Plan already provides that until all other
23 Movants incorporate by reference the arguments made by the Independent Directors on this point. See Independent Directors’ Mem. at Section IV.
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27
unsecured creditors are paid in full, EGI-TRB is contractually subordinated and will receive
nothing. (Bankr. Dkt. 12072, Attachment B at 6.)24
VII. These Claims Should Be Dismissed With Prejudice.
The claims against Mr. Zell, EGI, EGI-TRB and SIT should be dismissed with prejudice.
The Trustee and his predecessors have had ample opportunity to examine any possible claims.
The Tribune Bankruptcy Examiner, analyzing a mountain of evidence over the course of a 1400-
page report, made express findings that demonstrate the ultimate futility of claims against Mr.
Zell and his affiliates.25
For example, the Examiner “did not find a sufficient” evidentiary basis to conclude that
Mr. Zell, EGI-TRB, or EGI aided and abetted a breach of fiduciary duty. (Bankr. Dkt. 5250,
Examiner Report Vol. II at 397.) The Examiner found no factual basis to conclude that any
actions by Tribune’s officers or directors were based on any improper benefits that EGI or Mr.
Zell proposed. (See, e.g., Bankr. Dkt. 5247, Examiner Report Vol. I at 397-99 (citing sworn
testimony and multiple interviews).)
The unjust enrichment claims against Mr. Zell and the affiliated defendants are
additional examples of unsalvageable claims, as the Examiner expressly found it “reasonably
unlikely” that any unjust enrichment claims against Mr. Zell or EGI-TRB would be meritorious.
(Bankr. Dkt. 5248, Examiner Report Vol. II at 404, 406.)
24 Mr. Zell incorporates by reference the arguments made by the Independent Directors that Count Thirty-Six fails to state a claim for avoidance of Tribune’s indemnification obligations to the company’s directors. See Independent Directors’ Mem. at Section V. Additionally, to the extent that any arguments made by other parties support dismissal of the claims against Movants, Movants incorporate those arguments by reference herein.
25 See Shareholder Defendants’ Mem. at VII; Chandler Representative Mem. at VIII.
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28
The deficiencies of these claims were admitted to in the Bankruptcy Plan Disclosure
Statement, in which the Bankruptcy Court ordered creditors include an “accurate” report of
“what the Examiner found with respect to Mr. Zell and EGI,” (Bankr. Dkt. 6699, Nov. 29, 2010
Hr’g Tr. 164-65), and in which all plan proponents agreed that “[w]ith respect to EGI-TRB LLC
and Sam Zell, the Examiner determined that the alleged claims [we]re unlikely to succeed.”
(Bankr. Dkt. 7232 (emphasis added).) Nothing has changed to alter that conclusion.
Conclusion
For all of the foregoing reasons, this Court should grant the Motion to Dismiss and grant
such other relief as may be just.
Case 1:11-md-02296-RJS Document 5947 Filed 05/23/14 Page 36 of 37
Dated: May 23, 2014 SAMUEL ZELL, EGI-TRB, LLC, EQUITY GROUP INVESTMENTS, LLC, SAM INVESTMENT TRUST
By: /s/ David J. Bradford One of Their Attorneys
David J. Bradford Catherine L. Steege Daniel J. Weiss Andrew W. Vail JENNER & BLOCK LLP353 North Clark Street Chicago, Illinois 60654 (312) 840-8788 [email protected]
Case 1:11-md-02296-RJS Document 5947 Filed 05/23/14 Page 37 of 37
30087042.6
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
IN RE TRIBUNE FRAUDULENT CONVEYANCE LITIGATION
This Document Relates To:
Marc S. Kirschner, as Litigation Trustee for the TRIBUNE LITIGATION TRUST,
Plaintiff
v.
Dennis J. Fitzsimons, et al.,
Defendants.
Consolidated Multidistrict Action 11 MD 2296 (RJS)
12 MC 2296 (RJS)
Associated case: 12 CV 2652 (RJS)
MEMORANDUM OF LAW IN SUPPORT OF DEFENDANT DURHAM J. MONSMA’S
MOTION TO DISMISS WITH PREJUDICE COUNT TWELVE AND COUNT
THIRTEEN OF THE FIFTH AMENDED COMPLAINT (MOTION NO. 3)
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TABLE OF CONTENTS
I. PRELIMINARY STATEMENT ............................................................................................ 1
II. STATEMENT OF FACTS ..................................................................................................... 2
III. COUNT TWELVE FOR BREACH OF FIDUCIARY DUTY AGAINST MR. MONSMA
FAILS TO MEET THE STRICT STANDARDS OF RULE 9 ............................................. 4
IV. PLAINTIFF FAILS TO PLEAD AROUND THE DELAWARE BUSINESS JUDGMENT
RULE ..................................................................................................................................... 7
V. THE THIRTEENTH COUNT FOR AIDING AND ABETTING BREACH OF
FIDUCIARY DUTY ALSO FAILS TO MEET THE STANDARDS OF RULE 9 .............. 8
VI. THE FIFTH AMENDED COMPLAINT ALSO FAILS TO SATISFY THE ORDINARY
PLEADING REQUIREMENTS OF RULE 8 ....................................................................... 9
VII. PLAINTIFF SHOULD NOT BE ALLOWED A SEVENTH ATTEMPT TO AMEND ... 10
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TABLE OF AUTHORITIES
Page(s)
Cases
Anadarko Petroleum Corp. v. Panhandle Eastern Corp., 545 A.2d 1171 (Del. 1988) ........................................................................................................6
Ashcroft v. Iqbal, 556 U.S. 662 (2009) .............................................................................................................9, 10
ATSI Commc’ns, Inc. v. Schaar Fund. Ltd., 493 F.3d 87 (2d Cir. 2007) ....................................................................................................3, 6
Bell Atl. Corp. v. Twombly, 550 U.S. 444 (2007) .............................................................................................................9, 10
Granite Partners, L.P. v. Bear, Stearns & Co., 17 F. Supp. 2d 275 (S.D.N.Y. 1998) ......................................................................................5, 6
Johnson v. Nextel Commc’ns, Inc., 660 F.3d 131 (2d Cir. 2011).......................................................................................................6
Joseph P. Frank (In re Troll Commc’ns), 385 B.R. 110 (Bankr. D. Del. 2008) ..........................................................................................7
Kolbeck v. LIT America, Inc., 939 F. Supp. 240 (S.D.N.Y. 1996).........................................................................................8, 9
Off. Comm. v. McConnell (In re Grumman Olson Indus., Inc.), 329 B.R. 411 (Bankr. S.D.N.Y. 2005) .......................................................................................4
Off. Comm. v. Unsecured Creditors etc. (In re Verastar, Inc.), 343 B.R. 444 (Bankr. S.D.N.Y. 2006) ...................................................................................7, 8
Person Most Responsible v. Best Buy, Inc. (In re Musicland Holding Corp.), 398 B.R. 761 (Bankr. S.D.N.Y. 2008) ...................................................................................5, 6
Stanziale v. Nachtomi (In re Tower Air, Inc.), 416 F.3d 229 (3rd Cir. 2005) .....................................................................................................7
Statutes
Federal Rules of Civil Procedure Rule 8 ...................................................................................9, 10
Federal Rules of Civil Procedure Rule 9 ............................................................................... passim
Federal Rules of Civil Procedure Rule 12(b)(6) ..............................................................................7
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I. PRELIMINARY STATEMENT
Defendant Durham J. Monsma is an outlier in this massive fraudulent conveyance
litigation. Sued both as a shareholder1 and an officer and director. Mr. Monsma was neither an
officer nor director of the Tribune Company, but rather, only an officer and director of two of the
Tribune’s wholly owned subsidiaries.
Unlike the other officer and director defendants, Mr. Monsma was no longer either an
officer or director after Step One of the two-step leveraged buy-out. Instead, the assets of the
principal subsidiary, Southern Connecticut Newspapers, Inc. (“SCNI”) had been sold and Mr.
Monsma was no longer actively involved with either the subsidiary, much less its parent. Mr.
Monsma is not accused of receiving “special monetary incentives triggered by the LBO.” (Fifth
Amended Complaint ¶ 71) Nor are the two subsidiaries of which Mr. Monsma was previously
an officer and director insolvent, with the sole exception of the guarantee. One of the
subsidiaries is listed in the Bankruptcy Court schedules as having zero creditors whatsoever,
while the other is reported to have assets of over $244 Million and third party creditors of just
less than $125,000.
So why is Mr. Monsma being sued? You cannot tell from this Complaint. Instead of
specific allegations, Plaintiff improperly tries to hide the lack of factual assertions against Mr.
Monsma by grouping him with other subsidiary directors and officers in conclusions that are
conspicuously lacking in the specific facts required under Rule 9 of the Federal Rules of Civil
1 This motion seeks only to challenge the allegations against Mr. Monsma for breach of fiduciary duty and aiding and abetting breach of fiduciary duty in Counts Twelve and Thirteen. A separate omnibus motion including Mr. Monsma and over 5,200 shareholders for Count One for fraudulent transfer is filed concurrently but briefed separately, pursuant to the Court’s Order.
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Procedure. The vague and conclusionary allegations against Mr. Monsma do not even pass the
“possibility” test, much less the “plausibility” test.
Rule 9 makes clear that such a broadly barren pleading will not suffice when accusing
someone of fraud, including breaches of fiduciary duty. Having failed to come up with those
specific facts after no less than six tries, the claims of the Fifth Amended Complaint against Mr.
Monsma for breach of fiduciary duty in Counts Twelve and Thirteen should be dismissed with
prejudice. In applying Rule 9, federal courts have made clear that a plaintiff should not be
allowed to hide behind vague conclusions to drag a defendant through the mud of allegations of
supposed fraud.
II. STATEMENT OF FACTS
Mr. Monsma is mentioned directly or by reference in the following paragraphs of the
Fifth Amended Complaint: 5, 62, 70, 71, 119, 232-233, 240, 282-286, 329, 472-481.
In paragraph 62, the Plaintiff alleges that Mr. Monsma was “a director and officer of one
or more of the Subsidiary Guarantors at the time of the LBO,” and that, by virtue of that
position, “owed fiduciary duties to each Subsidiary Guarantor he or she served.” (¶ 70)
Conspicuously, however, in the chart set forth in paragraph 71, Mr. Monsma is the only
subsidiary director or officer who is not alleged to have received “special monetary incentives
triggered by the LBO.” Nowhere does the Fifth Amended Complaint ever explain why Mr.
Monsma is included in light of that glaring weakness.
In Exhibit B to the Fifth Amended Complaint, Mr. Monsma is identified as a director and
officer of SCNI and TMLS I, Inc., two wholly owned Tribune subsidiaries. Moreover, in
footnote 6, the Plaintiff conceded that Mr. Monsma was not a director as of December 20, 2007,
that is, before Step Two of the two-step LBO.
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The thrust of the claims against Mr. Monsma and the other subsidiary directors and
officers is that the subsidiary directors and officers approved guarantees of the LBO debt which
were “essential to the LBO.” (Fifth Amended Complaint, ¶¶ 282-286) Those paragraphs assert
that the Subsidiaries received none of the proceeds of the LBO and “in approving the Subsidiary
Guarantees, the Subsidiary D&O defendants did not consider the interest of the Subsidiary
Guarantors or their creditors” (¶ 285 (emphasis added)), and further assert – contrary to
Plaintiff’s own chart at ¶ 71 – that the Subsidiary D&O Defendants labored under “clear
conflicts of interests” because they stood to gain substantial “special monetary incentives” that
would be awarded if – but only if – the LBO was consummated. Nowhere does the Complaint
explain why Mr. Monsma was included given the Complaint’s own admission that in fact he
received no such monetary incentive.
The Fifth Amended Complaint is conspicuously silent on the specifics of the two
subsidiaries Mr. Monsma was involved with. The assets and liabilities schedules filed for those
two subsidiaries in the Tribune Bankruptcy show there were no creditors harmed by Mr.
Monsma’s alleged signing of the Subsidiary Guarantees.2 Rather, both of these companies were
at the time of the LBO inactive entities with substantial assets but virtually no liabilities.
In the case of TMLS I, Inc., its most recent Bankruptcy Schedule of assets and liabilities
show $7,819,570.00 in assets, consisting of inter-company receivables, and zero in liabilities.
(Case No. 08-13141-KJC, Docket #1417 at page 13)2. The SCNI schedule equally shows that
Mr. Monsma could reasonably sign the Guarantees. SCNI had assets of $232,770,677.93,
2 Copies of the most recent Schedules of Assets and Liabilities for each Subsidiary are attached for the Court’s convenience to the accompanying Declaration of Mark A. Neubauer filed concurrently. Legally required documents can be considered on a Motion to Dismiss. ATSI Commc’ns, Inc. v. Schaar Fund. Ltd., 493 F.3d 87, 98 (2d Cir. 2007).
Case 1:11-md-02296-RJS Document 5941 Filed 05/23/14 Page 6 of 14
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consisting of over $186 Million in inter-company accounts receivable. Of SCNI’s
$166,133,718.86 in liabilities, “inter-company claims” were $166,010,772.43. Of the remaining
liabilities which constitute less than 1% of the subsidiary’s estate, $55,089.45 was in “unclaimed
checks” and $65,881.68 was for salary continuation of the few remaining employees involved in
the closing down of SCNI, whose major assets, the Stamford Advocate and the Greenwich Time,
had already been sold to the Hearst Corporation. (See Case No. 08-13141-KJC, Docket #3573 at
pages 12 and 27-28).
Thus, none of the earmarks of fraud are presented in the allegations against Mr. Monsma.
In the Twelfth Count for Breach of Fiduciary Duty, Plaintiff groups Mr. Monsma in with
the other Subsidiary Director and Officer Defendants in a collection of conclusionary allegations
that are contrary to the Plaintiff’s own allegations earlier in his Fifth Amended Complaint,
claiming that Mr. Monsma engaged in supposed self-dealing to “obtain a personal gain.” (¶ 477).
Additionally, in Count Thirteen, Plaintiff again makes mere conclusionary assertions that Mr.
Monsma purportedly failed to exercise any business judgment on behalf of the two Subsidiary
Guarantors in supposedly being a “active and knowing participant in those breaches of fiduciary
duty” by signing the Subsidiary Guarantees. (¶ 486). Again, the allegations of monetary gain
directed at the other Subsidiary Directors and Officers are not directed at Mr. Monsma as shown
by the Fifth Amended Complaint’s own allegations.
III. COUNT TWELVE FOR BREACH OF FIDUCIARY DUTY AGAINST MR. MONSMA FAILS TO MEET THE STRICT STANDARDS OF RULE 9
The demanding requirements for Rule 9(b) apply to breach of fiduciary duty even though
fraud per se is not an element of the claim. Off. Comm. v. McConnell (In re Grumman Olson
Case 1:11-md-02296-RJS Document 5941 Filed 05/23/14 Page 7 of 14
5
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Indus., Inc.), 329 B.R. 411, 429 (Bankr. S.D.N.Y. 2005). As the Court noted in Granite
Partners, L.P. v. Bear, Stearns & Co., 17 F. Supp. 2d 275 (S.D.N.Y. 1998):
Federal Rules of Civil Procedure 9(b) requires that in all allegations of
fraud, the circumstances constituting the fraud must be stated with
particularity. The pleading must be sufficiently particular to serve the
three goals of Rule 9(b), which are (1) to provide a defendant with fair
notice of the claims against him; (2) to protect a defendant from harm to
his reputation or goodwill by unfounded allegations of fraud; and (3) to
reduce the number of strike suits.
17 F. Supp. 2d at 285-286 (citations omitted). The Court then went on to state:
The pleading must give notice to each opposing party of its alleged
misconduct. Thus, a claim may not rely upon blanket references to acts or
omissions by all the defendants, for each defendant named is entitled to be
apprised of the circumstances surrounding the fraudulent conduct with
which he is individually charged. This requirement facilitates the
preparation of an adequate defense while protecting a party’s reputation
from a groundless accusations [sic]. It also serves to prevent abuse of
process and gratuitous disruption of normal business activity.
17 F. Supp. 2d at 286 (citations omitted).
The Fifth Amended Complaint here unquestionably fails to meet the Rule’s standards for
specificity. By lumping Mr. Monsma in with a group where he clearly does not fit, Plaintiff
makes conclusory accusations of self-dealing and breach of fiduciary duty that are unsupported
even by his own allegations. (See ¶ 71). As the Court noted in Person Most Responsible v. Best
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Buy, Inc. (In re Musicland Holding Corp.), 398 B.R. 761, 774 (Bankr. S.D.N.Y. 2008), “group
pleading is generally forbidden because each defendant is entitled to know what he is accused of
doing.” The Court went on to quote Granite Partners, supra, saying:
Where multiple defendants are asked to respond to allegations of fraud,
the complaint should inform each defendant of the nature of his alleged
participation in the fraud.
398 B.R. at 774. As the Second Circuit stated in ATSI Communications, Inc. v. The Shaar Fund,
Ltd., 493 F.3d 87 (2d Cir. 2007): “Allegations that are conclusionary or unsupported by factual
assertions are insufficient.” 493 F.3d at 99. Yet, all that exists with regard to the allegations
against Mr. Monsma are conclusions unsupported by factual assertions. Indeed, the conclusions
are contrary to the factual assertions of the Fifth Amended Complaint.
The elements of a breach of fiduciary duty are: (i) the existence of a fiduciary duty;
(ii) a knowing breach of duty; and (iii) damages resulting therefrom. Johnson v. Nextel
Commc’ns, Inc., 660 F.3d 131, 138 (2d Cir. 2011) (emphasis added). Two questions remain in
the complaint against Mr. Monsma. To whom did he owe a fiduciary duty? And second, was
there a “knowing breach”? The Complaint is silent on those key elements except for mere
conclusions. However, the law is clear that “…(i)n a parent and wholly owned subsidiary
context, the directors of the subsidiary are obligated only to manage the affairs of the subsidiary
in the best interest of the parent and its shareholders.” Anadarko Petroleum Corp. v. Panhandle
Eastern Corp., 545 A.2d 1171, 1174 (Del. 1988).
The bankruptcy schedules of the two subsidiaries which Mr. Monsma served show there
is no risk of those subsidiaries not paying any of their own creditors. One had no creditors at all
and the other had, at best, a miniscule amount of outside creditors, half of which consisted of
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“unclaimed checks.” So, what harm did the beneficiaries of Mr. Monsma’s fiduciary duty as an
officer and director suffer? Again, the Complaint does not tell us – a defect which is fatal.
IV. PLAINTIFF FAILS TO PLEAD AROUND THE DELAWARE BUSINESS JUDGMENT RULE
“To survive a motion to dismiss under Rule 12(b)(6), the Trustee must ‘plead around the
business judgment rule.’” [citations omitted] Joseph v. Frank (In re Troll Commc’ns, 385 B.R.
110, 118 (Bankr. D. Del. 2008). The Fifth Amended Complaint is bereft of facts to take Mr.
Monsma’s activity outside of the business judgment rule. As the Court noted in Stanziale v.
Nachtomi (In re Tower Air, Inc.), 416 F.3d 229 (3rd Cir. 2005), “Overcoming the presumptions
of the business judgment rule on the merits is a near-Herculean task.” 416 F.3d at 238. Nor can
Plaintiff rely on his conclusions to circumvent that rule. In Off. Comm. v. Unsecured Creditors
etc., (In re Verastar, Inc.), 343 B.R. 444 (Bankr. S.D.N.Y. 2006), the Court held that in order to
overcome the business judgment rule and state a claim against corporate directors, the complaint
must set forth “specific, well-pleaded facts and cannot rest on generalities.” 343 B.R. at 459.
The Court went on to state:
These allegations are not saved by a conclusionary assertion that the
directors’ acts and omissions were not taken in good faith or involved
intentional misconduct or a knowing violation of the law….
Id. at 473, adding that the business judgment rule protects officers as well as directors.
Id. at 475. The Fifth Amended Complaint ignores the business judgment rule as applied
to Mr. Monsma.
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V. THE THIRTEENTH COUNT FOR AIDING AND ABETTING BREACH OF FIDUCIARY DUTY ALSO FAILS TO MEET THE STANDARDS OF RULE 9
In Off. Comm. v. Unsecured Creditors etc., (In re Verastar, Inc.), 343 B.R. 444 (Bankr.
S.D.N.Y. 2006), the Court set forth the standards for aiding and abetting breach of fiduciary duty
under Delaware law as follows:
Under Delaware law, to pursue a claim for aiding and abetting a breach of
fiduciary duty, a plaintiff properly must allege (i) the existence of a
fiduciary relationship; (ii) a breach of the fiduciary’s duty; and (iii) a
knowing participation in that breach by a defendant who is not a fiduciary;
and (iv) damages proximately caused by the concerted action of the
fiduciary and non-fiduciary.
343 B.R. at 482. The Court in Verastar went on to add:
Because a claim for aiding and abetting a breach of fiduciary duty can
only be sustained against a non-fiduciary, the Committee’s claim for
aiding and abetting breach of fiduciary duty is dismissed as to Verastar’s
directors and officers. Id.
Again, conspicuously lacking from the Fifth Amended Complaint are facts establishing
the conclusion that Mr. Monsma had a “knowing” participation in the breach. Indeed, as the
Fifth Amended Complaint itself admits, Mr. Monsma was no longer involved with the subsidiary
corporations by the time of the Step Two of the LBO. Nowhere does Plaintiff set forth facts
showing how Mr. Monsma had actual knowledge of any of the alleged facts relating to the
supposed breach of fiduciary duty by any of the Tribune’s officers and directors (as opposed to
the subsidiaries). As the Court observed in Kolbeck v. LIT America, Inc., 939 F. Supp. 240, 245
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(S.D.N.Y. 1996), “To the extent the underlying primary violations are based on fraud, the
allegations of aiding and abetting liability must meet particularity requirements of Fed. R. Civ. P.
9(b). Id.” Id. at 245. Like the breach of fiduciary duty claim, the aiding and abetting claim fails
against Mr. Monsma.
VI. THE FIFTH AMENDED COMPLAINT ALSO FAILS TO SATISFY THE ORDINARY PLEADING REQUIREMENTS OF RULE 8
In its Iqbal/Twombly analysis, the U.S. Supreme Court made clear that the Court should
not deem satisfactory allegations of a complaint that are mere “legal conclusions” or “threadbare
recitals of the elements of a cause of action, supported by mere conclusionary statements.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). See also, Bell Atl. Corp. v. Twombly, 550 U.S. 444
at 555 (2007). Rather, the plaintiff’s obligation is to provide grounds of his entitlement to belief
which requires “more than labels and conclusions, and a formulaic recitation of the elements of a
cause of action’s elements,” Twombly, 550 U.S. at 545, and “only a complaint that states a
plausible claim for relief survives a motion to dismiss.” Iqbal, 556 U.S. at 679.
Here, the claims against Mr. Monsma don’t even satisfy the “possible” test, much less the
“plausible” test. Mr. Monsma received no special bonus for signing the guarantees of the
subsidiary corporation. (Fifth Amended Complaint, ¶ 71). He was gone by the time of Step Two
of the LBO (Exhibit B to the Fifth Amended Complaint). The two subsidiary corporations of
which he was a director or officer were solvent and had no creditors who were harmed by his
signing the guarantees. Clearly, a parent corporation has the right to pledge the assets of its
wholly owned subsidiary where no creditors of that subsidiary are harmed. As the Supreme
Court warned, “A complaint cannot merely plead facts that are consistent with the defendant’s
liability but stop short of the line between possibility and plausibility of entitlement to relief.”
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Iqbal, 556 U.S. at 678. Therefore, even if the complaint arguably met Rule 9 standards, it clearly
fails under Rule 8 and should be dismissed as to Mr. Monsma.
VII. PLAINTIFF SHOULD NOT BE ALLOWED A SEVENTH ATTEMPT TO AMEND
The Supreme Court in Twombly warned the District Court should identify deficiency in a
complaint “at the point of minimum expenditure of time and money by the parties and the court.”
550 U.S. at 558 (quotation omitted). Here, the very undisputed facts establish there is no claim
against Mr. Monsma for breach of fiduciary duty or aiding and abetting breach of fiduciary duty.
The Litigation Trustee has already had the benefit of two years of its own pre-litigation
discovery plus the benefit of a $12 Million investigation by a Court-appointed bankruptcy
examiner with subpoena power, in addition to access to the Tribune’s records itself. Having had
multiple opportunities to re-plead, a seventh attempt would be futile.
Accordingly, Mr. Monsma respectfully requests this Court dismiss with prejudice Counts
Twelve and Thirteen of the Fifth Amended Complaint against him.
Respectfully submitted,
Dated: May 23, 2014 CARLTON FIELDS JORDEN BURT, LLP By: /s/ Mark A. Neubauer MARK A. NEUBAUER Mark A. Neubauer CARLTON FIELDS JORDEN BURT, LLP 2029 Century Park East, Suite 2000 Los Angeles, CA 90067-2901 Telephone: 310-651-2147 Facsimile: 424-653-5105 Email: [email protected]
Attorneys for Defendant Durham J. Monsma
Case 1:11-md-02296-RJS Document 5941 Filed 05/23/14 Page 13 of 14
30087042.6
CERTIFICATE OF SERVICE
I hereby certify that on May 23, 2014, the foregoing MEMORANDUM OF LAW IN
SUPPORT OF DEFENDANT DURHAM J. MONSMA’S MOTION TO DISMISS WITH
PREJUDICE COUNT TWELVE AND COUNT THIRTEEN OF THE FIFTH AMENDED
COMPLAINT (MOTION NO. 3) was electronically filed through the CM/ECF system for the
United States District Court, Southern District of New York and will be sent electronically to the
registered participants as identified on the Notice of Electronic Filing (NEF).
Dated: May 23, 2014 CARLTON FIELDS JORDEN BURT, LLP
By: /s/ Mark A. Neubauer MARK A. NEUBAUER Mark A. Neubauer CARLTON FIELDS JORDEN BURT, LLP 2029 Century Park East, Suite 2000 Los Angeles, CA 90067-2901 Telephone: 310-651-2147 Facsimile: 424-653-5105 Email: [email protected]
Attorneys for Defendant Durham J. Monsma
Case 1:11-md-02296-RJS Document 5941 Filed 05/23/14 Page 14 of 14
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ----------------------------------------------------------X
IN RE:
TRIBUNE COMPANY FRAUDULENT CONVEYANCE LITIGATION
::::::
Consolidated Multidistrict Action No. 11 MD 2296 (RJS); No. 12 MC 2296 (RJS)
MARC S. KIRSCHNER, as Litigation Trustee for the TRIBUNE LITIGATION TRUST,
Plaintiff,
v.
DENNIS J. FITZSIMONS, et al.
Defendants.
::::::::::::
Case No. 12-cv-02652 (RJS)
----------------------------------------------------------x
MOTION NO. 4: MEMORANDUM OF LAW IN SUPPORT OF CERTAIN DEFENDANTS’ JOINT MOTION TO DISMISS COUNTS FOURTEEN, FIFTEEN AND THIRTY-ONE OF THE LITIGATION
TRUSTEE’S FIFTH AMENDED COMPLAINT
Case 1:11-md-02296-RJS Document 5940 Filed 05/23/14 Page 1 of 32
TABLE OF CONTENTS
Page
i
I ..... . PRELIMINARY STATEMENT ....................................................................................... 1
II. .. FACTS ALLEGED IN THE COMPLAINT ..................................................................... 2
A. Tribune’s Shareholder Base And Board Composition........................................... 2
B. Tribune’s Independent Special Committee ............................................................ 3
C. EGI’s LBO Proposal And The Foundations’ And The Chandler Trusts’ Views Thereof ............................................................................................................................... 3
D. Tribune’s Approval Of The LBO Transactions And The Composition Of The Board And Shareholder Base Thereafter ........................................................................... 5
III. . CLAIMS ASSERTED IN THE COMPLAINT ................................................................. 6
A. Count Fourteen: Breach Of Fiduciary Duty ........................................................... 6
B. Count Fifteen: Aiding And Abetting Breach Of Fiduciary Duty .......................... 6
C. Count Thirty-One: Unjust Enrichment .................................................................. 8
IV. . APPLICABLE LEGAL STANDARD .............................................................................. 8
V. .. THE TRUSTEE FAILS TO ESTABLISH A FIDUCIARY DUTY OWED BY THE FOUNDATIONS OR THE CHANDLER TRUSTS, AND THUS FAILS TO ALLEGE A BREACH THEREOF (COUNT FOURTEEN) ................................................................. 8
A. The Trustee Fails To Allege Sufficiently That The Foundations Or The Chandler Trusts Exercised Actual Control Over The Board’s Decision To Approve The LBO Transactions ....................................................................................................................... 9
1. The Foundations’ And The Chandler Trusts’ Alleged Representation On The Board Does Not Establish Actual Domination And Control Of The Board. 11
2. The Foundations’ And The Chandler Trusts’ Alleged Interactions With The Special Committee And The Board Do Not Demonstrate Control .............. 12
3. The Chandler Trusts Voting Agreement Does Not Demonstrate Control 16
B. The Trustee Fails To Allege Facts Supporting A Rational Inference That The Foundations And The Chandler Trusts Agreed To Act In Concert With Respect To The LBO Transactions ............................................................................................................ 17
VI. . THE TRUSTEE FAILS TO ALLEGE THAT THE FOUNDATIONS OR THE CHANDLER TRUSTS KNOWINGLY PARTICIPATED IN A BREACH OF FIDUCIARY DUTY (COUNT FIFTEEN) ..................................................................... 19
Case 1:11-md-02296-RJS Document 5940 Filed 05/23/14 Page 2 of 32
TABLE OF CONTENTS (continued)
Page
ii
A. The Acts Alleged To Constitute Aiding And Abetting Have No Connection To The Alleged Breaches Of Fiduciary Duty ....................................................................... 20
B. The Trustee Fails To Allege Non-Conclusory Facts Demonstrating That The Foundations Or The Chandler Trusts Knowingly Participated In Any Breach Of Duty . 21
VII. THE TRUSTEE’S UNJUST ENRICHMENT CLAIM SHOULD BE DISMISSED (COUNT THIRTY-ONE) ................................................................................................ 23
VIII. THE COURT SHOULD GRANT THIS MOTION WITHOUT LEAVE TO AMEND . 25
IX. . CONCLUSION ................................................................................................................ 26
Case 1:11-md-02296-RJS Document 5940 Filed 05/23/14 Page 3 of 32
TABLE OF AUTHORITIES
Page(s)
iii
Cases Ashcroft v. Iqbal,
556 U.S. 662 (2009) ................................................................................................................... 8 Asousa P'ship v. Smithfield Foods, Inc. (In re Asousa P'ship),
2006 WL 1997426 (Bankr. E.D. Pa. June 15, 2006) ................................................................ 19 Bd. of Trustees of City of Ft. Lauderdale Gen. Emps.’ Ret. Sys. v. Mechel OAO,
811 F. Supp. 2d 853 (S.D.N.Y. 2011) ...................................................................................... 29 Beck & Panico Builders, Inc. v. Straitman,
2009 WL 5177160 (Del. Super. Nov. 23, 2009) ...................................................................... 27 Bell Atlantic Corp. v. Twombly,
550 U.S. 544 (2007) ................................................................................................................... 8 Burch v. Pioneer Credit Recovery, Inc.,
551 F.3d 122 (2d Cir. 2008) ..................................................................................................... 28 Citron v. Steego Corp.,
1988 WL 94738 (Del. Ch. Sept. 9, 1988) .......................................................................... passim City of Pontiac Policemen's and Firemen's Retirement System v. UBS AG,
___ F.3d ___, 2014 WL 1778041 (2d Cir. May 6, 2014) ........................................................ 29 Dawson v. Pittco Capital Partners, L.P.,
2012 WL 1564805 (Del.Ch. Apr. 30, 2012) ............................................................................. 20 Dubroff v. Wren Holdings, LLC,
Civ. A. No. 3940-VCN, 2009 WL 1478697 (Del. Ch. May 22, 2009) ................................ 9, 20 Foman v. Davis,
371 U.S. 178 (1962) ................................................................................................................. 28 Gilbert v. El Paso Co.,
490 A.2d 1050 (Del. Ch. 1984) ................................................................................................ 19 Globis Partners, L.P. v. Plumtree Software, Inc.,
2007 WL 4292024 (Del. Ch. Nov. 30, 2007) ..................................................................... 21, 22 In re IXC Communications, Inc. v. Cincinnati Bell, Inc.,
1999 WL 1009174 (Del. Ch. Oct. 27, 1999) ............................................................................ 18 In re Lear Corp. S’holder Litig.,
967 A.2d 640 (Del. Ch. 2008) .................................................................................................. 27 In re Lukens Inc. S’holder Litig.,
757 A.2d 720 (Del. Ch. 1999) .................................................................................................. 24 In re Morton’s Restaurant Group, Inc.,
74 A.3d 656 (Del. Ch. 2013) ............................................................................................. passim In re Novell, Inc. S’holder Litig.,
Civ. A. No. 6032-VCN, 2013 WL 322560 (Del. Ch. Jan. 3, 2013) .................................. passim In re PNB Holding Co. Shareholders Litig.,
2006 WL 2403999 (Del. Ch. Aug. 18, 2006) ..................................................................... 10, 11 In re Santa Fe Pacific Corp. S’holder Litig.,
669 A.2d 59 (Del. Super. Ct. 1995) .......................................................................................... 24 In re Sea-Land Corp. S’holders Litig.,
Civ. A. No. 8453, 1987 WL 11283 (Del. Ch. May 22, 1987) ............................................ 11, 12 In re Western Nat’l Corp. S’holders Litig.,
Civ. A. No. 15927, 2000 WL 710192 (Del. Ch. May 22, 2000) .............................................. 16
Case 1:11-md-02296-RJS Document 5940 Filed 05/23/14 Page 4 of 32
TABLE OF AUTHORITIES (continued)
Page(s)
iv
In re Wheelabrator Technologies Inc. Shareholders Litigation, C.A. No. 11495, 1992 WL 212595 (Del. Ch. Sept. 1, 1992) ............................................. 25, 26
Ivanhoe v. Newmont Mining Corp., 535 A.2d 1334 (Del. 1987) ................................................................................................. 17, 25
Lambrecht v. O'Neal, 3 A.3d 277 (Del. 2010) ............................................................................................................. 22
LaSalle Nat’l Bank v. Perelman, 82 F. Supp. 2d 279 (D. Del. 2000) ........................................................................................... 27
Malpiede v. Townson, 780 A.2d 1075 (Del. 2001) ................................................................................................. 21, 22
Official Comm. of Unsecured Creditors of Color Tile, Inc. v. Coopers & Lybrand, LLP, 322 F.3d 147 (2d Cir. 2003) ..................................................................................................... 29
Radnor Holdings Corp. v. Tennenbaum Capital Ptnrs, 353 B.R. 820 (Bankr. D. Del. 2006) ......................................................................................... 23
Saito v. McCall, No. Civ. A. 17132-NC, 2004 WL 3029876 (Del. Ch. Dec. 20, 2004) .................................... 22
Sirius XM S’holder Litig., 2013 WL 5411268 (Del. Ch. Sept. 27, 2013) ........................................................................... 14
St. Clair Shores Gen. Employees Retirement Sys. v. Eibeler, 745 F. Supp. 2d 303 (S.D.N.Y. 2010) ...................................................................................... 19
Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc., 171 F.3d 912 (3d Cir. 1999) ............................................................................................... 27, 28
Superior Vision Servs., Inc. v. Reliastar Life Ins. Co., Civ. A. No. 1688-N, 2006 WL 2521426 (Del. Ch. Apr. 25, 2006) ................................ 9, 10, 13
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) ......................................................................................................... 17
Winshall v. Viacom Intern., Inc., 76 A.3d 808 (Del. 2013) ........................................................................................................... 10
Case 1:11-md-02296-RJS Document 5940 Filed 05/23/14 Page 5 of 32
1
Defendants the Robert R. McCormick Foundation (the “McCormick Foundation”), the
Cantigny Foundation (together with the McCormick Foundation, the “Foundations”), and
Chandler Trust No. 1 and Chandler Trust No. 2 (together, the “Chandler Trusts”), through their
respective undersigned attorneys, respectfully submit this memorandum in support of their
motion to dismiss Counts Fourteen, Fifteen and Thirty-One of the Fifth Amended Complaint (the
“Complaint”) filed by Plaintiff Marc S. Kirschner, as Trustee of the Tribune Litigation Trust (the
“Trustee”), alleging breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty,
and unjust enrichment.1
I. PRELIMINARY STATEMENT
The Trustee’s claims arise from the tender offer and subsequent cash-out merger
transaction (collectively, the “LBO Transactions”) undertaken by Tribune Company (“Tribune”)
in 2007. After Tribune filed for bankruptcy protection, the Trustee’s predecessor, the Official
Committee of Unsecured Creditors appointed in Tribune’s bankruptcy case (the “Committee”),
sued Tribune’s former shareholders, including the Foundations and the Chandler Trusts, to avoid
the payments they received in the LBO Transactions as intentional fraudulent transfers. The
Committee also sued the Foundations and the Chandler Trusts for breach of fiduciary duty
(Count Fourteen), aiding and abetting breaches of fiduciary duty (Count Fifteen), and unjust
enrichment (Count Thirty-One), the three claims that are the subject of this motion to dismiss.
Each of these counts fail.
Count Fourteen (Breach of Fiduciary Duty): The Complaint is devoid of well-pleaded
facts establishing that the Foundations or the Chandler Trusts, acting independently or in concert 1 The Foundations and the Chandler Trusts are independent entities with distinct legal and
factual defenses. They join in this motion conscious of, and solely to lessen, the enormous burden this Court will confront in addressing the voluminous motions anticipated in Phase 2 of this multidistrict litigation. No adverse inference should be drawn from their agreement to file jointly rather than separately.
Case 1:11-md-02296-RJS Document 5940 Filed 05/23/14 Page 6 of 32
2
as the Trustee alleges, owned a majority of Tribune’s stock or exercised actual control over the
Tribune board of directors’ (the “Board”) decision to approve the LBO Transactions.
Consequently, the Complaint fails to allege sufficiently that the Foundations or the Chandler
Trusts owed, let alone breached, a fiduciary duty to Tribune, its creditors or other stakeholders.
Count Fifteen (Aiding and Abetting Breach of Fiduciary Duty): Even if the Trustee had
plausibly alleged that Tribune’s former directors and officers (the “Director and Officer
Defendants”) breached a fiduciary duty in connection with the LBO Transactions—which he has
not—the Complaint fails to allege that the Foundations or the Chandler Trusts “knowingly
participated” in such a breach, which is required to state a claim for aiding and abetting.
Count Thirty-One (Unjust Enrichment): This claim seeks to avoid “settlement payments”
made in connection with a leveraged buy-out and is thus preempted by section 546(e) of the
Bankruptcy Code. Furthermore, the Trustee fails to allege the lack of an adequate remedy at
law, or that the Foundations or the Chandler Trusts engaged in any tortious or otherwise
wrongful conduct, which are required to state a claim for unjust enrichment.
II. FACTS ALLEGED IN THE COMPLAINT
A. Tribune’s Shareholder Base And Board Composition
The events underlying the Trustee’s claims began in late 2005 when, in response to a
secular decline in the newspaper publishing industry, Tribune initiated a strategic review of its
business. (Compl. ¶ 126.) At that time, Tribune’s shares were publicly held by “tens of
thousands” of shareholders. (Compl. ¶ 94.) The Foundations and the Chandler Trusts held,
respectively, 13% and 20% of Tribune’s outstanding shares. (Compl. ¶¶ 491-492.)
Tribune’s Board consisted of eleven members. (Compl. ¶¶ 27-37.) Three members—
Jeffrey Chandler, Roger Goodan, and William Stinehart Jr. (collectively, the “Chandler
Representatives”)—were appointed to the Board by the Chandler Trusts. (Compl. ¶¶ 35-37.)
Case 1:11-md-02296-RJS Document 5940 Filed 05/23/14 Page 7 of 32
3
Another member of the Board was Tribune’s Chief Executive Officer, Dennis J. FitzSimons,
who also served as the Chairman of the Foundations. (Compl. ¶¶ 27, 73.) The other seven
members of Tribune’s Board had no affiliation with the Foundations, the Chandler Trusts or
Tribune’s management. (Compl. ¶¶ 28-34.)
B. Tribune’s Independent Special Committee
In June 2006, the Chandler Trusts suggested that the Board “promptly appoint a
committee of independent directors” to explore Tribune’s strategic options. (Compl. ¶ 130.) In
September 2006, the Board appointed a special committee of directors (the “Special
Committee”) “to oversee the Company’s exploration of alternatives.” (Compl. ¶¶ 9, 136.) No
representative of the Foundations or the Chandler Trusts was a member of the Special
Committee, and no member of the Special Committee was affiliated with Tribune’s management
team. (Compl. ¶¶ 28-34.)
In January 2007, the Special Committee asked the Foundations to comment on Tribune’s
strategic options. (Compl. ¶ 144.) From January to March 2007, the Special Committee “sought
the [Foundations’ and the Chandler Trusts’] views on potential strategic alternatives,” including
the LBO Transactions once they had been proposed. (Id.) The Foundations and Chandler Trusts
also allegedly discussed among themselves the “direction the Tribune should go.” (Compl. ¶
143.)
C. EGI’s LBO Proposal And The Foundations’ And The Chandler Trusts’ Views Thereof
In February 2007, Equity Group Investments, L.L.C. (“EGI”), an entity associated with
Sam Zell, proposed a merger transaction whereby EGI would acquire all of Tribune’s
outstanding common stock for $30 per share and Tribune would be the surviving corporation.
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4
(Compl. ¶ 146.) A newly-formed employee stock ownership plan (“ESOP”) would thereafter
acquire the majority of Tribune’s outstanding common stock. (Id.)
The Foundations and the Chandler Trusts each “express[ed] concerns” about EGI’s initial
proposal. (Compl. ¶ 149.) The Foundations were concerned with the price being offered to
shareholders, the time it would take to close the transaction (between 9 and 12 months), and,
given that delay and the need for approval from the Federal Communications Commission, the
risk that the deal would not actually close. (Id.) The Chandler Trusts “echoed th[o]se concerns”
along with the risk that the value of Tribune stock would decline during the time it would take to
close the transaction. (Id.) EGI requested that the Foundations and the Chandler Trusts enter
into voting agreements committing to support the proposal. (Id.) Each refused to do so. (Id.)
The Special Committee later requested that EGI’s proposal include a recapitalization to
provide an upfront distribution to Tribune’s shareholders. (Compl. ¶ 150.) EGI submitted a
revised proposal which contemplated that, prior to a merger, Tribune would effect a cash tender
offer for approximately half of its shares at $33 per share. (Id.) During subsequent negotiations,
Tribune sought to increase the amount to be received by Tribune’s shareholders pursuant to the
LBO Transactions. (Compl. ¶ 151.) As these negotiations proceeded, the Special Committee
and Tribune “provided . . . updates” to the Foundations and the Chandler Trusts. (Compl. ¶ 151.)
EGI ultimately agreed to pay Tribune’s shareholders $34 per share. (Compl. ¶ 203.) The
Chandler Trusts then entered into agreements with Tribune to, among other things, cause all of
their shares to be voted in favor of the LBO Transactions and register the Chandler Trusts’ stock
not sold in the tender offer so that their remaining stock could be sold immediately after the close
of the tender offer. (Compl. ¶ 204.) The Foundations are not alleged to have (and did not) enter
into any such agreement. (Id.)
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5
D. Tribune’s Approval Of The LBO Transactions And The Composition Of The Board And Shareholder Base Thereafter
On April 1, 2007, the Special Committee unanimously recommended that Tribune’s full
Board approve the LBO Transactions. (Compl. ¶ 211.) The Board, with the exception of the
Chandler Representatives, who abstained from voting and “remained silent” with respect to the
Board’s consideration of the LBO Transactions,2 and Dudley S. Taft, who was absent, then voted
unanimously to approve the LBO Transactions. (Compl. ¶¶ 211, 281.)
The LBO Transactions consisted of two separate transactions: a tender offer for 50% of
Tribune’s shares and a cash-out merger. (Compl. ¶¶ 211, 287, 353.) The transactions were
structured so that the cash-out merger would only occur if a number of material preconditions
were met, including but not limited to shareholder approval and the issuance of a solvency
opinion confirming that Tribune would be “balance-sheet solvent, adequately capitalized, and
able to pay its debts as they came due following [the merger].” (Compl. ¶¶ 17, 242, 352.)
On June 4, 2007, Tribune consummated the tender offer for approximately half of its
shares. (Compl. ¶ 287.) The Foundations participated in the tender offer and were left owning
only 10% of Tribune’s shares thereafter. (Compl. ¶ 492.) The Chandler Representatives
resigned from the Board on June 4, 2007, the date of the tender offer. (Compl. ¶¶ 35-37.) The
Chandler Trusts tendered the majority of their shares in the tender offer and then sold their
remaining shares in a private transaction three days later. (Compl. ¶ 72.) When the remaining
shareholders voted on the merger on August 21, 2007, 97% of the voting shares were voted to
approve it. (Compl. ¶ 352.)
2 As explained in section V.B of the Memorandum of Law in Support of the Chandler
Representatives’ Motion to Dismiss (Motion No. 5 filed concurrently herewith) (the “Chandler Representatives’ Motion”), their abstention from the vote on the LBO Transactions was due to fully-disclosed conflicts of interest.
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6
On December 20, 2007, the merger was consummated, whereby Tribune acquired the
remaining outstanding shares of its common stock and became a private company, wholly owned
by the ESOP. (Compl. ¶¶ 353-355.) The Chandler Trusts did not participate in the merger,
having sold all of their Tribune stock over six months earlier. Tribune filed for bankruptcy
protection on December 8, 2008, and this litigation ensued. (Compl. ¶ 359.)
III. CLAIMS ASSERTED IN THE COMPLAINT
A. Count Fourteen: Breach Of Fiduciary Duty
In Count Fourteen, the Trustee asserts that the Foundations and the Chandler Trusts owed
fiduciary duties to Tribune and its stakeholders because they each “functioned as,” and “for all
practical purposes” were, “controlling shareholders” with respect to the LBO Transactions.
(Compl. ¶¶ 491-493.) The Foundations and the Chandler Trusts allegedly controlled Tribune’s
Board because they:
(i) each had representatives on the Board (Compl. ¶¶ 491-492);
(ii) each “threatened” the Board with unspecified “adverse consequences” if the
Board failed to comport with their demands, which led the Board to form the
Special Committee, pursue strategic transactions, modify the LBO structure
proposed by Zell and ultimately enter into the LBO Transactions (id.);
(iii) each participated in the Special Committee’s review of potential transactions
(Compl. ¶¶ 144, 492); and
(iv) in the case of the Chandler Trusts, entered into a voting agreement to support the
LBO Transactions (Compl. ¶ 491).
B. Count Fifteen: Aiding And Abetting Breach Of Fiduciary Duty
In Count Fifteen, the Trustee asserts that, to the extent the Foundations and the Chandler
Trusts were not controlling shareholders with respect to the LBO Transactions, they are liable for
aiding and abetting the Director and Officer Defendants’ breaches of fiduciary duty. (Compl. ¶
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7
506.) The Trustee alleges that the Director and Officer Defendants breached their fiduciary
duties by:
(i) acting in their own interests by approving and/or recommending the LBO
Transactions and permitting and/or facilitating the tender offer and merger to
close even though they knew that it would render Tribune insolvent;
(ii) succumbing to financial incentives and catering to external influences in
facilitating and advocating for the LBO Transactions;
(iii) transferring virtually all of Tribune’s value to Tribune’s shareholders and/or the
LBO lenders, by causing the subsidiary guarantors to enter into the subsidiary
guarantees;
(iv) seeking to ensure that the LBO lenders would be paid in advance of Tribune’s and
its subsidiaries’ existing creditors;
(v) relying on the advice of outside advisors that they knew was not credible;
(vi) preparing and/or relying on patently unreasonable projections notwithstanding
their knowledge that (a) those projections were proffered to the Board by officers
with a financial interest in the consummation of the LBO Transactions, (b)
Tribune would have to vastly outperform its own performance in order to meet
those projections, and (c) Tribune could not achieve those projections;
(vii) relying on solvency opinions which they knew deviated from legal and
recognized industry standards and were inaccurate; and
(viii) failing, at every stage of the LBO Transactions, to adequately analyze the impact
of the transactions on Tribune.
(Compl. ¶¶ 395, 406.)
The Trustee alleges that the Foundations and the Chandler Trusts aided and abetted the
foregoing breaches by:
(i) “steering” the Director and Officer Defendants toward “a corporate strategy”
aimed at “enhancing the interests” of the Foundations and the Chandler Trusts;
(ii) “interposing themselves” in the Board’s decision-making process and “exerting
undue influence” over the Director and Officer Defendants in connection with the
Case 1:11-md-02296-RJS Document 5940 Filed 05/23/14 Page 12 of 32
8
LBO Transactions by, among other things, “threatening” the Board if it failed to
pursue “their desired course of action”; and
(iii) “ensuring” the consummation of a transaction that the Foundations and the
Chandler Trusts knew was not in the interests of Tribune.
(Compl. ¶ 507.)
C. Count Thirty-One: Unjust Enrichment
In Count Thirty-One, the Trustee alleges that, because of their “wrongful acts and
omissions,” and their “wrongful receipt” of payments and distributions when Tribune was
insolvent or became insolvent as a result of the distributions, the Foundations and the Chandler
Trusts have “unjustly retained” such distributions and “are . . . liable to Tribune for unjust
enrichment.” (Compl. ¶¶ 608-612.)
IV. APPLICABLE LEGAL STANDARD
The claims addressed in this motion to dismiss are subject to the standards of Rule
12(b)(6), as set forth in section I.B of the Memorandum of Law in Support of the Shareholder
Defendants’ Motion to Dismiss Count One of the Complaint (filed concurrently herewith) and
hereby incorporated by reference. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007);
Ashcroft v. Iqbal, 556 U.S. 662 (2009).
V. THE TRUSTEE FAILS TO ESTABLISH A FIDUCIARY DUTY OWED BY THE FOUNDATIONS OR THE CHANDLER TRUSTS, AND THUS FAILS TO ALLEGE A
BREACH THEREOF (COUNT FOURTEEN)
Count Fourteen of the Complaint must be dismissed because the Trustee fails to allege
facts sufficient to support a rational inference that the Foundations or the Chandler Trusts owed a
fiduciary duty to Tribune or its stakeholders. A shareholder may be considered a fiduciary only
if: (1) it is a majority shareholder owning more than 50% of the voting power of a corporation;
or (2) it exercises actual control over the board of the corporation. In re Morton’s Rest. Group,
Inc. S’holders Litig., 74 A.3d 656, 664 (Del. Ch. 2013); Starr Int’l Co. v. Fed. Reserve Bank of
Case 1:11-md-02296-RJS Document 5940 Filed 05/23/14 Page 13 of 32
9
N.Y., 906 F. Supp. 2d 202, 216 (S.D.N.Y. 2012); Superior Vision Servs., Inc. v. Reliastar Life
Ins. Co., Civ. A. No. 1688-N, 2006 WL 2521426, at *4 (Del. Ch. Apr. 25, 2006); Dubroff v.
Wren Holdings, LLC, Civ. A. No. 3940-VCN, 2009 WL 1478697, at *3 (Del. Ch. May 22,
2009).
The Trustee admits that the Foundations and the Chandler Trusts, whether independently
or together, did not ever own or control more than 33% of Tribune’s outstanding shares at any
relevant time. (Compl. ¶¶ 75, 491-492.) The Trustee instead alleges that, “for all practical
purposes,” the Foundations and the Chandler Trusts each “functioned as” controlling
shareholders because of their purported influence over the Board. (Compl. ¶¶ 491-492.)
Because the Trustee does not adequately plead such actual control, however, Count Fourteen
should be dismissed.
A. The Trustee Fails To Allege Sufficiently That The Foundations Or The Chandler Trusts Exercised Actual Control Over The Board’s Decision To Approve The LBO Transactions
To allege sufficiently that a minority shareholder exercised actual control over an
extraordinary corporate transaction like those comprising the LBO Transactions, “the Complaint
must contain well-pled facts showing that the minority stockholder exercised actual domination
and control over . . . [the] directors.” In re Morton’s, 74 A.3d at 664-65 (granting motion to
dismiss because “plaintiffs have fallen far short of their burden to plead facts supporting a
reasonable inference that [a minority shareholder] was a controlling stockholder”) (emphasis
added and internal quotation marks omitted);3 Starr Int’l, 906 F. Supp.2d at 223-24 (granting
motion to dismiss because there was no allegation that a majority of directors was “beholden” to 3 Notably, the Twombly/Iqbal plausibility standard is more rigorous than Delaware’s
counterpart pleading standard. Winshall v. Viacom Intern., Inc., 76 A.3d 808, 813 n.12 (Del. 2013). Under Delaware case law, a complaint will survive a motion to dismiss if it states a cognizable claim under any “reasonably conceivable” set of circumstances inferable from the alleged facts. Id.
Case 1:11-md-02296-RJS Document 5940 Filed 05/23/14 Page 14 of 32
10
party and thus “the Amended Complaint falls well short of alleging the exercise of actual
control”). The minority shareholder’s power must be “so potent that independent directors . . .
cannot freely exercise their judgment, fearing retribution” from the shareholder. In re PNB
Holding Co. S’holders Litig., No. Civ. A. 28-N, 2006 WL 2403999, at *9 (Del. Ch. Aug. 18,
2006) (internal citations omitted and emphasis added); see also Superior Vision Servs., 2006 WL
2521426, at *4 n.38 (“[Q]uestions of control by a significant shareholder should be assessed at
the board level in terms of whether the board’s capacity to exercise its judgment independently
has been impaired.”); Citron v. Steego Corp., Civ. A. No. 10171, 1988 WL 94738, at *6 (Del.
Ch. Sept. 9, 1988) (same). Put another way, a shareholder must have “such formidable voting
and managerial power that [it], as a practical matter, [is] no differently situated than if [it] had
majority voting control.” In re PNB Holding Co., 2006 WL 2403999, at *9. Bare conclusory
allegations that a minority shareholder possessed control are insufficient. In re Morton’s, 74
A.3d at 664. Furthermore, “[t]he potential ability to exercise control does not suffice, as it is not
equivalent to the actual exercise of that ability.” Starr Int’l, 906 F. Supp.2d at 216 (citing In re
Sea-Land Corp. S’holders Litig., Civ. A. No. 8453, 1987 WL 11283, at *5 (Del. Ch. May 22,
1987)) (emphasis in original). This “actual control” requirement “is not an easy one to satisfy
and stockholders with very potent clout have been deemed, in thoughtful decisions, to fall short
of the mark.” In re PNB Holding Co., 2006 WL 2403999, at *9.
The Trustee alleges that the Foundations and the Chandler Trusts: (i) had representatives
on Tribune’s Board (Compl. ¶¶ 491-492); (ii) threatened the Board with unspecified “adverse
consequences” if the Board failed to comport with their demands (id.); (iii) participated in the
Special Committee’s review of potential transactions (Compl. ¶¶ 144, 492); and (iv) in the case
of the Chandler Trusts, entered into a voting agreement with respect to the LBO Transactions
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(Compl. ¶ 491). These allegations are woefully insufficient to establish their “actual domination
and control” over the Board, In re Morton’s, 74 A.3d at 664-65, such that the Foundations or the
Chandler Trusts “deprive[d] the [Board] of the[ir] independent judgment” with respect to their
decision to approve the LBO Transactions, Citron, 1988 WL 94738, at *6.
1. The Foundations’ And The Chandler Trusts’ Alleged Representation On The Board Does Not Establish Actual Domination And Control Of The Board
The Trustee fails to allege facts to support an inference that the Foundations or the
Chandler Trusts controlled the Board through their Board representation. The Trustee alleges
that the Foundations were actively involved in Tribune’s management through Dennis
FitzSimons, the Chief Executive Officer of Tribune and the Chairman of the Board. (Compl.
¶¶ 73, 492.) But the trustee fails to identify any act by FitzSimons that was undertaken for the
benefit of, or at the behest of, the Foundations. Significantly, FitzSimons was only one of the 11
directors comprising the Board, and all the other directors were completely independent of the
Foundations and/or Tribune’s management. (Compl. ¶¶ 28-37.) Mr. FitzSimons also was not a
member of the Special Committee of independent directors appointed to explore strategic
alternatives for Tribune. (Compl. ¶¶ 9, 27-37.)
The Chandler Trusts had only three representatives on Tribune’s eleven-member Board.
(Compl. ¶¶ 35-37.) All the other directors were completely independent of the Chandler Trusts.
(Compl. ¶¶ 27-35.) And not one of the Chandler Representatives was either an officer of
Tribune or a member of the Special Committee. (Compl. ¶¶ 136, 138.)
That the Foundations’ chairman and the three Chandler Representatives sat on the eleven-
member Board, without more, cannot establish actual domination of the Board. In re Sea-Land
Corp., 1987 WL 11283, at *5 (“Even if [the alleged controlling shareholder] had caused its
nominees to be elected to the . . . board . . . that fact, without more, does not establish actual
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domination or control.”); Superior Vision Servs., 2006 WL 2521426, at *4 n.37 (same
proposition); see also In re Morton’s, 74 A.3d at 662, 664-65 (holding that there is “no authority
under Delaware law [for the proposition] that a stockholder with only a 27.7% block and whose
employees comprise only two out of ten board seats creates a rational inference that it was a
controlling shareholder”); Citron, 1988 WL 94738, at *6 (stockholder’s designation of two
members of nine-member board fell “far short” of control).
Delaware law is clear that a shareholder does not become a fiduciary merely because the
shareholder is affiliated with a director. In other words, there is no automatic imputation of the
director’s fiduciary obligations to the shareholder:
If plaintiffs’ argument were the law, then whenever a director is affiliated with a significant stockholder, that stockholder automatically would acquire the fiduciary obligations of the director by reason of that affiliation alone. The notion that a stockholder could become a fiduciary by attribution (analogous to the result under the tort law doctrine of respondeat superior) would work an unprecedented, revolutionary change in our law, and would give investors in a corporation reason for second thoughts about seeking representation on the corporation’s board of directors.
Emerson Radio Corp. v. Int’l Jensen Inc., Civ. A. Nos. 15130, 14992, 1996 WL 483086, at *20
n.18 (Del. Ch. Aug. 20, 1996).
Thus, either individually or collectively, the Foundations’ and the Chandler Trusts’
minority interest in Tribune’s stock and minority representation on Tribune’s Board did not even
rise to the potential for “actual domination and control” over the Board. In re Morton’s, 74 A.3d
at 664-65; Starr Int’l, 906 F. Supp.2d at 216 (potential control does not suffice).
2. The Foundations’ And The Chandler Trusts’ Alleged Interactions With The Special Committee And The Board Do Not Demonstrate Control
The Trustee fails to establish control by the Foundations or the Chandler Trusts through
their alleged threats, demands and discussions with the Board and the Special Committee.
Significantly, the Trustee does not specify any of the “adverse consequences” “threatened” by
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the Foundations and the Chandler Trusts, or the “demands” either of them made that led to
approval of the LBO Transactions. (Compl. ¶¶ 141-142, 144, 491-492.) Such conclusory and
threadbare recitals of “threats” and “demands” are insufficient to survive a motion to dismiss. In
re Sirius XM S’holder Litig., Civ. A. No. 7800-CS, 2013 WL 5411268, at *4 (Del. Ch. Sept. 27,
2013) (holding that conclusory allegations unsupported by specific facts need not be accepted as
true); In re Novell, Inc. S’holder Litig., Civ. A. No. 6032-VCN, 2013 WL 322560, at *12 (Del.
Ch. Jan. 3, 2013) (“The Plaintiffs’ speculation that the Board feared reprisals if [the alleged
controlling shareholder’s] notions were not implemented is not supported with factual
allegations. There are no specific allegations that make it reasonably conceivable that control by
(or even fear of) [the shareholder] resulted in any breach of fiduciary duty.”).
Instead of alleging any facts demonstrating the purported threats and demands by the
Foundations and the Chandler Trusts, the Trustee blatantly tries to back into their existence by
alleging the following “responses” to the unidentified threats and demands: (i) the Board formed
the Special Committee; (ii) the Board actively pursued strategic transactions; (iii) the Board
modified the initial LBO structure proposed by Zell; and (iv) Tribune ultimately entered into the
LBO Transactions. (Compl. ¶¶ 491-492.) None of these alleged “responses” demonstrates that
the Foundations or the Chandler Trusts threatened, much less dominated and controlled, the
Special Committee or the Board.
Neither Tribune’s formation of the Special Committee nor its active pursuit of strategic
transactions even suggests, let alone establishes, that the Foundations or the Chandler Trusts
controlled the Board’s decision to approve the LBO Transactions. As an initial matter, the
Trustee does not allege that the Foundations had anything to do with the Board’s creation of the
Special Committee. (Compl. ¶¶ 128-134.) The Trustee acknowledges that the Foundations did
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not become involved in Tribune’s review of strategic alternatives until “the beginning of 2007”
(Compl. ¶¶ 139-142), months after the Special Committee was formed in September 2006
(Compl. ¶¶ 9, 136). Furthermore, the Special Committee was formed “to explore strategic
alternatives,” not to enter into the LBO Transactions, which were not proposed until five months
after the Special Committee was formed. (Compl. ¶¶ 9, 136, 146.)
Notably, the Trustee does not even allege facts demonstrating that the Foundations or the
Chandler Trusts asked, let alone demanded or otherwise caused, the Board to approve the LBO
Transactions.4 The Trustee also does not allege that the Board ever opposed any action
purportedly demanded by the Foundations or the Chandler Trusts but took that action anyway
because of their domination and control. See Starr, 906 F. Supp.2d at 225 (holding that the
“conclusory” allegation that a party “‘unilateral[ly]’ replaced AIG’s CEO” was “insufficient to
show actual control” because the plaintiff “does not, notably, allege that AIG’s Board (or even
any member of it) opposed replacing [the] CEO”).
The Trustee’s conclusory allegation that the Board modified the initial LBO structure in
response to alleged threats and demands by the Foundations and the Chandler Trusts also fails to
demonstrate control. That the Special Committee might have “solicit[ed] the views of the
Chandler Trusts and the Foundations with respect to Zell’s proposal,” and that they might have
offered their “views,” is of no consequence. (Compl. ¶ 148) (emphasis added).5 The Delaware
Chancery Court in In re Western National Corp. Shareholders Litigation, Civ. A. No. 15927,
2000 WL 710192 (Del. Ch. May 22, 2000), explained that “[t]he mere fact that [a company]
solicited the view of a [large] shareholder with respect to an extraordinary business transaction,” 4 The Trustee may have avoided making such allegations because he knew they would be
untrue.
5 The Trustee does not even allege how or why the Foundations “directly participat[ed] in the Special Committee’s review of potential transactions.” (Compl. ¶ 492.)
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and the shareholder expressed its “view,” “does not indicate a relationship of domination and
control”:
The fact that a large shareholder [49.7 percent], the putative parent, takes steps to “veto” a business combination between the putative subsidiary corporation and a proposed merger partner, is not particularly probative of whether the large shareholder exercises actual control over the business and affairs of the corporation. Section 141(a) of Delaware’s corporation statute provides that the business and affairs of a Delaware corporation fall under the direction of its board of directors. Similarly, the standard for determining whether a large, though non-majority shareholder, exercises control over the corporation requires a judicial finding of actual control over the business and affairs of the corporation. Notwithstanding the explicit statutory grant of authority over the business and affairs of a Delaware corporation to its board of directors, certain events in the life of the corporation, such as a merger, require the affirmative participation of the corporation’s shareholders. The shareholders’ right to voice their view as to the advisability of a proposed merger, however, does not indicate that they exercise actual control over the corporation’s business and affairs.
Id. at *8 (emphasis in original); see also Citron, 1988 WL 94738, at *6 (large (48.8%)
shareholder’s alleged expression of its views with respect to a transaction falls “far short of
establishing the control that gives rise to a fiduciary duty”).
Moreover, the Trustee’s general allegation that the Foundations and the Chandler Trusts
wished to “advance their [own] objectives” (Compl. ¶¶ 491-492) “is not a sufficient pleading of
domination or control under Delaware law.” In re Novell, 2013 WL 322560, at *11. “[I]t is well
established law that nothing precludes [a large but non-controlling] stockholder from acting in its
own self-interest.” Ivanhoe v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987) (citing
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 958 (Del. 1985)). And, even if the Board
had taken some action suggested by the Foundations or the Chandler Trusts, that would still fail
to demonstrate their actual control and domination over the Board. In re Novell, 2013 WL
322560, at *12 (“[M]erely making such a suggestion and obtaining the desired response hardly is
sufficient evidence of domination or undue influence.”).
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Thus, even assuming the truth of the sparse factual allegations regarding the Foundations’
and the Chandler Trusts’ interactions with the Special Committee and the Board, those
allegations fail to demonstrate domination and control over the Board with respect to its approval
of the LBO Transactions.
3. The Chandler Trusts Voting Agreement Does Not Demonstrate Control
That the Chandler Trusts entered into a voting agreement does not demonstrate their
actual domination and control over the Board’s decision to approve the LBO. Notably, the
Chandler Trusts’ voting agreement bound only them. (Compl. ¶ 204.) The Trustee does not
allege that it required the Foundations or any other shareholder to support the LBO Transactions.
Furthermore, the Trustee alleges that the voting agreement “virtually guaranteed
shareholder approval for the LBO [Transactions].” (Compl. ¶ 205) (emphasis added). The
Trustee thus admits that it did not, in fact, control the outcome of the vote. See In re IXC
Communic’ns, Inc. v. Cincinnati Bell, Inc., C.A. No. 17324, 1999 WL 1009174, at *8 (Del. Ch.
Oct. 27, 1999) (rejecting plaintiffs’ allegation that voting agreement involving 40% of the
outstanding shares “almost completely lock[s] up the vote-thus giving shareholders scant power
to defeat the Merger,” on the basis that “[a]lmost locked up’ does not mean ‘locked up,” because
the majority of shareholders “may still freely vote for or against the merger”) (emphasis in
original); Emerson Radio Corp., 1996 WL 483086, at *20 (that voting agreement “‘lock[ed] up’
26%” of corporation’s shares “is not a circumstance for which [the alleged controlling
shareholder] can be charged with legal responsibility, as a fiduciary or otherwise,” because “74%
of [the corporation’s] shares remain free to reject the . . . proposal if they choose”). Thus, the
Chandler Trusts’ voting agreement, governing far less than a majority of Tribune’s stock
(specifically, 20%), fails to demonstrate the Chandler Trusts’ alleged control over the Board.
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In fact, the Complaint demonstrates the Chandler Trusts’ lack of control by
acknowledging that in May 2006, just before the Special Committee was established, the Board
approved a $1.8 billion leveraged recapitalization transaction over the opposition of the Chandler
Trusts and notwithstanding the Chandler Representatives’ “refus[al] to vote in favor of the
transaction.” (Compl. ¶¶ 127, 206-207); see Asousa P’ship v. Smithfield Foods, Inc. (In re
Asousa P’ship), Adv. No. 04-1012, 2006 WL 1997426, at *13 (Bankr. E.D. Pa. June 15, 2006)
(“That [alleged controlling shareholder] could not exercise control . . . is demonstrated by the
Board’s decision to issue more stock . . . against the votes of [the shareholder’s representatives
on the board].”); Gilbert v. El Paso Co., 490 A.2d 1050, 1056 (Del. Ch. 1984) (“Burlington’s
lack of actual control is illustrated by its frustration in attempting to block El Paso’s attempt to
sell certain of its assets.”).
B. The Trustee Fails To Allege Facts Supporting A Rational Inference That The Foundations And The Chandler Trusts Agreed To Act In Concert With Respect To The LBO Transactions
The Trustee alleges “[u]pon information and belief” that the Foundations and the
Chandler Trusts agreed to act in concert “at all relevant times.” (Compl. ¶ 143.) “Delaware law
will not easily label a group of persons a controlling group of shareholders.” St. Clair Shores
Gen. Emps. Ret. Sys. v. Eibeler, 745 F. Supp. 2d 303, 312 (S.D.N.Y. 2010). To allege
sufficiently that shareholders formed a “control group” with fiduciary duties under applicable
Delaware law, “a plaintiff cannot simply lump together the[ir] holdings” but rather must allege
that the shareholders reached the equivalent of a “blood pact to act together.” Id. (emphasis
added).
Significantly, the Trustee fails to allege the terms, purpose, or goal of the alleged
agreement between the Foundations and the Chandler Trusts, or what the shareholders actually
achieved by purportedly acting in concert. The Trustee’s allegation is thus insufficient to
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establish an agreement to work together. See Dubroff, 2009 WL 1478697, at *5 (finding that it
would be unreasonable to infer shareholders’ agreement to work together in support of the
transaction at issue from a letter that did not specify the substance of the shareholders’ alleged
agreement, and dismissing claim for breach of fiduciary duty against alleged controlling
shareholders with prejudice). At most, the Trustee infers that the Foundations and the Chandler
Trusts had “parallel interests” around the time of the LBO Transactions, which is “insufficient as
a matter of law to support the inference that the shareholders were part of a control group.” Id. at
*3. And, any of the Trustee’s allegations that are merely “consistent with the existence of a
control group” are likewise insufficient because they fail to “establish the necessary linkage
among the [shareholders].” Id. at *4.
Ultimately, however, even if the Foundations and the Chandler Trusts had agreed to act
together—which they did not—the Trustee fails to allege that they actually controlled or
dominated the Board with respect to the LBO Transactions. See Dawson v. Pittco Capital
Partners, L.P., C.A. No. 3148-VCN, 2012 WL 1564805, at *16 (Del. Ch. Apr. 30, 2012) (“[A]t
the time of the Merger, Pittco and Starnes, alone, controlled only 37% of the Preferred Interests
and only two of the five seats on the Board; therefore, even if this Court were to find that there
was some legally significant connection between them, they could not, collectively, have
asserted control over LaneScan.”).
In sum, viewing the Foundations and the Chandler Trusts individually or collectively,
their minority ownership interest, minority representation on Tribune’s board, and alleged
interactions with the Special Committee and the Board fail to demonstrate their “actual
domination and control” over the Board, In re Morton’s, 74 A.3d at 664-65, to such an extent
that they “deprive[d] the [Board] of the[ir] independent judgment” with respect to approval of
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the LBO Transactions, Citron, 1988 WL 94738, at *6. Under Twombly and Iqbal, much more is
required. Because the Trustee has not alleged a single fact demonstrating actual control, he has
not pleaded a cognizable fiduciary duty. Count Fourteen, alleging breach of fiduciary duty,
should therefore be dismissed.
VI. THE TRUSTEE FAILS TO ALLEGE THAT THE FOUNDATIONS OR THE CHANDLER TRUSTS KNOWINGLY PARTICIPATED IN A BREACH OF
FIDUCIARY DUTY (COUNT FIFTEEN)
“Under Delaware law, a valid claim for aiding and abetting a breach of fiduciary duty
requires: (1) the existence of a fiduciary relationship; (2) the fiduciary breached its duty; (3) a
defendant, who is not a fiduciary, knowingly participated in a breach; and (4) damages to the
plaintiff resulted from the concerted action of the fiduciary and the nonfiduciary.” Globis
Partners, L.P. v. Plumtree Software, Inc., Civ. A. No. 1577-VCP, 2007 WL 4292024, at *15
(Del. Ch. Nov. 30, 2007); Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001).6 This test is
a “stringent” one. Saito v. McCall, No. Civ. A. 17132-NC, 2004 WL 3029876, at *9 (Del. Ch.
Dec. 20, 2004), overruled on other grounds by Lambrecht v. O'Neal, 3 A.3d 277, 293 (Del.
2010).
To satisfy the third element, “knowing participation,” the plaintiff must plead specific
facts demonstrating that each defendant offered “substantial assistance” to the fiduciary and
“act[ed] with the knowledge that the conduct advocated or assisted constitute[d] . . . a breach [of
fiduciary duty].” In re Novell, 2013 WL 322560, at *17; Malpiede, 780 A.2d at 1097. As shown
6 Because an underlying breach of fiduciary duty is a prerequisite to a claim for aiding and
abetting, in the event this Court dismisses the breach of fiduciary duty claims against the Director and Officer Defendants (Counts Three and Four) for lack of a breach of duty, then this claim must also be dismissed. Globis Partners, 2007 WL 4292024, at *15. This Motion hereby incorporates by reference the argument in section I of the Memorandum of Law in Support of the Independent Directors’ Motion to Dismiss (Motion No. 1 filed concurrently herewith) (the “Independent Directors’ Motion”) that the Trustee has failed to allege a breach of duty by the Director Defendants.
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below, the Trustee has not pleaded any facts demonstrating that the Foundations or the Chandler
Trusts knowingly participated in any breach of duty by the Director and Officer Defendants.
Count Fifteen should therefore be dismissed.
A. The Acts Alleged To Constitute Aiding And Abetting Have No Connection To The Alleged Breaches Of Fiduciary Duty
The acts alleged to constitute aiding and abetting by the Foundations and the Chandler
Trusts do not intersect with, or have any logical connection to, the alleged breaches of duty by
the Director and Officer Defendants. Specifically, the Trustee alleges that the Director and
Officer Defendants breached their fiduciary duties by: (a) acting in their own self-interest; (b)
succumbing to financial incentives; (c) transferring virtually all of Tribune’s value to Tribune’s
shareholders and LBO lenders; (d) seeking to ensure the LBO lenders would be paid before
creditors; (e) relying on advice they knew was not credible; (f) preparing unreasonable
projections; (g) relying on unreasonable solvency opinions; (h) permitting the tender offer and
merger to close; and (i) failing to adequately analyze the impact of the LBO Transactions on
Tribune. (Compl. ¶¶ 395, 406.) Next, the Trustee alleges that the Foundations and the Chandler
Trusts aided and abetted the foregoing breaches by: (x) steering the Board toward a strategy
aimed at enhancing the interests of the Foundations and the Chandler Trusts; (y) exerting undue
influence over the Board; and (z) ensuring consummation of a transaction they knew was not in
the interests of Tribune. Because the alleged acts of aiding and abetting do not intersect with the
alleged breaches of fiduciary duty, the Trustee has failed to allege that the Foundations or the
Chandler Trusts even participated, let alone knowingly participated, in any breach of duty.
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B. The Trustee Fails To Allege Non-Conclusory Facts Demonstrating That The Foundations Or The Chandler Trusts Knowingly Participated In Any Breach Of Duty
Even if the sheer disconnect between the alleged acts of aiding and abetting and the
alleged breaches of duty were not sufficient to warrant dismissal of Count Fifteen, the Trustee
fails to plead facts sufficient to establish that the Foundations or the Chandler Trusts knowingly
participated in any breach of duty. See Radnor Holdings Corp. v. Tennenbaum Capital Partners,
353 B.R. 820, 844 (Bankr. D. Del. 2006) (“a plaintiff must prove that the defendant knowingly
participated not just in the transactions but in the breach of fiduciary duties”). To survive this
motion to dismiss, the Trustee must “plead non-conclusory facts to support a reasonable
inference of knowing participation.” In re Novell, 2013 WL 322560, at *17; In re Lukens Inc.
S’holders Litig., 757 A.2d 720, 734-35 (Del. Ch. 1999) (finding that the complaint’s conclusory
allegation that the alleged wrongdoer “approved and urged” the director defendants to enter into
the disputed transaction failed to satisfy the pleading burden); In re Santa Fe Pacific Corp.
S’holder Litig., 669 A.2d 59, 72 (Del. 1995) (holding that the conclusory statement that the
alleged aider and abettor “had knowledge of” the director defendants’ fiduciary duties and
“knowingly and substantially participated and assisted” in the alleged breaches did not state a
claim).
Instead of alleging facts supporting a rational inference that the Foundations or the
Chandler Trusts knew the Director and Officer Defendants’ conduct constituted a breach of
fiduciary duty and offered substantial assistance to such conduct anyway, the Trustee alleges that
the Foundations and the Chandler Trusts: (a) “steered” the Board toward “a corporate strategy”
aimed at enhancing their own interests; (b) “interposed” themselves in the Board’s decision-
making process and “exerted undue influence” over the Board “in connection with the LBO
[Transactions]” by, among other things, “threatening” the Board if it failed to pursue their
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“desired course of action”; and (iii) “ensured” the consummation of “a transaction” that they
knew was not in the interests of Tribune. (Compl. ¶ 507.) As noted above, each of these
allegations is conclusory in nature and not supported by well-pleaded facts. There is not one
non-conclusory allegation that the Foundations or the Chandler Trusts dominated, controlled, or
exerted undue influence over the Board’s decision to approve the LBO Transactions, or that the
Foundations or the Chandler Trusts ensured the consummation of the LBO Transactions.
In fact, several of the Trustee’s allegations pertain to events that occurred months before
Zell even “emerged as a potential bidder for Tribune” in “late January 2007.” (Compl. ¶ 145;
see Compl. ¶¶ 128-132 (alleged “threaten[ing]” letter from the Chandler Trusts “dated June 13,
2006”), 133-134 (discussing “‘talking points’ prepared by the Chandler Trusts on or about
July 17, 2006”), 136 (Board allegedly established the Special Committee “[i]n response to the
demands made by the Chandler Trusts, in September 2006”), 138 (discussing a Chandler Trusts
letter to the Board “[o]n October 2, 2006”).) Thus, the Trustee’s allegations are not only
disconnected from the Director and Officer Defendants’ alleged breaches of fiduciary duty; they
are also disconnected from the LBO Transactions altogether. (See, e.g., Compl. ¶ 507 (alleging
that the Foundations and the Chandler Trusts steered the Director and Officer Defendants toward
“a corporate strategy aimed at enhancing [their] interests”) (emphasis added).)
Finally, the Foundations and the Chandler Trusts cannot be liable for aiding and abetting
because, as non-controlling shareholders, they were free to act in their own interests, even in the
manner alleged in the Complaint. In re W. Nat’l Corp., 2000 WL 710192, at *8 (citing Ivanhoe,
535 A.2d at 1344). For example, the plaintiff in In re Wheelabrator Technologies Inc.
Shareholders Litigation, C.A. No. 11495, 1992 WL 212595 (Del. Ch. Sept. 1, 1992), alleged that
a shareholder aided and abetted a board’s breach of fiduciary duty by “‘dictat[ing]’ terms” to the
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board “after having threatened to dispose of its 22% minority position . . . if its terms were not
met.” Id. at *10. The court dismissed the complaint on the basis that the “allegations, if true,
lead to an inference of hard bargaining on the part of [the shareholder]—conduct in which [it]
had every right to engage—not of complicity in whatever breaches of duty [the corporation’s]
board may have committed.” Id. Even assuming the truth of the Trustee’s allegations, as this
Court must on a motion to dismiss, they do not support a reasonable inference that the
Foundations or the Chandler Trusts exceeded the sort of “hard bargaining” in which they, as non-
controlling shareholders, “had every right to engage.” Id.
Thus, Count Fifteen should be dismissed because the Trustee has failed to plead facts
sufficient to establish that the Foundations or the Chandler Trusts knowingly participated in any
breach of fiduciary duty.
VII. THE TRUSTEE’S UNJUST ENRICHMENT CLAIM SHOULD BE DISMISSED (COUNT THIRTY-ONE)
Count Thirty-One alleges that the Foundations and the Chandler Trusts were unjustly
enriched by the distributions they received through the LBO Transactions as a result of their
“wrongful acts and omissions.” (Compl. ¶ 609.) This claim fails for three independent reasons.
As set forth in section III of the Independent Directors’ Motion, which is hereby
incorporated by reference, (a) the Trustee fails to allege that he lacks an adequate remedy at law,
which is required to state a claim for unjust enrichment, and (b) the claim is preempted by
section 546(e) of the Bankruptcy Code, which precludes the avoidance of a “settlement
payment” made in connection with a leveraged buy-out (except by a claim brought under 11
U.S.C. § 548(a)(1)(A)).
The Trustee has also failed to allege facts sufficient to state a claim for unjust enrichment
against the Foundations or the Chandler Trusts. To state a claim for unjust enrichment, the
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Trustee must allege: “1) an enrichment, 2) an impoverishment, 3) a relation between the
enrichment and the impoverishment, 4) the absence of justification and 5) the absence of a
remedy provided by law.” LaSalle Nat’l Bank v. Perelman, 82 F. Supp. 2d 279, 294-95 (D. Del.
2000). The fourth element, absence of justification, embodies the requirement of a wrongful or
tortious act. In re Lear Corp. S’holder Litig., 967 A.2d 640, 657 n.73 (Del. Ch. 2008) (“Under
Delaware law, unjust enrichment requires an absence of justification . . . [which] usually entails
some type of wrongdoing or mistake at the time of transfer.”) (citations omitted). Courts have
opined that “an unjust enrichment claim is essentially another way of stating a traditional tort
claim (i.e., if defendant is permitted to keep the benefit of his tortious conduct, he will be
unjustly enriched).” Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc.
(“Phillip Morris”), 171 F.3d 912, 936 (3d Cir. 1999). Thus, it logically follows that “[w]here the
plaintiff cannot satisfy the elements required to make out a tort claim, an argument that the
defendant has been unjustly enriched by tortious conduct necessarily fails as well.” Beck &
Panico Builders, Inc. v. Straitman, 2009 WL 5177160, at *7 (Del. Super. Ct. Nov. 23, 2009);
Phillip Morris, 171 F.3d at 937 (“We can find no justification for permitting plaintiffs to proceed
on their unjust enrichment claim once we have determined that the District Court properly
dismissed the traditional tort claims . . . .”).
As discussed above with regard to Counts Fourteen and Fifteen, the Trustee has failed to
allege any tortious or otherwise wrongful conduct by the Foundations or the Chandler Trusts.
While the Trustee has also brought Count One (intentional fraudulent transfer) against the
Foundations and the Chandler Trusts, significantly, that claim does not contain a single
allegation of wrongdoing by the Foundations or the Chandler Trusts. (See Compl. ¶¶ 376-381.)
This Court should thus dismiss Count Thirty-One.
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25
VIII. THE COURT SHOULD GRANT THIS MOTION WITHOUT LEAVE TO AMEND
Leave to amend a complaint “should generally be denied in instances of futility, undue
delay, bad faith or dilatory motive, repeated failure to cure deficiencies by amendments
previously allowed, or undue prejudice to the non-moving party.” Burch v. Pioneer Credit
Recovery, Inc., 551 F.3d 122, 126 (2d Cir. 2008) (per curiam) (citing Foman v. Davis, 371 U.S.
178, 182 (1962)). For the reasons set forth in section VIII of the Chandler Representatives’
Motion, which is hereby incorporated by reference, this Court should not grant the Trustee leave
to amend Counts Fourteen, Fifteen or Thirty-One because: (a) the Trustee (and the Committee
before him) has already had six opportunities in over three years to adequately plead these
claims; and (b) considering that the examiner appointed in Tribune’s bankruptcy case has already
developed the factual record regarding the LBO Transactions (including Counts Fourteen,
Fifteen and Thirty-One) in his report spanning over 1,400 pages and including over 1,100
exhibits, many of which are already squeezed into the Trustee’s monolithic 196-page, 654-
paragraph Complaint, it is not possible for the Trustee to include additional allegations,
consistent with those in the Complaint, which would entitle him to relief in a sixth amended
complaint.7 See Official Comm. of Unsecured Creditors of Color Tile, Inc. v. Coopers &
Lybrand, LLP, 322 F.3d 147, 168 (2d Cir. 2003) (affirming denial of leave to amend where there
was a “repeated failure to cure deficiencies by amendments previously allowed”) (citation
omitted); City of Pontiac Policemen’s and Firemen’s Retirement System v. UBS AG, No. 12-
4355-cv, ___ F.3d ___, 2014 WL 1778041, at *8 (2d Cir. May 6, 2014) (affirming denial of
leave to amend where the plaintiff already had one opportunity to amend its complaint and there
were no additional facts or legal theories that plaintiff could have asserted if leave were granted). 7 It should not be lost on the Court that nowhere in the Complaint does the Trustee allege that
the Foundations ever supported the LBO Transactions.
Case 1:11-md-02296-RJS Document 5940 Filed 05/23/14 Page 30 of 32
26
Granting the Trustee leave to amend would thus be futile and result in undue prejudice to the
Foundations and the Chandler Trusts. See Bd. of Trustees of City of Ft. Lauderdale Gen. Emps.’
Ret. Sys. v. Mechel OAO, 811 F. Supp. 2d 853, 883 (S.D.N.Y. 2011) (denying leave to amend
claims as futile).
IX. CONCLUSION
For the foregoing reasons, Counts Fourteen, Fifteen and Thirty-One of the Complaint
should be dismissed in their entirety, with prejudice and without leave to amend.
Dated: May 23, 2014 Respectfully submitted,
By: /s/ David C. Bohan DAVID C. BOHAN JOHN P. SIEGER KATTEN MUCHIN ROSENMAN LLP 525 W. Monroe Street Chicago, IL 60661-3693 Tel: (312) 902-5200 [email protected] [email protected] Counsel for The Robert R. McCormick Foundation and Cantigny Foundation
By: /s/ Joel. A. Feuer JOEL A. FEUER OSCAR GARZA DOUGLAS G. LEVIN GIBSON, DUNN &CRUTCHER LLP 2029 Century Park East Los Angeles, CA 90067 Tel: (310) 551-8808 [email protected] [email protected] [email protected] Counsel for Chandler Trust No. 1 and Chandler Trust No. 2
Case 1:11-md-02296-RJS Document 5940 Filed 05/23/14 Page 31 of 32
CERTIFICATE OF SERVICE
I certify that on May 23, 2014, the foregoing was electronically filed through the CM/ECF system for the United States District Court, Southern District of New York and served through the Court’s electronic filing system to all counsel and parties of record.
Dated: May 23, 2014 GIBSON, DUNN & CRUTCHER LLP
By: /s/ Joel A. Feuer Joel A. Feuer [email protected] 2029 Century Park East Los Angeles, CA 90067 Tel: (310) 551-8808
Case 1:11-md-02296-RJS Document 5940 Filed 05/23/14 Page 32 of 32
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ----------------------------------------------------------X
IN RE:
TRIBUNE COMPANY FRAUDULENT CONVEYANCE LITIGATION
:::::
Consolidated Multidistrict Action No. 11 MD 2296 (RJS); No. 12 MC 2296 (RJS)
MARC S. KIRSCHNER, as Litigation Trustee for the TRIBUNE LITIGATION TRUST,
Plaintiff,
v.
DENNIS J. FITZSIMONS, et al.
Defendants.
:::::::::::
Case No. 12 CV 2652 (RJS)
-----------------------------------------------------------X
MOTION NO. 5: MEMORANDUM OF LAW IN SUPPORT OF MOTION TO DISMISS COUNTS TWO, THREE, FIFTEEN AND THIRTY-ONE OF THE
LITIGATION TRUSTEE’S FIFTH AMENDED COMPLAINT BY DEFENDANTS JEFFREY CHANDLER, ROGER GOODAN, AND WILLIAM STINEHART, JR.
Case 1:11-md-02296-RJS Document 5944 Filed 05/23/14 Page 1 of 34
TABLE OF CONTENTS Page
i
I. PRELIMINARY STATEMENT ..................................................................................................1
II. SUMMARY OF RELEVANT ALLEGED FACTS ...................................................................1
III. LEGAL STANDARD FOR MOTION TO DISMISS ...............................................................5
IV. TRUSTEE SHOULD DISMISS COUNT TWO FOR VIOLATION OF DGCL SECTIONS 160 AND/OR 173 ............................................................................................6
V. THE COURT SHOULD DISMISS COUNT THREE AGAINST THE CHANDLER REPRESENTATIVES BECAUSE THEY DID NOT BREACH ANY FIDUCIARY DUTY ............................................................................................................7
A. Trustee’s Generalized Allegations Against the “Director Defendants” Do Not Apply to the Chandler Representatives, Who Trustee Admits Were Uniquely Situated Due to Their Disclosed Conflicts In Connection With The LBO Transactions .............................................................................................7
B. The Chandler Representatives Cannot Be Liable for Breach of Fiduciary Duty Because, Due to Their Conflicts, They Properly Abstained From Voting on the LBO Transactions ...........................................................................10
C. Delaware Law Requires Abstention Where a Director Is Potentially or Actually Conflicted ................................................................................................12
D. Delaware’s “Total Abstention” Doctrine Does Not Preclude the Chandler Representatives From Representing the Chandler Trusts’ Interests in Connection With the LBO Transactions ................................................................13
E. The Complaint Contains No Facts From Which to Infer That the Chandler Representatives Breached Their Duties of Loyalty or Good Faith; Thus, They Are Entitled to the Protection of the Business Judgment Rule .....................15
F. The Exculpatory Provision in Tribune’s Charter Bars Trustee’s Breach of Duty of Care Claim ................................................................................................18
VI. THE CHANDLER REPRESENTATIVES DID NOT AID OR ABET ANY ALLEGED BREACH OF FIDUCIARY DUTY ...............................................................18
A. Trustee Cannot Plead an Underlying Breach of Fiduciary Duty ...........................19
B. The Chandler Representatives’ “Knowing Participation” Is Not Adequately Pled and is Disproved by Trustee’s Own Allegations ........................19
C. Trustee Cannot State a Claim Against the Chandler Representatives
Case 1:11-md-02296-RJS Document 5944 Filed 05/23/14 Page 2 of 34
TABLE OF CONTENTS (continued)
Page
ii
Because an Aiding And Abetting Claim Can Only Be Alleged Against Non-Fiduciaries ......................................................................................................21
VII. TRUSTEE’S UNJUST ENRICHMENT CLAIM SHOULD BE DISMISSED ....................22
A. Trustee’s Unjust Enrichment Claim is Preempted by Federal Law .......................22
B. Trustee Has Failed to Adequately Plead the Tortious Conduct Upon Which the Unjust Enrichment Claim is Based ......................................................24
C. Trustee Fails to Allege the Lack of an Adequate Remedy at Law ........................26
VIII. THE COURT SHOULD GRANT THIS MOTION WITHOUT LEAVE TO AMEND .............................................................................................................................26
IX. CONCLUSION........................................................................................................................28
Case 1:11-md-02296-RJS Document 5944 Filed 05/23/14 Page 3 of 34
TABLE OF AUTHORITIES Page(s)
iii
Cases AP Services LLP v. Silva,
483 B.R. 63 (S.D.N.Y. 2012) ................................................................................................... 25 Ashcroft v. Iqbal,
556 U.S. 662 (2009) ................................................................................................................... 5 ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,
493 F.3d 87 (2d Cir. 2007) ......................................................................................................... 6 Bd. of Trustees of City of Ft. Lauderdale Gen. Emps.’ Ret. Sys. v. Mechel OAO,
811 F. Supp. 2d 853 (S.D.N.Y. 2011) ...................................................................................... 31 Beck & Panico Builders, Inc. v. Straitman,
2009 WL 5177160 (Del. Super. Ct. Nov. 23, 2009) ................................................................. 27 Bell Atlantic Corp. v. Twombly,
550 U.S. 544 (2007) ................................................................................................................... 5 Bennett v. Propp,
187 A.2d 405 (Del. 1962) ......................................................................................................... 12 Burch v. Pioneer Credit Recovery, Inc.,
551 F.3d 122 (2d Cir. 2008) ..................................................................................................... 29 Citron v. E.I Du Pont de Nemours & Co.,
584 A.2d 490 (Del. Ch. 1990) ...................................................................................... 11, 12, 15 City of Pontiac Policemen's and Firemen's Retirement System v. UBS AG,
2014 WL 1778041 (2d Cir. May 6, 2014) ................................................................................ 30 Contemporary Indust. Corp. v. Frost,
564 F.3d 981 (8th Cir. 2009) .................................................................................................... 25 Deutscher Tennis Bund v. ATP Tour, Inc.,
610 F.3d 820 (3d Cir. 2010) ..................................................................................................... 17 Emerald Partners v. Berlin,
2003 WL 21003437 (Del. Ch. Apr. 28, 2003) .......................................................................... 13 Globis Partners, L.P. v. Plumtree Software, Inc.,
2007 WL 4292024 (Del. Ch. Nov. 30, 2007) ..................................................................... 20, 23 In re BJ’s Wholesale Club, Inc. S’holders Litig.,
2013 WL 396202 (Del. Ch. Jan 31, 2013) ................................................................................ 21 In re Lear Corp. S’holder Litig.,
967 A.2d 640 (Del. Ch. 2008) .................................................................................................. 26 In re Lukens Inc. S’holder Litig.,
757 A.2d 720 (Del. Ch. 1999) .................................................................................................. 21 In re NYMEX S’holders Litig.,
2009 WL 3206051 (Del. Ch. Sept. 30, 2009) ..................................................................... 22, 23 In re Santa Fe Pac. Corp. S’holder Litig.,
669 A.2d 59 (Del. 1995) ........................................................................................................... 21 In re Tri-Star Pictures, Inc., Litig.
1995 WL 106520 (Del. Ch. Mar. 9, 1995) ........................................................................ passim In re U.S. Mortgage Corp.,
492 B.R. 784 (Bankr. D.N.J. 2013) .......................................................................................... 26
Case 1:11-md-02296-RJS Document 5944 Filed 05/23/14 Page 4 of 34
TABLE OF AUTHORITIES (continued)
Page(s)
iv
In re Walt Disney Co. Derivative Litig., 907 A.2d 693 (Del. Ch. 2005) .................................................................................................... 8
In re Wheelabrator Techs. Inc. S’holders Litig., 1992 WL 212595 (Del. Ch. Sept. 1, 1992) ......................................................................... 12, 22
John Q. Hammons Hotels, Inc. S’holder Litig., 2011 WL 227634 (Del. Ch. Jan. 14, 2011) ......................................................................... 15, 20
Kramer v. Time Warner, Inc., 937 F.2d 767 (2d Cir. 1991) ....................................................................................................... 6
LaSalle Nat’l Bank v. Perelman, 82 F. Supp. 2d 279 (D. Del. 2000) ..................................................................................... 26, 27
Lyondell Chem. Co. v. Ryan, 970 A.2d 235 (Del. 2009) ......................................................................................................... 17
Malpiede v. Townson, 780 A.2d 1075 (Del. 2001) ................................................................................................. 21, 22
Official Comm. of Unsecured Creditors of Color Tile, Inc. v. Coopers & Lybrand, LLP, 322 F.3d 147 (2d Cir. 2003) ..................................................................................................... 29
Official Comm. of Unsecured Creditors v. Fleet Retain Fin. Grp. (In re Hechinger Investment Co.), 274 B.R. 71 (D. Del. 2002)....................................................................................................... 24
Parfi Holding AB v. Mirror Image Internet, Inc., 794 A.2d 1211 (Del. Ch. 2001); rev’d on other grounds, 817 A.2d 149 (Del. 2002) .............. 23
Plymouth County Retirement Assoc. v. Brookfield Homes Corp., et al., Civil Action No. 6062-CS (Del. Ch. October 12, 2012) ......................................................... 16
Propp v. Sadacca, 175 A.2d 33 (Del. Ch. 1961) .................................................................................................... 12
Salinger v. Projectavision, Inc., 972 F. Supp. 222 (S.D.N.Y. 1997) ........................................................................................... 30
Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc., 171 F.3d 912 (3d Cir. 1999) ..................................................................................................... 27
U.S. Bank N.A. v. Verizon Commc’ns Inc., 892 F. Supp. 2d 805 (N.D. Tex. 2012) ..................................................................................... 26
Weil v. Morgan Stanley DW Inc., 877 A.2d 1024 (Del. Ch. 2005) ................................................................................................ 20
Weinberger v. UOP, Inc. Del. Supr., 457 A.2d 701 (1983) ........................................................................................ 13, 14
Statutes 11 U.S.C. § 546(e) ........................................................................................................................ 22 8 Del. C. § 102(b)(7) ..................................................................................................................... 18 8 Del. C. § 160 ................................................................................................................................ 6 8 Del. C. § 172 ................................................................................................................................ 7 8 Del. C. § 173 ................................................................................................................................ 6
Case 1:11-md-02296-RJS Document 5944 Filed 05/23/14 Page 5 of 34
1
I. PRELIMINARY STATEMENT
Defendants Jeffrey Chandler,1 Roger Goodan, and William Stinehart, Jr. (collectively,
the “Chandler Representatives”), sued in their capacity as former members of the Board of
Directors (the “Board”) of Tribune Company (“Tribune”), hereby move to dismiss the following
claims asserted against them by Plaintiff Litigation Trustee (“Trustee”) in the Fifth Amended
Complaint (the “Complaint”): (a) violations of Delaware General Corporation Law (“DGCL”)
§ 160 and/or § 173 (Count Two); (b) breach of fiduciary duty (Count Three); (c) aiding and
abetting breach of fiduciary duty (Count Fifteen); and (d) unjust enrichment (Count Thirty-One).
Trustee’s claims fail because, due to disclosed conflicts of interest, the Chandler Representatives
did not participate in the decision-making process of the Board or the special committee created
by the Board to oversee Tribune’s exploration of strategic alternatives (the “Special Committee”)
with regard to the tender offer and subsequent cash-out merger transactions that comprised the
leveraged buy-out of Tribune in 2007 (the “LBO Transactions”). Delaware law is clear that “a
director who plays no role in the process of deciding whether to approve a challenged transaction
cannot be held liable on a claim that the board’s decision to approve that transaction was
wrongful.” In re Tri-Star Pictures, Inc., Litig. (“Tri-Star”), 1995 WL 106520, at *2 (Del. Ch.
Mar. 9, 1995). Accordingly, the claims against the Chandler Representatives should be
dismissed now with prejudice.
II. SUMMARY OF RELEVANT ALLEGED FACTS
Chandler Trust No. 1 and Chandler Trust No. 2 (together, the “Chandler Trusts”)2 are
1 Jeffery Chandler passed away in August 2012. 2 The Chandler Trusts and the Chandler Representatives are sometimes referred to collectively
throughout this motion as the “Chandler Defendants.” Capitalized terms used but not defined herein have the meanings ascribed to them in the Complaint.
Case 1:11-md-02296-RJS Document 5944 Filed 05/23/14 Page 6 of 34
2
trusts of the Chandler family, who owned a significant interest in the Los Angeles Times until its
sale to Tribune in 2000. The Chandler Trusts received stock in Tribune, at one point holding as
much as 20% thereof. (Compl. ¶¶ 72, 127.) In 2000, the Chandler Trusts appointed the three
Chandler Representatives to the eleven-member Board. Each of the Chandler Representatives
was, at all relevant times, a trustee of the Chandler Trusts. (Id. ¶¶ 35-37.)
Tribune’s financial performance declined in the two years prior to the LBO Transactions
amid a secular decline in the print newspaper business. (Id. ¶ 125.) Accordingly, Chandler
Representative Stinehart, while “acting in his capacity as Trustee for the Chandler Trusts,”
submitted “a publicly filed letter to the Tribune Board dated June 13, 2006” encouraging the
Board to maximize the current value of Tribune’s stock or consider a “‘value enhancing strategic
repositioning.’” (Id. ¶¶ 129-130.) Chandler Representative Stinehart, in his capacity as trustee
for the Chandler Trusts, also requested that the Board “promptly appoint a [special] committee of
independent directors to . . . take prompt decisive action to enhance stockholder value.” (Id.
¶ 130.) The Board established the Special Committee in September 2006 to “oversee [Tribune’s]
exploration of alternatives.” (Id. ¶ 136.) The Special Committee consisted entirely of
independent, “highly sophisticated” and “financially literate” directors, a majority of whom were
“audit committee financial experts.” (Id. ¶¶ 136, 220-222.) No Chandler Representative was a
member of the Special Committee. (Id. ¶ 138.) Without any representation on the Special
Committee, the Chandler Trusts requested “the opportunity to discuss with the [S]pecial
[C]ommittee and its advisors important issues . . . in order that the views of the Chandler Trusts
may be considered . . . .” (Id.)
On or about January 17, 2007, the Chandler Trusts, through the Chandler
Representatives, submitted their own bid for a strategic transaction (the “Chandler Trusts’
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3
Proposal”). (See Tribune Company, Offer to Purchase for Cash Up to 126,000,000 Shares of Its
Common Stock (including the Associated Preferred Share Purchase Rights) for a Purchase Price
of $34.00 Net Per Share (the “Offer to Purchase”) at 15-19, which is attached as Exhibit A to the
Chandler Representatives’ Request for Judicial Notice (“RJN”) filed concurrently herewith.)
In late January 2007, Samuel Zell (“Zell”) “emerged as a potential bidder for Tribune.”
(Compl. ¶ 145.) On February 2, 2007, Zell submitted his own proposal, which ultimately led to
the LBO Transactions. (Id. ¶ 145.) On or around February 24, 2007, “the Special Committee
directed Tribune’s management and financial advisors to solicit the views of the Chandler Trusts
and [another group of shareholders,] the Foundations[,] with respect to Zell’s proposal.” (Id.
¶ 148.) The Chandler Trusts responded to the Special Committee by letter, “expressing
concerns” and “stating that they were not willing to sign voting agreements supporting Zell’s
proposal.” (Id. ¶ 149.) In fact, the Chandler Trusts were “oppos[ed] to the LBO.” (Id. ¶ 430(c).)
“Over the course of the next few weeks,” in March 2007 “the Special Committee and Tribune
provided the [Chandler Trusts and certain other large shareholders] with regular updates
respecting Zell’s proposal, and Zell . . . also negotiated directly with the [Chandler Defendants]”
regarding terms for the LBO Transactions. (Id. ¶ 151.) On or around March 30, 2007, the
Special Committee sought to “improve and finalize the Zell proposal.” (Id. ¶ 203.) “Over the
course of the next 24 hours, Tribune, the ESOP, EGI, and the Chandler Trusts negotiated the
agreements respecting Zell’s proposal.” (Id.)
Ultimately, the Chandler Trusts entered into proposed agreements with Tribune
relating to the LBO Transactions. Specifically, “the Chandler Trusts agreed to enter into a
voting agreement with [Tribune] whereby they agreed to vote their shares in favor of the LBO
[Transactions] . . . in exchange for certain registration rights.” (Id. ¶ 204.) The “Voting
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4
Agreement” between the Chandler Trusts and Tribune, dated April 1, 2007, is attached as
Exhibit B to the RJN. The “Registration Rights Agreement” between the Chandler Trusts and
Tribune, dated April 1, 2007, is attached as Exhibit C to the RJN. Thus, in connection with the
LBO Transactions, the Chandler Trusts (through the Chandler Representatives who were trustees
of the Chandler Trusts) negotiated separate agreements with Tribune regarding the Chandler
Trusts’ rights. As a result of the Registration Rights Agreement, the Chandler Trusts could sell
their remaining Tribune shares following the Tender Offer (defined below) and not take the
financial risk that the Merger (defined below) would not ultimately close.
On their face, the Voting Agreement and the Registration Rights Agreement expressly
presupposed that the Board would approve the LBO Transactions at the same time as approving
those two agreements. As a result, there was an actual (but fully disclosed) conflict of interest on
the part of the Chandler Representatives at the time of the Board’s consideration of the LBO
Transactions because the entire package of agreements under consideration by the Board also
included agreements between the Chandler Trusts, on the one hand, and Tribune, on the other
hand. Just as the Chandler Representatives had a conflict of interest relating to Tribune’s decision
to enter into the two agreements with the Chandler Trusts, they had a conflict relating to Tribune’s
decision to enter into the proposed LBO Transactions upon which the Voting Agreement and the
Registration Rights Agreement depended.
On or about April 1, 2007, “the Special Committee unanimously recommended that the
Tribune Board approve the [LBO Transactions].” (Compl. ¶ 211.) The Board, with the
exception of the Chandler Representatives, who abstained from voting, and Dudley S. Taft,
who was absent, then voted to approve the LBO Transactions. (Id.) The Chandler
Representatives “remained silent” during the Board’s consideration and approval of the LBO
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5
Transactions. (Compl. ¶ 281.) Thus, even if the three Chandler Representatives had voted
against the LBO Transactions, their votes would not have changed the result. Whether they
voted against or abstained, a majority of seven Board members voted in favor of the LBO
Transactions.
The LBO Transactions comprised two distinct transactions: (a) the “Tender Offer,”
which closed on June 4, 2007, in which Tribune borrowed approximately $7 billion to purchase
approximately 50% of its outstanding shares at a price of $34.00 per share; and (b) the “Merger,”
which closed on December 20, 2007, in which Tribune borrowed approximately $3.7 billion to
purchase its remaining outstanding shares at a price of $34.00. (Id. ¶ 119.) Pursuant to the
Chandler Trusts’ Voting Agreement, approved by the Board at the same time as the LBO
Transactions, the Chandler Representatives resigned from the Tribune Board on the date of the
Tender Offer, June 4, 2007, over six months prior to the Merger. (Id. ¶¶ 35-37, 287, 353.)
Additionally, having sold a significant portion of its Tribune stock through the Tender Offer, as a
result of the Registration Rights Agreement (also approved by the Board at the same time as the
LBO Transactions), the Chandler Trusts sold their remaining Tribune stock through a private
third-party sale on or around June 7, 2007, three days after the Tender Offer. (Id. ¶ 72.)
III. LEGAL STANDARD FOR MOTION TO DISMISS
The claims addressed in this motion to dismiss are subject to the legal standard of Rule
12(b)(6) of the Federal Rules of Civil Procedure, as set forth in Section I.B of the Memorandum
of Law in Support of Shareholder Defendants’ Motion to Dismiss Count One of the Complaint,
which is hereby incorporated by reference. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544
(2007); Ashcroft v. Iqbal, 556 U.S. 662 (2009). In evaluating a motion to dismiss, courts may
consider the allegations of the complaint and any exhibits thereto, as well as any matters
incorporated by reference or integral to the claim, items subject to judicial notice, matters of
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6
public record, orders, and items appearing in the record of the case. Kramer v. Time Warner,
Inc., 937 F.2d 767, 773-74 (2d Cir. 1991); see also ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,
493 F.3d 87, 98 (2d Cir. 2007) (“[W]e may consider [on a motion to dismiss] any written
instrument attached to the complaint, statements or documents incorporated into the complaint
by reference, legally required public disclosure documents filed with the SEC, and documents
possessed by or known to the plaintiff and upon which it relied in bringing the suit.”).
IV. TRUSTEE SHOULD DISMISS COUNT TWO FOR VIOLATION OF DGCL SECTIONS 160 AND/OR 173
In Count Two of the Complaint, Trustee alleges that the “Director Defendants,” including
the Chandler Representatives, violated Sections 160 and/or 173 of the DGCL by distributing
“cash and/or property to its shareholders as a result of the LBO Transactions . . . while Tribune
lacked a sufficient surplus or net profits or was otherwise insolvent.” (Compl. ¶ 386.) As
detailed in Section II.A of the Memorandum of Law in Support of the Independent Directors’
Motion to Dismiss (Motion No. 1) (the “Independent Directors’ Brief”), which is hereby
incorporated by reference, this claim fails against the Chandler Representatives for two reasons.
First, Trustee has not alleged any facts from which to plausibly infer that Tribune’s
capital was impaired at the time of, or as a result of, the Tender Offer. Of course, Trustee admits
that the Chandler Representatives resigned from the Board on June 4, 2007, the date of the
Tender Offer. (Compl. ¶¶ 35-37, 287). The only distributions made by Tribune when the
Chandler Representatives were members of the Board that could be the subject of a DGCL claim
were the payments for Tribune’s stock pursuant to the Tender Offer. As such, Trustee’s
allegation that the Chandler Representatives are liable for “[t]he payments made by Tribune in
connection with the LBO” (which encompass the payments associated with both the Tender
Offer and the Merger) is factually deficient and fatally flawed. (Id. ¶¶ 118, 386.)
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7
Second, as set forth in the Independent Directors’ Brief, Trustee has pled facts sufficient
to conclusively establish a complete “safe harbor” defense to liability under Section 172 of the
DGCL, which entitled the Board to rely on the opinions of financial professionals (e.g., VRC’s
solvency opinion regarding the Tender Offer) to determine compliance with Section 160.
V. THE COURT SHOULD DISMISS COUNT THREE AGAINST THE CHANDLER REPRESENTATIVES BECAUSE THEY DID NOT BREACH ANY FIDUCIARY DUTY
A. Trustee’s Generalized Allegations Against the “Director Defendants” Do Not Apply to the Chandler Representatives, Who Trustee Admits Were Uniquely Situated Due to Their Disclosed Conflicts In Connection With The LBO Transactions
Trustee alleges that the “Director Defendants” (which Trustee defines to include the
Chandler Representatives) breached their duties of good faith, care, and loyalty by generally
causing Tribune to enter into the LBO Transactions. (Compl. ¶ 395(a)-(l).)3 However, Trustee’s
blanket allegations against the Director Defendants do not state claims against the individual
Chandler Representatives. See In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 748 (Del.
Ch. 2005) (“More recent cases understand that liability determinations must be on a director-by-
director basis.”).
The Chandler Representatives were differently situated than the Director Defendants for
the following reasons. 3 Trustee alleges that the “Director Defendants” breached their fiduciary duties by: (a)
“[a]cting in their own interests by approving” the LBO Transactions; (b) “facilitating and advocating” for the LBO Transactions; (c) “causing the Subsidiary Guarantors to enter into the Subsidiary Guarantees”; (d) “creating Holdco and Finance and authorizing complex transactions” that indebted Tribune to Finance; (e) “[r]elying on the advice of outside advisors . . . with a financial interest in consummating” the LBO Transactions; (f) “[r]elying on patently unreasonable” 2007 projections; (g) “[r]elying on inadequate downside analysis” of Tribune’s projections; (h) “[r]elying on VRC’s solvency opinions”; (i) “[f]ailing . . . to adequately analyze the impact” of the LBO Transactions, “voting in favor of and/or advocating for” the LBO Transactions, and “allowing the [LBO Transactions] to close”; (j) “[f]ailing . . . to consider all material facts” and “ignoring the duties they owed to Tribune”; (k) “[e]ngaging in self-dealing by causing Tribune to borrow money . . . in order to obtain a personal gain”; and (l) furthering the LBO Transactions for purposes other than the advancement of Tribune. (Compl. ¶ 395(a)-(l).)
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8
First, as Trustee acknowledges in the Complaint, the Chandler Representatives were
conflicted because “[a]t the time of the LBO, . . . the Chandler [] Representatives represented the
Chandler Trusts’ interests on the Tribune Board” (Compl. ¶ 72) and “had [fiduciary] duties to the
Chandler Trusts that were different from and inconsistent with their duties to Tribune” (id.
¶ 429).4 As reflected in the letters that Stinehart sent to the Board in June 2006 and October
2006 in his capacity as a trustee of the Chandler Trusts, the Chandler Representatives sought to
protect the interests of the Chandler Trusts, which is also why they were not “independent”
directors capable of serving on the Special Committee. (Id. ¶¶ 129-130, 138.)
Second, the Chandler Trusts, as represented by the Chandler Representatives, had
submitted the Chandler Trusts’ Proposal to purchase key Tribune assets. (Offer to Purchase at
15-19.) The pendency of the Chandler Trusts’ Proposal created a potential conflict of interest
that necessitated the Chandler Representatives’ abstention from voting on competing proposals
including the LBO Transactions.
Third, the Chandler Representatives were in direct conflict with Tribune with respect to
the LBO Transactions. The Chandler Trusts’ negotiations with Tribune regarding Zell’s
proposal resulted in the Chandler Trusts entering into the Voting Agreement and the Registration
Rights Agreement with Tribune. (Offer to Purchase at 67-68; RJN, Exhibits B and C.) These
agreements were presented to the Board for consideration and approval at the same time as, and
as part of, the LBO Transactions. Thus, the Chandler Trusts (via the Chandler Representatives
4 In the Complaint, Trustee alleges that the Chandler Representatives were conflicted directors
because they were appointed by, and for the benefit of, the Chandler Trusts. (Compl. ¶¶ 35-37; id. ¶ 129 (Mr. Stinehart “purportedly act[ed] in his capacity as Trustee for the Chandler Trusts”); id. ¶ 206 (“[I]n May 2006, defendants Stinehart, Goodan, and Chandler[] act[ed] in their capacities as the Chandler Trusts’ representatives on the Tribune Board . . . .”); id. ¶ 430 (“The Zell Defendants knowingly exploited the[] conflicts of interest [of the Chandler Representatives] . . . .”).)
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as trustees of the Chandler Trusts) and Tribune were on opposite sides of the agreements. They
were in a conflicted position to Tribune with respect to the consideration and approval of those
two agreements. And because those two agreements presupposed that the Board would approve
the LBO Transactions at the same time as they approved the Voting Agreement and the
Registration Rights Agreement, the Chandler Representatives were in a conflicted position with
Tribune as to the approval of the LBO Transactions as well. Based on these fully disclosed
conflicts, the Chandler Representatives openly and exclusively aligned themselves with the
Chandler Trusts (as opposed to Tribune, as did the other Director Defendants) in connection with
every aspect of the LBO Transactions.
In sum, Trustee’s breach of fiduciary duty allegations in the Complaint (¶ 395(a)-(l))
assumes that each of the Director Defendants caused Tribune to enter into the LBO Transactions.
However, because the Chandler Representatives aligned themselves completely with the
Chandler Trusts and abstained entirely from the strategic transaction review process on behalf of
Tribune, none of them actually caused Tribune to enter into the LBO Transactions. Hence,
Trustee’s breach of fiduciary duty claims are wholly inapplicable to the Chandler
Representatives.5
5 For example, in order for the Chandler Representatives to be liable for “[a]cting in their own
interests by approving” the LBO Transactions, “voting in favor of” such transactions, or “causing Tribune to borrow money” in connection therewith as alleged in the Complaint at ¶ 395(a), (i) and (k), the Chandler Representatives must have actually recommended/voted for the transactions (they did not). The same holds true for ¶ 395(c) and (d) which alleges breach based on “causing the Subsidiary Guarantors to enter into the Subsidiary Guarantees” or “creating Holdco and Finance.” Moreover, ¶ 395(e)-(h) alleges that the Director Defendants breached their fiduciary duties by “relying” on self-interested advice, unreasonable projections, inadequate downside analysis, and flawed solvency opinions in connection with the LBO Transactions. However, even assuming that the Chandler Representatives did rely on such information (they did not), it is impossible for their purported “reliance” to have contributed to Tribune’s harm given that the Chandler Representatives played no role in either recommending or voting for the LBO Transactions. Additionally, the allegations in ¶ 395(j)
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B. The Chandler Representatives Cannot Be Liable for Breach of Fiduciary Duty Because, Due to Their Conflicts, They Properly Abstained From Voting on the LBO Transactions
Because the Chandler Representatives did not participate in either the Special
Committee’s decision to recommend, or the Board’s decision to approve, the LBO Transactions,
they cannot be held liable for breach of fiduciary duty in connection therewith. “Delaware law
clearly prescribes that a director who plays no role in the process of deciding whether to approve
a challenged transaction cannot be held liable on a claim that the board’s decision to approve that
transaction was wrongful.” Tri-Star, 1995 WL 106520, at *2 (citing Citron v. E.I Du Pont de
Nemours & Co. (“Citron”), 584 A.2d 490 (Del. Ch. 1990)). In Tri-Star, the board of Tri-Star
was considering a transaction between Tri-Star and Coca Cola. Id. at *1. Two of the Tri-Star
directors recognized that they had a potential conflict of interest (because they were both Tri-Star
directors and senior executives at Coca-Cola), so they “deliberately removed themselves from
the [board’s] decision-making process.” Id. at *2. The Tri-Star court granted the two directors’
summary judgment motion on the breach of fiduciary duty claims, noting that:
[T]here is no claim or evidence that those directors played any role, overt or covert, in the board’s decision-making process. That being so, those directors’ absence from the meeting, and their abstention from voting to approve the [transaction], does, in my view, have dispositive significance, and shields these defendants from liability on any claims predicated upon the board’s decision to approve that transaction.
Id. at *9 (emphasis added).
are rebutted by the Complaint’s admission that the Chandler Representatives declined to serve on the Special Committee and affirmatively abstained from the Board vote, both of which necessarily required the Chandler Representatives to “consider all material facts” as well as the “duties they owed to Tribune” during the LBO Transactions. (Compl. ¶¶ 136, 211.) Finally, ¶ 395(b) and (l) alleges that the Chandler Representatives facilitated, advocated for, and furthered the LBO Transactions; however, other allegations of the Complaint tell a different story—one where the Chandler Representatives initially pushed the Chandler Trusts’ Proposal, rejected the Zell proposal, and only after the latter gained traction with the Special Committee did the Chandler Representatives negotiate at arms’ length on behalf of the Chandler Trusts regarding the terms of the Zell proposal.
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Similarly, in Citron, the minority shareholders of Remington brought a class action
against Remington’s board challenging a stock-for-stock merger transaction whereby DuPont,
Remington’s majority shareholder/parent, acquired the 30% of Remington’s shares that it did not
already own. Citron, 584 A.2d at 492-93. Upon receiving Dupont’s merger proposal,
Remington’s board created a merger committee comprised of three independent and unaffiliated
board members, which promptly retained advisors. Id. at *494. After intense negotiations, the
merger committee’s advisor ultimately opined that the proposal was “fair.” Id. The merger
committee recommended the transaction to Remington’s board, which, except for the DuPont
representatives (who had absented themselves from the meeting), approved the proposal. Id. at
497. The plaintiffs complained that the Remington directors breached their fiduciary duties in
approving an “unfair” transaction. Id. at 498. However, the court rejected the breach of
fiduciary duty claims against the DuPont-affiliated members of the Remington board and
concluded that they played “no role” in the merger committee’s decision to recommend the
transaction or the Remington board’s decision to approve it, noting that:
The only Remington directors against whom any arguable claim can be asserted are those who were not affiliated with DuPont, because the DuPont director-designees played no role in the Merger Committee’s, or the Board’s, decisionmaking process. On that ground alone plaintiff has failed to establish a factual or legal basis for a claim against Remington’s DuPont-affiliated directors.
Id. at 499 (emphasis added); see also In re Wheelabrator Techs. Inc. S’holders Litig., 1992 WL
212595, at *10 (Del. Ch. Sept. 1 1992) (granting motion to dismiss breach of fiduciary duty
claims against shareholder’s designees on Wheelabrator’s board because such designees recused
themselves from the Wheelabrator board’s negotiations and vote on the challenged transaction,
and, thus, “violated no fiduciary duties since they did not participate in the merger negotiations
on [Wheelabrator]’s behalf”); Propp v. Sadacca, 175 A.2d 33, 39 (Del. Ch. 1961) (holding that a
director who, in good faith, abstained from a board vote ratifying a corporate stock repurchase
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based on a perceived conflict was not “legally responsible for the transaction under attack”),
aff’d in part, rev’d in part sub nom. Bennett v. Propp, 187 A.2d 405 (Del. 1962).
Here, like the abstaining directors in Tri-Star and Citron, the Chandler Representatives
played no role in the Special Committee’s decision to recommend, or the Board’s decision to
approve, the LBO Transactions and Trustee admits as much in the Complaint. First, the
Complaint acknowledges that the Chandler Representatives did not participate in the Special
Committee. (Compl. ¶¶ 136, 138.) Second, the Complaint admits that, at the April 1, 2007
Board meeting, the Chandler Representatives did not participate in the Board’s decision-making
process regarding whether to approve the LBO Transactions and abstained from the Board vote
approving the LBO Transactions. (Id. ¶¶ 211, 224, 281.) Without more, the Chandler
Representatives’ mere attendance at the Board meeting where the LBO Transactions were
approved is insufficient to establish liability for breach of fiduciary duty. See Emerald Partners
v. Berlin, 2003 WL 21003437, at *42 (Del. Ch. Apr. 28, 2003) (finding no breach of fiduciary
duty where potentially conflicted director attended meetings of the independent board members
related to the challenged transaction, but abstained from voting and did not attempt to direct the
outcome of the vote).
C. Delaware Law Requires Abstention Where a Director Is Potentially or Actually Conflicted
Trustee alleges that the Chandler Representatives purportedly: (a) “had an obligation to
voice their views” regarding the LBO Transactions (Compl. ¶ 224); and (b) “could not discharge
their fiduciary duties simply by sitting out of the vote” (id.) and “remain[ing] silent” (id. ¶ 281).
Trustee’s argument is similar to that of the plaintiffs in Tri-Star, who argued that even if the Tri-
Star directors had a conflict, they still “had a fiduciary duty not to abstain.” Tri-Star, 1995 WL
106520, at *3 (emphasis added). The Tri-Star court rejected plaintiffs’ argument because it ran
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“squarely counter” to well-established Delaware law and “the Supreme Court’s command in
Weinberger v. UOP, Inc. [(“Weinberger”)], Del. Supr., 457 A.2d 701, 711 (1983), that
directors who have a conflict of interest relating to a proposed transaction should totally
abstain from participating in the board’s consideration of that transaction.” Id. (emphasis
added).
As is evident from the allegations in the Complaint, the Chandler Representatives
dutifully complied with Delaware law by totally abstaining from Tribune’s decision-making and
approval process regarding the LBO Transactions. Specifically, as a result of their potential and
actual conflicts of interest, the Chandler Representatives: (i) did not serve on the Special
Committee (Compl. ¶¶ 136, 138); (ii) openly represented the Chandler Trusts (not Tribune) in
arms’ length dealings regarding the LBO Transactions and related Voting Agreement and
Registration Rights Agreement (id. ¶¶ 149, 151, 204); and (iii) “remained silent” and abstained
from voting at the Tribune Board meeting where the Voting Agreement, the Registration Rights
Agreement and the related LBO Transactions were considered and approved (id. ¶¶ 211, 281).
Accordingly, contrary to Trustee’s allegations, the Chandler Representatives’ abstention was in
complete accordance with Delaware law. See Tri-Star, 1995 WL 106520, at *3 (“Messrs.
Herbert and Vincent can hardly be faulted for having observed [Weinberger’s] admonition, and
Mr. Fuchs can hardly be exposed to possible liability for having not attended and participated in
a board of directors’ meeting.”).
D. Delaware’s “Total Abstention” Doctrine Does Not Preclude the Chandler Representatives From Representing the Chandler Trusts’ Interests in Connection With the LBO Transactions
Under Delaware law, a potentially conflicted director can “totally abstain” from the
board’s consideration of a transaction while still participating in the transaction on behalf of
another party. For example, in Citron, one of the DuPont-affiliated Remington board members,
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Mr. Heckert (who was both a DuPont executive and Remington board member), negotiated the
seminal term6 of the merger agreement on behalf of DuPont at an “intense” 10-hour meeting
between the parties. 584 A.2d at 496. Notwithstanding Mr. Heckert’s decision to participate in
the merger negotiations on DuPont’s behalf (as opposed to Remington’s), the court found that
Mr. Heckert had not breached his duty of loyalty because he was not “one of the persons whose
decisionmaking actions caused th[e] result to come about” for Remington. Id. at 499 n.12
(emphasis added). Stated differently, even though Mr. Heckert clearly participated in the merger
negotiations on Dupont’s behalf, he “totally abstained” from the Remington board meeting and
played no role in Remington’s merger committee. See id. at 499; see also John Q. Hammons
Hotels, Inc. S’holder Litig., 2011 WL 227634, at *7 (Del. Ch. Jan. 14, 2011) (citing Tri-Star, the
court rejected plaintiffs’ breach of fiduciary duty claims against potentially conflicted director
and controlling stockholder because, although he affirmatively participated in the merger
discussions by separately negotiating the consideration to be paid for his Class B shares, he “did
not participate in the approval of the Merger as a director of [the corporation], and he did not
participate in the Special Committee Process” that established the price for the Class A shares on
behalf of the minority shareholders).
Here, as in Citron, the Chandler Representatives’ alleged participation in the LBO
Transactions on behalf of the Chandler Trusts (as opposed to Tribune) does not change the fact
that they “totally abstained” from Tribune’s (i.e., the Special Committee’s and the Board’s)
decision-making and approval process regarding the LBO Transactions. Thus, just as the Citron
court rejected the plaintiffs’ breach of fiduciary claim against Mr. Heckert notwithstanding his
participation in the merger negotiations solely on DuPont’s behalf, this Court should similarly 6 The seminal term was a “collar” that the Remington board required to protect Remington’s
shareholders from pre-merger stock price fluctuations.
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reject Trustee’s fiduciary duty claims against the Chandler Representatives notwithstanding their
participation in the LBO Transactions solely on behalf of the Chandler Trusts.
This result is consistent with the ruling of then-Chancellor Leo Strine (now the chief
justice of the Delaware Supreme Court) in Plymouth County Retirement Assoc. v. Brookfield
Homes Corp., et al. (“Plymouth”). (See Transcript of Oral Argument on Motions to Dismiss and
Bench Rulings of the Court in Plymouth, Civil Action No. 6062-CS (Del. Ch. October 12, 2012)
(the “Plymouth Transcript”) attached to the RJN as Exhibit D.) There, Chancellor Strine
considered a motion to dismiss filed by Robert Stelzl, a director who sat on the boards of two
affiliated companies, Brookfield Homes (“Homes”) and Brookfield Properties (“Properties”),
that were planning to merge. Because Mr. Stelzl was a member of Properties’ special
committee, and based on his potential conflict, he abstained from participating in Homes’
consideration and approval of the merger. Relying on Citron, Judge Strine granted Mr. Stelzl’s
motion to dismiss plaintiff’s breach of fiduciary duty claim on the basis that Mr. Stelzl’s decision
to openly declare a team (i.e., Properties) and abstain from participating in the other team’s (i.e.,
Homes) deliberations/vote insulated him from liability:
Stelzl I think is the strongest case for the defendants . . . . The complaint states that Stelzl was on the Properties special committee. Well, he called team then openly and honestly. He had to be on one team . . . [and] at least as I understand the common-sense approach that’s been taken with the case law to date, if someone like Mr. Stelzl declares team openly and honestly by being on the special committee of one company and recusing at the other and there’s no pleading that he did anything at the other company to taint the process, to create unfairness in the process, called, fairly, team, then he’s not supposed to be put in the untenable position of irreconcilable conflict. And so he is dismissed . . . .
(Plymouth Trx. at 112:2-113:7) (emphasis added).
E. The Complaint Contains No Facts From Which to Infer That the Chandler Representatives Breached Their Duties of Loyalty or Good Faith; Thus, They Are Entitled to the Protection of the Business Judgment Rule
The Complaint alleges that the Director Defendants (which includes the Chandler
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Representatives) both individually and collectively breached their duties of loyalty and good
faith by “[a]cting in their own [self] interests” and “engaging in self-dealing” by receiving
money on account of their sales of Tribune stock during the LBO Transactions. (Compl.
¶¶ 395(a)&(k), 396.) Under Delaware law, to allege a breach of the duty of loyalty based on the
Board’s action or omission, Trustee must establish that a majority of the Board “was either
interested in the outcome of the [LBO Transactions] or lacked the independence to consider
objectively whether the [LBO Transactions were] in the best interest of [Tribune] and all of its
shareholders.” Deutscher Tennis Bund v. ATP Tour, Inc., 610 F.3d 820, 838-39 (3d Cir. 2010)
(affirming dismissal of duty of loyalty claim against director because plaintiff failed to, in part,
establish that the majority of the board was self-interested) (emphasis in original; citation
omitted). To establish that the Board was self-interested, Trustee “must allege facts as to the
interest . . . of the individual members of that board.” Id. at 839 (emphasis in original; citation
omitted). An individual director is self-interested if the director “appear[s] on both sides of a
transaction . . . [or] derive[s] any personal financial benefit from it in the sense of self-dealing, as
opposed to a benefit which devolves upon the corporation or all stockholders generally.” Id.
(citation omitted). Similarly, to allege a breach of the duty of good faith, Trustee must allege
facts showing that the Director Defendants “intentionally fail[ed] to act in the face of a known
duty to act, demonstrating a conscious disregard for [their] duties.” Lyondell Chem. Co. v. Ryan,
970 A.2d 235, 243 (Del. 2009) (citation omitted). Trustee has plausibly alleged neither in the
Complaint with respect to the Chandler Representatives.
As for the duty of good faith, the Complaint shows that the Chandler Representatives
abstained from voting on the LBO Transactions due to their conflicts. As explained in Section
V.B above, under Delaware law, the Chandler Representatives had a duty to abstain (i.e., a duty
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to not act) as opposed to a duty to act owing to their disclosed conflicts of interest with Tribune.
Thus, by their abstention, the Chandler Representatives did not “intentionally fail to act,” rather,
they prudently discharged their duty to abstain that arose as a result of their conflicts. Further,
Trustee alleges no facts from which to infer that the Chandler Representatives abstained in bad
faith. Accordingly, Trustee cannot state a claim for breach of the duty of good faith.
Regarding the duty of loyalty, as discussed in Section I.B of the Independent Directors’
Brief, which is hereby incorporated by reference, the Complaint fails to allege facts from which
to infer that a majority of the Board was self-interested in the LBO Transactions. To be sure, the
only benefit conveyed upon the Chandler Representatives in connection with the LBO
Transactions was cash for stock, which is the exact same consideration that all of the other
Tribune shareholders received. The Chandler Representatives received no additional
consideration through the LBO Transactions. This is evidenced by the allegations in the
Complaint itself, which admits that the only “inducement” Zell purportedly provided to the
Chandler Representatives was to increase the price of the shares to $34 for all of Tribune’s
shareholders. (Compl. ¶ 203.) Accordingly, because the Complaint contains no facts from
which to plausibly infer that the Chandler Representatives, let alone the majority of the Board,
were self-interested with respect to the LBO Transactions, Trustee cannot state a claim for
breach of loyalty.
Finally, as discussed in Section I.B of the Independent Directors’ Brief, which is hereby
incorporated by reference, Trustee’s breach claims should be dismissed because the Complaint
fails to plead facts sufficient to rebut the business judgment rule, which presumes the Chandler
Representatives acted loyally and in good faith in connection with the LBO Transactions.
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F. The Exculpatory Provision in Tribune’s Charter Bars Trustee’s Breach of Duty of Care Claim
For the reasons set forth in Section I.A of the Independent Directors’ Brief, which is
hereby incorporated by reference (including the request that this Court take judicial notice of
Tribune’s charter), Trustee’s claim against the Chandler Representatives for breach of their duty
of care should be dismissed because Tribune’s charter expressly exculpates Board members from
such breaches. As set forth in Section V.C above, the Complaint alleges that the Chandler
Representatives breached their duty of care by abstaining rather than voting against the LBO
Transactions. However, as discussed in Sections V.A & V.B above, the Chandler
Representatives actually discharged their fiduciary duties by abstaining in accordance with
Delaware law. Nevertheless, even assuming that abstention constituted a breach of the Chandler
Representatives’ duty of care (it doesn’t - see Section V.C. above), the exculpatory provision in
Tribune’s charter adopted pursuant to Section 102(b)(7) of the DGCL applies to exculpate the
Chandler Representatives from money damages resulting from any breach of the duty of care.
VI. THE CHANDLER REPRESENTATIVES DID NOT AID OR ABET ANY ALLEGED BREACH OF FIDUCIARY DUTY
In Count Fifteen of the Complaint, Trustee alleges that the Chandler Representatives
aided and abetted breaches of fiduciary duty by purportedly “steering the D&O Defendants
toward a corporate strategy” and “ensuring the consummation of a transaction” that was
detrimental to Tribune, as well as “exerting undue influence over the D&O Defendants.”
(Compl. ¶ 507.) “Under Delaware law, a valid claim for aiding and abetting a breach of
fiduciary duty requires: (1) the existence of a fiduciary relationship; (2) the fiduciary breached
its duty; (3) a defendant, who is not a fiduciary, knowingly participated in a breach; and (4)
damages to the plaintiff resulted from the concerted action of the fiduciary and the
nonfiduciary.” Globis Partners, L.P. v. Plumtree Software, Inc. (“Globis”), 2007 WL 4292024,
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at *15 (Del. Ch. Nov. 30, 2007). As detailed below, Trustee’s aiding and abetting claim against
the Chandler Representatives fails because the Complaint neither: (a) plausibly pleads an
underlying claim for breach of fiduciary duty (i.e., the second element); nor (b) alleges specific
facts sufficient to infer “knowing participation by a non-fiduciary” (i.e., the third element).
A. Trustee Cannot Plead an Underlying Breach of Fiduciary Duty
A claim for aiding and abetting another’s breach of a fiduciary duty “necessarily fail[s]”
where plaintiff cannot state an underlying claim for breach of fiduciary duty. Weil v. Morgan
Stanley DW Inc., 877 A.2d 1024, 1039 (Del. Ch. 2005) (dismissing aiding and abetting claim
against Morgan Stanley for, in part, failing to state an underlying claim for breach of fiduciary
duty), aff’d, 894 A.2d 407 (Del. 2005); see also Globis, 2007 WL 4292024, at *15 (“As this
Court has determined that the Complaint fails to state a claim for any underlying breach of
fiduciary duty, BEA cannot be liable for aiding and abetting such a breach.”); In re John Q.
Hammons Hotels Inc. S’holder Litig., 2011 WL 227634, at *7 (“Having found that neither
Hammons nor the JQH board members breached a fiduciary duty, plaintiffs’ aiding and abetting
theory cannot succeed.”). For the reasons set forth in Section V above and in Section I of the
Independent Directors’ Brief, which is incorporated herein by reference, Trustee cannot state a
claim for breach of fiduciary duty. Because Trustee cannot successfully plead an underlying
breach of fiduciary duty, Trustee cannot assert a claim for aiding and abetting such breach of
fiduciary duty against the Chandler Representatives.
B. The Chandler Representatives’ “Knowing Participation” Is Not Adequately Pled and is Disproved by Trustee’s Own Allegations
Knowing participation in a board’s breach of fiduciary duty requires that a third party
offer “substantial assistance” in the fiduciary’s breach and “act with the knowledge that the
conduct advocated or assisted constitutes such a breach.” Malpiede v. Townson (“Malpiede”),
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780 A.2d 1075, 1097, n.78 (Del. 2001). To adequately plead knowing participation, the
complaint must show that the defendant “sought to induce the breach of a fiduciary duty” and
contain specific “factual allegations from which knowing participation may be inferred.” In re
BJ’s Wholesale Club, Inc. S’holders Litig., 2013 WL 396202, at *14 (Del. Ch. Jan 31, 2013)
(citation omitted). Vague and conclusory allegations that a party “had knowledge of” or
“knowingly and substantially participated,” without more, are insufficient to state a claim. In re
Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 72 (Del. 1995); In re Lukens Inc. S’holder
Litig., 757 A.2d 720, 735 (Del. Ch. 1999) (conclusory allegation that party “approved and urged”
directors to enter into a merger agreement “does not satisfy this pleading burden”).
Here, Trustee’s aiding and abetting claim rests solely on the conclusory allegation that
the Chandler Representatives “were active and knowing participants in” the D&O Defendants’
purported breaches of fiduciary duties that resulted in the approval and consummation of the
LBO Transactions. (Compl. ¶ 507.) However, this is “precisely the sort of conclusory
allegation” that fails to state an aiding and abetting a breach of fiduciary duty claim, as it
provides neither detail nor substance as to how the Chandler Representatives actively and
knowingly participated in the underlying breach. In re NYMEX S’holders Litig. (“NYMEX”),
2009 WL 3206051, at *12 (Del. Ch. Sept. 30, 2009). Trustee has not alleged any facts indicating
that any of the Chandler Representatives actually knew that any of the alleged actions of the
D&O Defendants constituted a breach of fiduciary duty (assuming such a breach occurred).
Similarly, Trustee can point to no alleged facts from which it can be reasonably inferred that the
Chandler Representatives actually “participated in the board’s decisions, conspired with the
board, or otherwise caused the board to make the decisions at issue.” Malpiede, 780 A.2d at
1098. To the contrary, the Complaint admits that the Chandler Representatives negotiated across
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the table from Tribune, were not members of the Special Committee, and affirmatively abstained
from the Board vote approving the LBO Transactions. See Wheelabrator, 1992 WL 212595, at
*10 (dismissing aiding and abetting claim against shareholder-affiliated directors who played no
role in negotiating or approving a merger on Wheelabrator’s behalf).
Finally, Trustee’s aiding and abetting claim impermissibly lumps all of the Chandler
Representatives together rather than asserting specific factual allegations regarding particular
actions taken by each named defendant (i.e., Jeffrey Chandler, Roger Goodan, and William
Stinehart Jr.) from which this Court could infer knowing participation in a breach. As such,
Trustee’s failure to allege facts sufficient to infer “knowing participation” on behalf of each of
the Chandler Representatives (on an individual basis) is fatal to Trustee’s claim.
C. Trustee Cannot State a Claim Against the Chandler Representatives Because an Aiding And Abetting Claim Can Only Be Alleged Against Non-Fiduciaries
Trustee’s aiding and abetting claim against the Chandler Representatives also fails
because such a claim can only be asserted against non-fiduciaries—otherwise it is duplicative of
Trustee’s breach of fiduciary duty claim. See NYMEX, 2009 WL 3206051, at *12 (requiring
“knowing participation in the breach by a non-fiduciary defendant” to state a claim for aiding
and abetting); Globis, 2007 WL 4292024, at *15 (same). The rationale for such a rule is straight-
forward: Where Party A is alleged to be a fiduciary, any aiding and abetting by Party A of Party
B’s breach of fiduciary duties would similarly constitute a breach of Party A’s fiduciary duties.
In such situations, there is no need to “cast an imputational net” of liability over those against
whom a plaintiff already has a direct claim for breach of fiduciary duty. Parfi Holding AB v.
Mirror Image Internet, Inc., 794 A.2d 1211,1238 (Del. Ch. 2001) (likening civil conspiracy
claims to aiding and abetting claims, and dismissing such claim as duplicative of the direct
breach of fiduciary claims), rev’d on other grounds, 817 A.2d 149 (Del. 2002).
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Here, the Complaint alleges that “[a]lthough the Chandler [] Representatives abstained
from voting on the LBO, they were still Tribune fiduciaries at this time” by virtue of their
directorships. (Compl. ¶ 224 (emphasis added).) As such, Trustee is bound by its affirmative
allegation that the Chandler Representatives were fiduciaries of Tribune at the time of the alleged
aiding and abetting (which allegation should be assumed true for purposes of this motion).
Accordingly, because an aiding and abetting claim can only be asserted against non-fiduciaries
under Delaware law, there is zero basis for Trustee to assert an aiding and abetting claim against
the Chandler Representatives.
VII. TRUSTEE’S UNJUST ENRICHMENT CLAIM SHOULD BE DISMISSED
Count Thirty-One of the Complaint alleges that the Chandler Representatives were
unjustly enriched by the distributions they received from Tribune as a result of their “wrongful
acts and omissions” in connection with the LBO Transactions. (Compl. ¶ 609.) Trustee’s unjust
enrichment claim, which seeks restitution through the disgorgement of the payments received by
the Chandler Representatives (id. ¶ 611), fails for three independent reasons. First, the claim is
preempted by section 546(e) of the Bankruptcy Code, which precludes the avoidance of a
settlement payment made in connection with a leveraged buy-out.7 Second, the Complaint fails
to plead specific facts to establish any underlying wrongful conduct by the Chandler
Representatives. Third, Trustee fails to allege the lack of an adequate remedy at law.
A. Trustee’s Unjust Enrichment Claim is Preempted by Federal Law
It is well settled that section 546(e) of the Bankruptcy Code preempts state law unjust
enrichment claims that seek restitution of settlement payments made by or to a financial
7 The only avoidance claim excepted from the section 546(e) “safe harbor” is a claim for intentional fraudulent transfer under section 548(a)(1)(A) of the Bankruptcy Code. 11 U.S.C. § 546(e).
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institution. Official Comm. of Unsecured Creditors v. Fleet Retain Fin. Grp. (In re Hechinger
Investment Co.), 274 B.R. 71, 96 (D. Del. 2002) (“Claims that Congress deemed unavoidable
under sections 544(b) and 546(e) of the Bankruptcy Code cannot be avoided by simply re-
labeling avoidance claims as unjust enrichment claims; if they could, the exemption set forth in
section 546(e) would be rendered useless.”). In Contemporary Indust. Corp. v. Frost, 564 F.3d
981, 989 (8th Cir. 2009) (which, like this case, involved an LBO) the plaintiff sought to recover
settlement payments through state law claims for unjust enrichment and illegal shareholder
distributions. Although the state law claims did not fall within the textual confines of section
546(e) (i.e., they were not claims to “avoid a transfer” brought under sections 544 or 548), it
made no difference. The Eighth Circuit explained that “[a]llowing recovery on these [state law]
claims would render the [section] 546(e) exemption meaningless, and would wholly frustrate the
purpose behind that section.” Id. at 988. In rendering its decision, the Eight Circuit relied on
Hechinger, another case involving an LBO, where the court held that section 546(e) preempted
an unjust enrichment claim:
If the court were to entertain the Committee’s unjust enrichment claim, a claim that effectively acts as an avoidance claim against the shareholders . . . and allowed the Committee to circumvent section 546(e) by asserting a state law claim for unjust enrichment . . . , the purpose of section 546(e) would be frustrated.
274 B.R. at 96-98; see also AP Services LLP v. Silva, 483 B.R. 63, 71 (S.D.N.Y. 2012) (“The
Court could not permit the unjust enrichment claim to go forward without frustrating the purpose
of Section 546(e).”); U.S. Bank N.A. v. Verizon Commc’ns Inc., 892 F. Supp. 2d 805, 824-25
(N.D. Tex. 2012) (“allowing the plaintiff . . . to recover for the cash payments under state
unlawful dividend statute would render Section 546(e) meaningless”); In re U.S. Mortgage
Corp., 492 B.R. 784, 817 (Bankr. D.N.J. 2013) (“[C]ircumventing the provisions of §546(e) by
merely re-labeling claims but seeking essentially the same relief frustrates the purpose of
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24
§546(e).”). Based on the foregoing, and as further discussed in Section III of the Independent
Directors’ Brief, which is hereby incorporated by reference, Trustee’s unjust enrichment claim is
preempted by section 546(e) and should be dismissed with prejudice.
B. Trustee Has Failed to Adequately Plead the Tortious Conduct Upon Which the Unjust Enrichment Claim is Based
Even if the unjust enrichment claim were not preempted, Trustee has failed to properly
allege facts sufficient to state an unjust enrichment claim against the Chandler Representatives.
To properly plead a claim for unjust enrichment, Trustee must allege: “1) an enrichment, 2) an
impoverishment, 3) a relation between the enrichment and the impoverishment, 4) the absence of
justification and 5) the absence of a remedy provided by law.” LaSalle Nat’l Bank v. Perelman,
82 F. Supp. 2d 279, 294-95 (D. Del. 2000). The fourth element, absence of justification,
embodies the requirement of a wrongful or tortious act: “Under Delaware law, unjust enrichment
requires an absence of justification for the transfer that enriches one party and impoverishes the
other. That requirement usually entails some type of wrongdoing or mistake at the time of
transfer.” In re Lear Corp. S’holder Litig., 967 A.2d 640, 657 n.73 (Del. Ch. 2008) (citations
omitted).
Courts have opined that “an unjust enrichment claim is essentially another way of stating
a traditional tort claim (i.e., if defendant is permitted to keep the benefit of his tortious conduct,
he will be unjustly enriched).” Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris,
Inc. (“Phillip Morris”), 171 F.3d 912, 936 (3d Cir. 1999). Thus, it logically follows that
“[w]here the plaintiff cannot satisfy the elements required to make out a tort claim, an argument
that the defendant has been unjustly enriched by tortious conduct necessarily fails as well.” Beck
& Panico Builders, Inc. v. Straitman, 2009 WL 5177160, at *7 (Del. Super. Ct. Nov. 23, 2009).
Stated differently, in order to state a claim for unjust enrichment, the plaintiff must plead specific
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25
facts establishing the underlying tort or wrongful conduct perpetrated by the defendant. Thus,
where the tort claim underlying the unjust enrichment claim is dismissed, the unjust enrichment
claim itself must also be dismissed. See Perelman, 82 F. Supp. 2d at 295 (dismissing unjust
enrichment claim where plaintiff failed to allege the underlying tort claim against defendants);
Phillip Morris, 171 F.3d at 937 (“We can find no justification for permitting plaintiffs to proceed
on their unjust enrichment claim once we have determined that the District Court properly
dismissed the traditional tort claims . . . .”).
As discussed above, the Chandler Representatives have moved to dismiss Trustee’s
breach of fiduciary duty and aiding and abetting claims in connection with the LBO
Transactions. If, by this motion, the Court dismisses these underlying claims against the
Chandler Representatives, then Trustee’s unjust enrichment claim must be dismissed as well.
Furthermore, Trustee cannot rely on its fraudulent transfer claim (Count One) as the
underlying basis for its unjust enrichment claim because the Complaint does not actually allege
that the Chandler Representatives engaged in any wrongdoing in connection with the purported
fraudulent conveyance. Just as Trustee’s generalized allegations against the “Director
Defendants” in Count Three (discussed in Section V.B above) are wholly inapplicable to the
Chandler Representatives because of their unique factual circumstances, Trustee’s allegations
against the D&O Defendants/Director Defendants in Count One are similarly inapposite to the
Chandler Representatives for the same reasons.8 In fact, Trustee does not state a single
8 Specifically, because the Chandler Representatives played no role in recommending or
approving the LBO Transactions on Tribune’s behalf, the Chandler Representatives could not have: (i) relied upon faulty advice/analysis in approving the transactions (Compl. ¶ 379(d)&(j)); (ii) caused the transfer of virtually all of Tribune’s value (id. ¶ 379(g)); (iii) created Holdco and Finance or authorized intercompany obligations (id. ¶ 379(h)); (iv) advocated/voted in favor of the LBO Transactions (id. ¶ 379(i)); or (v) failed to analyze the impact thereof (id. ¶ 379(k)).
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allegation of wrongdoing specific to the Chandler Representatives in all of Count One. As such,
as alleged in the Complaint, Count One cannot constitute the “tort” or “wrongdoing” that
underlies Trustee’s unjust enrichment claim.
Finally, the Complaint is wholly devoid of specific factual allegations from which it can
be inferred that the Chandler Representatives engaged in any other tortious behavior upon which
Trustee’s unjust enrichment claim could stand.9 Accordingly, because Trustee has failed to
adequately plead an underlying tort claim against the Chandler Representatives, Trustee has
necessarily failed to state a claim for unjust enrichment.
C. Trustee Fails to Allege the Lack of an Adequate Remedy at Law
As detailed in Section III of the Independent Directors’ Brief, which is hereby
incorporated by reference, Trustee’s unjust enrichment claim should be dismissed with prejudice
because the Complaint fails to allege the lack of an adequate remedy at law. Because other
counts in the Complaint, specifically Count Three and Count Fifteen, seek the identical remedy
of disgorgement of funds from the LBO Transactions, Trustee has an adequate remedy at law.
(Compl. ¶¶ 399, 510.)
VIII. THE COURT SHOULD GRANT THIS MOTION WITHOUT LEAVE TO AMEND
Leave to amend a complaint “should generally be denied in instances of futility, undue
delay, bad faith or dilatory motive, repeated failure to cure deficiencies by amendments
previously allowed, or undue prejudice to the non-moving party.” Burch v. Pioneer Credit
9 On its face, Count Thirty-One of the Complaint is sprinkled with conclusory allegations
against the Chandler Representatives that attack their purported: (a) “wrongful acts and omissions”; (b) “wrongful receipt of payments and distributions from Tribune”; and (c) “violat[ion of] fundamental principles of justice, equity, and good conscience” (Compl. ¶ 609), none of which are supported by allegations of specific facts from which a reasonable inference of tortious conduct can be drawn in Trustee’s favor.
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Recovery, Inc., 551 F.3d 122, 126 (2d Cir. 2008) (per curiam) (denying leave to amend due to
futility of proffered amendments). Granting this motion without leave to amend is appropriate
because Trustee (and the Committee before him) has had ample opportunity to adequately plead
his claims (six opportunities in over three years to be exact). See Official Comm. of Unsecured
Creditors of Color Tile, Inc. v. Coopers & Lybrand, LLP, 322 F.3d 147, 168 (2d Cir. 2003)
(affirming denial of leave to amend where there was a “repeated failure to cure deficiencies by
amendments previously allowed”) (citation omitted); Salinger v. Projectavision, Inc., 972 F.
Supp. 222, 236 (S.D.N.Y. 1997) (denying further leave to amend because “[t]hree bites at the
apple is enough”).
Additionally, due to the existence of the Examiner’s Report,10 which is over 1,400 pages
long, includes over 1,100 exhibits, and reflects the Examiner’s painstaking efforts to develop the
factual record regarding the LBO Transactions (including the claims addressed herein), Trustee
must know all of the relevant facts and would not benefit from additional discovery at this stage.
In fact, Trustee has already included most of the widely-known facts into the 196 page, 654
paragraph Complaint. As such, it is virtually impossible for Trustee to craft a Sixth Amended
Complaint containing new allegations that would entitle him to relief. See City of Pontiac
Policemen's and Firemen's Retirement System v. UBS AG, 2014 WL 1778041, at *8 (2d Cir.
May 6, 2014) (affirming denial of leave to amend where the plaintiff already had one opportunity
10 Kenneth Klee (the “Examiner”) and his team spent tens of thousands of hours and incurred
over $10 million in fees investigating and researching the issues surrounding the LBO Transactions. They interviewed numerous witnesses and reviewed hundreds of pages of briefing from the parties before the Bankruptcy Court. They also analyzed tens of thousands of pages of documents, including all or virtually all of the documents referenced in the Complaint. The Examiner filed his report (the “Examiner’s Report”) with the Bankruptcy Court on August 3, 2010. The conclusions reached in the Examiner’s Report do not support Trustee’s claims against the Chandler Representatives (or the Chandler Trusts) for breach of fiduciary duty or aiding and abetting breach of fiduciary duty.
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28
to amend its complaint and there were no additional facts or legal theories that plaintiff could
have asserted if leave were granted). Thus, granting Trustee leave to amend the Complaint at
this stage would be futile. See Bd. of Trustees of City of Ft. Lauderdale Gen. Emps.’ Ret. Sys. v.
Mechel OAO, 811 F. Supp. 2d 853, 883 (S.D.N.Y. 2011) (denying leave to amend claims as
futile).
IX. CONCLUSION
For the reasons stated above, Trustee cannot state a claim against the Chandler
Representatives for: (a) violations of DGCL § 160 and/or § 173 (Count Two); (b) breach of
fiduciary duty (Count Three); (c) aiding and abetting breach of fiduciary duty (Count Fifteen);
or, (d) unjust enrichment (Count Thirty-One). Accordingly, these Counts should be dismissed
with prejudice and without leave to amend.
Dated: May 23, 2014 GIBSON, DUNN & CRUTCHER LLP
By: /s/ Joel A. Feuer Joel A. Feuer JOEL A. FEUER [email protected] OSCAR GARZA [email protected] DOUGLAS G. LEVIN [email protected] 2029 Century Park East Los Angeles, CA 90067 Tel: (310) 551-8808 Attorneys For Defendants Jeffrey Chandler, Roger Goodan, And William Stinehart, Jr.
101721375.4
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CERTIFICATE OF SERVICE
I certify that on May 23, 2014, the foregoing was electronically filed through the CM/ECF system for the United States District Court, Southern District of New York and served through the Court’s electronic filing system to all counsel and parties of record.
Dated: May 23, 2014 GIBSON, DUNN & CRUTCHER LLP
By: /s/ Joel A. Feuer Joel A. Feuer [email protected] 2029 Century Park East Los Angeles, CA 90067 Tel: (310) 551-8808
Case 1:11-md-02296-RJS Document 5944 Filed 05/23/14 Page 34 of 34
1666420
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
X ECF CASE IN RE: TRIBUNE COMPANY FRAUDULENT CONVEYANCE LITIGATION
Consolidated Multidistrict Action 11-MD-2296 (RJS) 12-MC-2296 (RJS)
X THIS DOCUMENT RELATES TO: MATTERS LISTED ON EXHIBIT 1
MOTION #6: MOVANTS’1 MEMORANDUM SUPPORTING THEIR MOTION TO DISMISS THE SECTION 548 CLAIMS ALLEGED IN COUNT 34 OF THE MAIN ADVERSARY ACTION AND COUNT 2 OF THE TAG-ALONG ACTIONS AS TO TRANSITION PLAN PAYMENTS
X
I. INTRODUCTION
Count 34 of the Fifth Amended Complaint in Kirschner v. FitzSimons, et al.
(12-CV-2652-RJS) (“Main Adversary Action”) and Count 2 of the 18 Tag-Along Actions are
brought under Section 548 of the Bankruptcy Code (11 U.S.C. § 548). They seek to avoid,
inter alia, certain severance payments made to Tribune executives who were involuntarily
terminated within a year of the LBO. These payments were made pursuant to the Tribune’s
Transitional Compensation Plan for Executive Employees (the “Plan”), which was enacted by
the Tribune Board in 1985, more than 20 years prior to Tribune’s December 2008 bankruptcy.
The Plan was last amended in July 2006, more than two years prior to the bankruptcy. There is
1 Movants on this motion are: James L. Ellis, Dennis J. FitzSimons, Donald C. Grenesko, David Dean Hiller, Timothy P. Knight, Timothy J. Landon, Thomas D. Leach, Luis E. Lewin, R. Mark Mallory, Richard H. Malone, David P. Murphy, John E. Reardon, Irene M.F. Sewell, Scott C. Smith, John J. Vitanovec, and Kathleen M. Waltz. Vincent A. Malcolm (Case No. 13-CV-3752 (RJS)) and Marc S. Schacher (Case No. 13-CV-3747 (RJS)) have, upon information and belief, not appeared in this case or participated in this motion, but the arguments made herein appear to apply to these two individuals as well.
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no allegation that the recipients were paid any more than the Plan specified. Both the Movants
and the transfers that are the subjects of this motion are highlighted in yellow on Exhibits A
and B to the Declaration of Amy Y. Cho in Support of Movants’ Motion to Dismiss the Section
548 Claims Alleged in the Main Adversary Action and Related Tag-Along Actions as to
Transition Plan Payments (“Cho Decl.”).
The key time period under Section 548 is the two years prior to the filing of a bankruptcy
petition. Where an obligation is incurred more than two years prior to bankruptcy, a trustee may
not seek to avoid it. In this case, the obligation at issue (i.e., the obligation incurred under the
Plan to later make severance payments if specified conditions are met) was incurred more than
two years prior to the time of the bankruptcy. Accordingly, the Plan is an obligation that cannot
be avoided under Section 548.
Section 548 also covers the Trustee’s authority to avoid transfers (or payments) that are
made by the debtor within two years of bankruptcy. In this case, the severance payments due
under the Plan are the executive transition payments and excise tax gross-up payments (together,
“Transition Plan Payments”) shown on Exhibits A and B to the Cho Decl. All of them were
made after the LBO, i.e., within a year of the bankruptcy. The Trustee may therefore seek to
avoid the listed Transition Plan Payments under Section 548. To do so successfully, however,
the Trustee must allege and prove (as to each transfer) that the transferor (post-LBO Tribune)
either (1) received less than reasonably equivalent value in exchange for payment of the
obligation that was due; or (2) made the severance payment with actual intent to hinder, delay or
defraud the company’s creditors. Item No. 2, under established law, must be pled with
particularity.
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As outlined below, the Trustee fails to allege the elements necessary to state a claim for
avoidance of the payments made. First, the complaints contain only a bare legal conclusion
(with no factual support) that the transferor failed to receive reasonably equivalent value, which
is clearly insufficient under Twombly and Iqbal. Moreover, courts have been clear that a dollar-
for-dollar payment of an unavoidable debt (such as a payment due under a severance plan put in
place more than two years before bankruptcy) is a payment made for reasonably equivalent
value. Second, the Trustee has failed to allege any facts or set forth any plausible theory, let
alone one pled with particularity, to support his asserted legal conclusion that post-LBO Tribune,
when paying these unavoidable obligations, was acting with the intent to hinder, delay or defraud
other creditors. For these reasons, the Trustee’s attempt to use Section 548 to avoid the specified
Transition Plan Payments must be dismissed for failure to state a claim.
II. STATEMENT OF FACTS
The Plan2 was enacted and approved by Tribune’s Board of Directors in 1985, more than
twenty years before the LBO. (Cho Decl., Ex. C at 1.) Over the years, it was amended from
time to time. Tribune’s Board approved the last amendment in July 2006 (id.), more than two
years before the December 2008 bankruptcy filing.
Tribune’s Plan states that it was intended to attract and retain executives. (Id.) Plan
payments were based on a formula and would become due only upon the occurrence of two
events. The first necessary event was a Change in Control of the Company. (Id. § 4.) The Plan
defined a Change in Control as the “[c]onsummation of a . . . merger . . . involving Tribune
2 Exhibit C to the Cho Decl. is Tribune Company 2007 Form 10-K, Exhibit 10.7, which describes the Plan. The Court is permitted to take judicial notice of this SEC filing. See Fed. R. Evid. 201; Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (for purposes of a motion to dismiss, a complaint is deemed to include public disclosure documents required by law to be filed with the SEC); Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991) (same).
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Company . . . to which persons who were shareholders of Tribune Company immediately prior to
such . . . merger . . . do not, immediately thereafter, own . . . 50% or more of the combined
voting power of the then outstanding securities entitled to vote . . . .” (Id. § 4(c).) The LBO
therefore constituted a Change in Control under the Plan, and the Trustee does not allege
otherwise. On December 20, 2007, Sam Zell (who had put $315 million of his own money into
the transaction) became the new Chairman and CEO of the Company.
The Change in Control, by itself, was not sufficient to require new Tribune to make
Transition Plan Payments to anyone. The second event necessary to make a payment come due
under the Plan was a termination: a Plan participant became entitled to a Transition Plan
Payment (executive transition and related excise tax gross-up payments) if involuntarily
terminated after a Change in Control. (Id. § 3.)
As the Trustee alleges, each of the Movants “had a right to payment on account” of the
“obligation owed to” him under the Plan. (5th Am. Compl. ¶ 646.) Accordingly, the Transition
Plan Payments “were for, or on account of, debts owed” by the Company. (Id.) The Trustee
does not allege that any Transition Plan Payment was greater than the amount set by the formula
in the Plan. By making each Transition Plan Payment, the Company eliminated a debt that it
owed. (See Cho Decl. Exs. A-B (charts identifying the Movants and the payments at issue).)
III. THE TRUSTEE HAS NOT PLED THE ESSENTIAL ELEMENTS OF A SECTION 548 CLAIM
A. The Standard Under Rule 12(b)(6)
Rule 12(b)(6) allows a party to move to dismiss a cause of action for “failure to state a
claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). A plaintiff’s factual
allegations in a complaint “must be enough to raise a right to relief above the speculative level.”
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). It is not enough to recite the elements of
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the cause of action or to make only conclusory legal assertions. Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009). A complaint “must contain sufficient factual matter, accepted as true, to ‘state a
claim to relief that is plausible on its face.’” Id. (quoting Twombly, 550 U.S. at 570).
B. The Obligation Was Incurred More Than Two Years Before Bankruptcy And Therefore Cannot Be Avoided Under Section 548
Tribune’s Plan constituted an obligation to make specified payments in the event of a
future Change in Control and an involuntary termination. The Plan was adopted in 1985 and last
amended in July 2006. (Cho Decl., Ex. C at 1.) Because the bankruptcy petition was filed in
December 2008, the Plan is an obligation (i.e., a commitment to make specified payments in the
event of a Change in Control and involuntary termination) that was incurred more than two years
prior to bankruptcy. Consequently, the Plan is an obligation that cannot be avoided under
Section 548(a)(1): “The trustee may avoid . . . any obligation . . . that was . . . incurred on or
within 2 years before the filing date of the petition, if the debtor . . . .” (emphasis added).
In a possible bid to bring the Plan within the two-year period, the Trustee alleges that
Tribune “reaffirm[ed]” the obligation to make Transition Plan Payments (see 5th Am. Compl.
¶ 640), presumably referring to the April 2007 Merger Agreement cited at Paragraph 160 of the
Fifth Amended Complaint. That agreement simply provided that Tribune, as the surviving
corporation under the merger, would fully “honor, fulfill, and discharge” its preexisting
obligations under the Plan. It did not change the obligation in any way and simply reflected a
result that would have occurred by operation of law in any event. See, e.g., Tourageau v.
Uniroyal, Inc., 138 F. Supp. 2d 259, 268 (D. Conn. 2001) (“Indeed, even if the obligation had
not been expressly assumed, under Delaware law, which governed the merger, the surviving
company would assume by operation of law all debts, liabilities, and duties of the merging
companies to the same extent as if it had incurred them itself”) (citing Del. Code Ann. tit. 8,
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§ 259 (West)).
The alleged “reaffirmation” of an obligation incurred more than two years prior to
bankruptcy does not transform that obligation into a new one that would be avoidable under
Section 548. In re Incentium, LLC, 473 B.R. 264 (E.D. Tenn. 2012) rejected a similar effort to
generate a new obligation from a preexisting and unavoidable one. In Incentium, the trustee
brought a claim pursuant to Section 548 seeking to avoid the debtor’s separation agreement with
its former president-CEO as a fraudulent obligation and the payments made thereunder as
preferential transfers. The CEO’s employment agreement had been signed outside of
Section 548’s two-year window, while his subsequent separation agreement was signed within
the two-year window. The court rejected the argument that the signing of the separation
agreement created a new obligation within Section 548’s two-year window:
[T]here was not a new . . . severance obligation created in favor of an insider within two years of the debtor’s bankruptcy filing. Rather, the severance obligation in the Separation Agreement was the same severance obligation created by the original Employment Agreement and was part of the overall compensation package negotiated to hire the defendant as the debtor’s CEO. . . . [I]t was not changed to a different severance obligation within two years of the debtor’s bankruptcy filing that could be avoided . . . The severance obligation in this proceeding was created in the original Employment Agreement and it is not avoidable . . . .
Id. at 272.
No different result is appropriate here. Tribune’s obligation under the Plan was incurred
(at the latest) by July 2006. The Merger Agreement did not change or modify that obligation.
Tribune’s obligation was incurred outside Section 548’s two-year look-back period and is
therefore not subject to avoidance. Id.
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C. The Trustee Has Failed To Adequately Plead An Avoidable Transfer
Tribune employees were entitled to payments under the Plan when two conditions were
met: (a) a Change in Control and (b) involuntary termination within a year of the Change. To
state a claim under Section 548 for avoidance of such a payment, the Trustee must allege that the
transferor (here, post-LBO Tribune) (1) received less than reasonably equivalent value for the
transfer (a required element of a “constructive fraud” claim); or (2) made the payments with the
actual intent to hinder, delay or defraud the company’s creditors (an “actual fraud” claim). The
Trustee failed to do so as a matter of law.
1. The Trustee Has Failed To Allege That The Transferor Received Less Than Reasonably Equivalent Value
To properly plead this element of a Section 548 constructive fraud claim, the Trustee
must allege facts that would, if true, establish that post-LBO Tribune “received less than a
reasonably equivalent value” in exchange for making the Transition Plan Payments. 11 U.S.C.
§ 548(a)(1)(B)(i). The Trustee has not done so. The Trustee does not allege that any recipient
was paid more than he was due under the Plan, and properly describes the amounts due as debts
of the Company. Payments that match, on a dollar-for-dollar basis, the amounts due under an
unavoidable obligation are payments made for reasonably equivalent value as a matter of law. In
re Wilkinson, 196 Fed. Appx. 337, 341-43 (6th Cir. 2006) (dollar-for-dollar reduction in debt to
third party was reasonably equivalent value for the transfer); In re Incentium, 473 B.R at 272 (as
cited above); In re Trinsum Grp., Inc., 460 B.R. 379, 388-89 (Bankr. S.D.N.Y. 2011) (dismissing
constructive fraud claim because “it is presumed the transfers were made ‘for value’” when
promissory notes associated with the transfers were executed outside of the two-year reach-back
period); In re USDigital, Inc., 443 B.R. 22, 39-40 (Bankr. D. Del. 2011) (constructive fraud
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claim dismissed for failure to allege facts demonstrating plausible claim for relief when payment
resulted in direct dollar-for-dollar reduction in debtor’s assumed liability).
The Trustee’s only attempt to properly plead this required element of his constructive
fraud claim is a bald legal conclusion: Tribune received “less than reasonably equivalent value”
for making the Transition Plan Payments. (5th Am. Compl. ¶ 640.) This bare recitation of an
essential element of his claim under Section 548 does not comply with Federal Rule of Civil
Procedure 8. See Iqbal, 556 U.S. at 678 (reiterating that labels, conclusions, and formulaic
recitations of elements of a cause of action do not meet the Rule 8 pleading standard); In re
Garcia, 494 B.R. 799, 815-16 (Bankr. E.D.N.Y. 2013) (constructive fraud claim dismissed when
plaintiff “merely state[d] in conclusory fashion that he did not receive reasonably equivalent
value” because “[a] complaint predicated on the mere possibility that a plaintiff will not receive
reasonably equivalent value in exchange for transferred property is not plausible on its face”).
The Trustee has thus failed to properly plead constructive fraud as to the Transition Plan
Payments and its claim must be dismissed.
2. The Trustee Has Failed To Allege That Post-LBO Tribune Made Transition Plan Payments With The Intent To Hinder, Delay Or Defraud Creditors
Section 548 allows avoidance of a transfer made within the two years prior to bankruptcy
if the debtor “made such transfer . . . with actual intent to hinder, delay or defraud” creditors.
See 11 U.S.C. § 548(a)(1)(A) (emphasis added). There are two parts to that test: the first is that
the transferor must have the requisite intent; the second is that it must have that intent at the time
of the transfer. Thus the first step in the analysis requires the Trustee to demonstrate that the
transferor had the requisite fraudulent intent. In re Bayou Grp., LLC, 362 B.R. 624, 631 (Bankr.
S.D.N.Y. 2007); see also In re Actrade Fin. Techs. Ltd., 337 B.R. 791, 808 (Bankr. S.D.N.Y.
2005) (same); In re Andrew Velez Constr., Inc., 373 B.R. 262, 269 (Bankr. S.D.N.Y. 2007)
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(dismissing complaint alleging actual fraud because it contained “no allegations whatsoever of
the Debtor’s own intent to hinder, delay or defraud its creditors”). Then the Trustee must allege
that the transferor had the requisite fraudulent intent as of the time the transfer was made. See In
re Bayou Grp., LLC, 439 B.R. 284, 304 (S.D.N.Y. 2010) (Section 548(a)(1)(A) claims turn on
the intent of the debtor in making the transfer); In re Roca, 404 B.R. 531, 543 (Bankr. D. Ariz.
2009) (“When performing [Section 548(a)(1)(A)] analysis, it is the transferor’s intent at the time
of the transfer which is crucial.”). Finally, any claim of intent to defraud also must be pled with
particularity, as required by Fed. R. Civ. P. 9(b), a requirement that frequently leads to dismissal
of Section 548(a)(1)(A) claims. See In re MarketXT Holdings Corp., 361 B.R. 369, 395 (Bankr.
S.D.N.Y. 2007) (dismissing actual fraud claim because fraudulent intent was insufficiently
alleged); In re Actrade, 337 B.R. at 808 (same); In re M. Fabrikant & Sons, Inc., 480 B.R. 480,
484-85 (S.D.N.Y. 2012), aff’d, 547 F. App’x 55 (2d Cir. 2013) (same); see also In re Sharp Int’l
Corp., 403 F.3d 43, 56 (2d Cir. 2005) (affirming dismissal of state-law intentional fraudulent
conveyance claim because complaint did not adequately allege “intent to hinder, delay, or
defraud”).
Each Transition Plan Payment at issue in Count 34 was made after the requisite Change
in Control, after Sam Zell had become the company’s Chairman and CEO, and after the recipient
of the payment had been terminated. The only allegation directed at the transferor’s intent is the
Trustee’s one-liner that “Tribune . . . made the Insider Payments [defined as including Transition
Plan Payments] . . . with the actual intent to hinder, delay and defraud Tribune’s creditors.” (5th
Am. Compl. ¶ 639.) This conclusory allegation is nothing more than a “formulaic recitation of
[one of] the elements of a cause of action” under the plain language of Section 548 and therefore
cannot survive a motion to dismiss. Twombly, 550 U.S. at 555; In re Adler, 372 B.R. 572, 581
Case 1:11-md-02296-RJS Document 5934 Filed 05/23/14 Page 9 of 11
10 1666420
(Bankr. E.D.N.Y. 2007) (“conclusory statements that [defendants] acted with the actual intent to
hinder, delay, or defraud creditors without anything more” did not survive Rule 12(b)(6) motion
to dismiss). Moreover, the Trustee has failed to plead any facts to show that, at the time the
transferor (i.e., post-LBO Tribune) made severance payments to terminated executives, the
transferor did so with an intent to hinder, delay or defraud the Company’s other creditors. The
Trustee has not plausibly alleged – with particularity or otherwise – that after Mr. Zell invested
$315 million of his own money in the transaction and assumed the positions of Chairman and
CEO, post-LBO Tribune intentionally defrauded other creditors by funneling money to
terminated individuals who had no right to the payments. Any claim based on such a theory
would fail the Twombly/Iqbal plausibility standard. Iqbal, 556 U.S. at 678.
In sum, there are no factual allegations to support the Trustee’s contention that the
Transition Plan Payments were made by post-LBO Tribune with the actual intent to defraud
creditors. As shown above, the payments at issue were made pursuant to a long-established
Transitional Compensation Plan For Executive Employees, there is no allegation that any of the
terminated executives received more than he was due under the Plan, and the transferor received
equivalent value by eliminating a debt dollar-for-dollar in exchange for the transfer. Any
contention that the transferor gave something away for nothing in order to injure other creditors
is both implausible and contrary to the well-pled allegations of the Trustee’s own complaint.
The Trustee’s actual fraud claims should be dismissed.
IV. CONCLUSION
For the foregoing reasons, Count 34 of the Fifth Amended Complaint and Count 2 of the
Tag-Along Complaints against James Ellis, Vincent Malcolm, David Murphy, Marc Schacher
and Irene Sewell should be dismissed with prejudice for failure to state a claim as it relates to the
Transition Plan Payments identified in Exhibits A and B to the Cho Decl.
Case 1:11-md-02296-RJS Document 5934 Filed 05/23/14 Page 10 of 11
1666420
Dated: May 23, 2014 SUGAR FELSENTHAL GRAIS AND HAMMER LLP
By: /s/ Mark S. Melickian Mark S. Melickian
Mark S. Melickian 30 North LaSalle Street Suite 3000 Chicago, Illinois 60602 Telephone: (312) 704-9400 Facsimile: (312) 372-7951
Attorneys for James L. Ellis and David P. Murphy
Respectfully submitted, GRIPPO & ELDEN LLC
By: /s/ George R. Dougherty George R. Dougherty John R. McCambridge George R. Dougherty (#6196845) Maile H. Solís GRIPPO & ELDEN LLC 111 South Wacker Drive Chicago, Illinois 60606 Telephone: (312) 704-7700 Facsimile: (312) 558-1195 Email: [email protected] Attorneys for Dennis J. FitzSimons, Donald C. Grenesko, David Dean Hiller, Timothy J. Landon, Thomas D. Leach, Luis E. Lewin, R. Mark Mallory, Richard H. Malone, John E. Reardon, Irene M.F. Sewell, Scott C. Smith, John J. Vitanovec, and Kathleen M. Waltz
HANNAFAN & HANNAFAN, LTD.
By: /s/ Blake T. Hannafan Blake T. Hannafan
Blake T. Hannafan One East Wacker Drive Suite 2800 Chicago, Illinois 60601 Telephone: (312) 527-0055 Facsimile: (312) 527-0220
Attorneys for Timothy P. Knight
Case 1:11-md-02296-RJS Document 5934 Filed 05/23/14 Page 11 of 11
Case 1:11-md-02296-RJS Document 5934-1 Filed 05/23/14 Page 1 of 2
EXHIBIT 1
to Motion #6: Movants' Memorandum Supporting Their
Motion to Dismiss the Section 548 Claims Alleged in Count 34 of the
Main Adversary Action and Count 2 of the Tag-Along Actions as
to Transition Plan Payments
Case 1:11-md-02296-RJS Document 5934-1 Filed 05/23/14 Page 2 of 2
Exhibit 1 to Motion to Dismiss re: Section 548
Case Number Case Name
12-CV -2652 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Dennis J. FitzSimons, et al.
13-CV -3737 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Irene M.F. Sewell
13-CV-3742 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. David P. Murphy
13-CV-3746 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. James L. Ellis
13-CV-3747 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Marc S. Schacher
13-CV -3752 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v.Vincent A. Malcolm
1669966
1661795
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
X ECF CASE IN RE: TRIBUNE COMPANY FRAUDULENT CONVEYANCE LITIGATION
Consolidated Multidistrict Action 11-MD-2296 (RJS) 12-MC-2296 (RJS)
X THIS DOCUMENT RELATES TO: MATTERS LISTED ON EXHIBIT 1
MOTION #7: MOVANTS’1 MEMORANDUM SUPPORTING THEIR MOTION TO DISMISS CERTAIN SECTION 547 CLAIMS ALLEGED IN COUNT 35 OF THE MAIN ADVERSARY ACTION AND COUNT 1 OF THE TAG-ALONG ACTIONS
X I. Introduction.
Relying on Section 547 of the Bankruptcy Code, the Litigation Trustee (“Trustee”) seeks
to avoid certain payments made to defendants during the year prior to the bankruptcy petition.2
This motion seeks to dismiss the Trustee’s Section 547 claims against specific transfers made
more than 90 days prior to bankruptcy. Both the movants and the transfers that are the subjects
of this motion are highlighted in yellow on Exhibits A and B to the Declaration of Amy Y. Cho
in Support of Movants’ Motion to Dismiss Certain Section 547 Claims Alleged in Count 35 of
1 The Movants in this motion are: Betty Ellen Berlamino, Tom E. Ehlmann, James L. Ellis, Dennis J. FitzSimons, Vincent R. Giannini, Donald C. Grenesko, John R. Hendricks, David Dean Hiller, Peter A. Knapp, Timothy P. Knight, Timothy J. Landon, Thomas D. Leach, Luis E. Lewin, Brian F. Litman, R. Mark Mallory, Richard H. Malone, Gina M. Mazzaferri, David P. Murphy, Pamela S. Pearson, John F. Poelking, John E. Reardon, Irene M.F. Sewell, Patrick Shanahan, Scott C. Smith, Kathleen M. Waltz, and Gary Weitman. William P. Shaw (No. 13-CV-3749 (RJS)), Vincent A. Malcolm (Case No. 13-CV-3752 (RJS)), Marc S. Schacher (Case No. 13-CV-3747 (RJS)), and Joseph A. Young (Case No. 13-CV-3738 (RJS)) have, upon information and belief, not appeared in this case or participated in this motion, but the arguments made herein appear to apply to these individuals as well.
2 See Count 35 of Kirschner v. FitzSimons, et al. (12-CV-2652-RJS) (the “Main Adversary Action”) and Count 1 of the 18 Tag-Along Actions.
Case 1:11-md-02296-RJS Document 5930 Filed 05/23/14 Page 1 of 10
-2- 1661795
the Main Adversary Action and Count 1 of the Tag-Along Actions and Memorandum in Support
Thereof (“Cho Decl.”). As to each highlighted transfer, the Trustee has failed to allege an
essential element of his claim, which requires dismissal under Fed. R. Civ. P. 12(b)(6).
As a general rule, transfers may be avoided as preferences pursuant to Section 547 only if
they are made within the 90 days prior to the date the bankruptcy petition is filed. The 90-day
“look-back” period can, however, be extended to a year in one narrow circumstance – if the
transfer was made to someone who was an insider “at the time of such transfer.” In this case, the
Main Adversary Action and the Tag-Alongs all fail to make the essential allegation – required as
to each transfer at issue in this motion – that the recipient was an insider at the time of the
transfer.
In brief, the Main Adversary Action alleges generally that the defendants were insiders at
the time of the LBO transaction. But all of the transfers at issue occurred after the LBO
transaction, and the Trustee does not allege that any defendant was an insider at the time any of
the transfers was made. As for the Tag-Along Actions, the Trustee alleges that each defendant
was an insider at one point or another, but fails to include a single factual allegation to support
the conclusory “insider” label as to any Tag-Along Defendant. Accordingly, under recent
Supreme Court authority (Twombly and Iqbal), the Trustee has failed to properly allege insider
status for any of them.
For these reasons, both the Main Adversary Action and the Tag-Along Actions should be
dismissed as to the highlighted transfers at issue in this motion.
II. The Statute Allows Avoidance Of A Transfer Made More Than 90 Days Before Bankruptcy Only If Its Recipient Was An Insider At The Time Of The Transfer.
Bankruptcy Code Section 547(b)(4)(A) allows a trustee to avoid transfers to creditors
made within 90 days before the filing of a bankruptcy petition. 11 U.S.C. § 547(b)(4)(A).
Case 1:11-md-02296-RJS Document 5930 Filed 05/23/14 Page 2 of 10
-3- 1661795
Transfers made outside the 90-day period are governed by Section 547(b)(4)(B)
(“Subsection B”), which allows avoidance in just one circumstance. Under Subsection B, a
transfer is avoidable if it was made:
between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider[.]3
Nearly every court that has considered Subsection B over the last 20 years or so has held
that it means precisely what it says: to state a claim for avoidance of a transfer made more than
90 days prior to bankruptcy, the complaint must allege facts that, if proven, would establish that
(1) the transferee was an “insider” (2) “at the time of such transfer.” This requirement is often
referred to as the “Exact Date” doctrine.
The only appellate court opinion to explicitly analyze this provision, Butler v. David
Shaw, Inc., 72 F.3d 437, 441-42 (4th Cir. 1996), concluded that the statutory language
unambiguously requires insider status at the time of the transfer. In rejecting the argument that
“transfer” could mean a related series of events stretching from the date the transfer was
“arranged” to the actual date of payment, the Fourth Circuit relied upon the Supreme Court’s
decision in Barnhill v. Johnson, 503 U.S. 393, 399-400 (1992). In Barnhill, the Supreme Court
held that a “transfer” for purposes of the Bankruptcy Code is a single event occurring at a
definite moment in time. Id.
Since Butler was decided, virtually every case that has considered the question adopted
the “Exact Date” rule and rejected the so-called “Arranged Transfer” approach, which would
allow avoidance of transfers that were “arranged” when the transferee was an insider. See, e.g.,
In re Incentium, LLC, 473 B.R. 264, 273 (E.D. Tenn. 2012) (disavowing cases that followed the
“Arranged Transfer” approach and stating that the “Exact Date” rule was “consistent with 3 Emphasis added throughout unless otherwise indicated.
Case 1:11-md-02296-RJS Document 5930 Filed 05/23/14 Page 3 of 10
-4- 1661795
virtually all of the cases that had examined the issue in the last twenty years”); In re Netbank,
Inc., 424 B.R. 568, 572 (M.D. Fla. 2010) (applying the “Exact Date” rule and rejecting the
“Arranged Transfer” approach, citing Butler and Barnhill); In re Am. Eagle Coatings, Inc.,
353 B.R. 656, 670 (W.D. Mo. 2006) (adopting the “Exact Date” line of cases, citing the Supreme
Court’s reasoning on statutory interpretation in Lamie v. U.S. Trustee, 540 U.S. 526, 534
(2004)); Stanley v. U.S. Bank, Nat’l Ass’n, 2008 WL 8866400, at *2-4 (S.D. Tex. Sept. 24, 2008)
(vacating the bankruptcy court’s ruling that certain payments were avoidable preferences,
rejecting the “Arranged Transfer” approach and adopting the “Exact Date” rule, citing Butler);
In re Toy King Distribs., Inc., 256 B.R. 1, 97-98 (M.D. Fla. 2000) (“The insider relationship is to
be determined on the exact date of the transfer.”); Mann v. GTCR Golder Rauner, LLC, 351 B.R.
708, 714 (D. Ariz. 2006) (to avoid the transfer, the Trustee must show insider status at the date
the transfer took effect); In re Paschall, 403 B.R. 366, 376-77 (E.D. Va. 2009) (“The insider
relationship is determined as of the date of the transfer of the Properties.”).
The “Exact Date” rule has also been endorsed and adopted by the leading bankruptcy
treatise, which states that “The point in time when the transferee was an insider is critical. ‘The
language of Section 547(b)(4)(B) states that an insider relationship is to be determined on the
exact date of the challenged transfer.’” 5 COLLIER ON BANKRUPTCY ¶ 547.03[6] n.92 (16th ed.
2014) (quoting Dent v. Martin, 86 B.R. 290, 292 (S.D. Fla. 1988) and also citing Butler)
(emphasis in original). Indeed, it appears that only one post-1992 case followed the “Arranged
Transfer” approach, and that decision was reversed on other grounds. In re Consol. Indus.
Corp., 292 B.R. 354, 364 (N.D. Ind. 2002), rev’d on other grounds, Freeland v. Enodis Corp.,
540 F.3d 721 (7th Cir. 2008).
Case 1:11-md-02296-RJS Document 5930 Filed 05/23/14 Page 4 of 10
-5- 1661795
In sum, under the unambiguous statutory language and the last 20 years of authority, the
Trustee cannot state a claim under Section 547(b)(4)(B) unless he alleges with facts that the
recipient of a challenged transfer was an insider at the time of the transfer. As shown below, he
has not done so as to any of the highlighted transfers at issue in this motion.
III. Application Of Subsection B Standards To The Preference Claims At Issue Requires Their Dismissal.
A. The Main Adversary Complaint – Count 35.
In Exhibit C to the Fifth Amended Complaint, the Trustee identified the transfers that he
is attempting to avoid in Count 35. The movants seek to dismiss the Trustee’s claims as to
certain of the transfers listed on Exhibit C. For ease of reference, the movants have identified
those transfers by highlighting them on the original of Exhibit C. (Cho Decl., Ex. A.)
As Exhibit A to the Cho Decl. shows, each of the transfers at issue on this motion was
made more than 90 days prior to the bankruptcy petition (i.e., before September 9, 2008). Each
is therefore governed by Subsection B. The highlighted transfers were made to 12 different
individuals on 17 different dates over eight months. In order to state a claim as to any
highlighted transfer, the Trustee must make the essential allegation that the particular transferee
was an insider at the time of that transfer.
The Trustee has not met his obligation. Instead of dealing with a transferee’s status on
the date the transfer was made, he alleges that the Count 35 defendants as a group were insiders
“at the time of the transaction,” i.e., the December 20, 2007 LBO. (5th Am. Compl. ¶ 643;
see also id. ¶ 1 (Tribune “filed for bankruptcy less than one year after the transaction was
completed.”).) By alleging insider status only on a date prior to the dates of the highlighted
transfers, the Trustee failed to allege an essential element of the claim under Subsection B as to
Case 1:11-md-02296-RJS Document 5930 Filed 05/23/14 Page 5 of 10
-6- 1661795
each of them. Accordingly, Count 35 should be dismissed as it relates to each transfer
highlighted on Exhibit A to the Cho Decl.4
B. The Tag-Along Complaints – Count 1.
After the Fifth Amended Complaint, the Trustee filed a First Amended Complaint in 15
of the 18 Tag-Along Actions.5 Count 1 of each Tag-Along Complaint asserts a Section 547
claim against one or more transfers made to the defendant therein. In each complaint, any
transfer that the Trustee seeks to avoid is identified in paragraph 22. For the Court’s
convenience, the movants copied the relevant portion of each paragraph 22 and placed them all
in a single document attached hereto as Exhibit B to the Cho Decl.
This motion seeks the dismissal of Count 1 of the Tag-Along Actions as to each of the
transfers highlighted in Exhibit B to the Cho Decl. Because every highlighted transfer occurred
more than 90 days prior to bankruptcy, Subsection B applies to all of them. Accordingly, in
order to state a claim, the Trustee must allege that the transferee was an insider at the time of
each transfer. Acknowledging the invalidity of the “time of the transaction” approach that he
4 The Trustee has not merely made a mistake in pleading. Documents referenced in the complaint and filed with the SEC make it clear, for example, that “Executive Transition” and “Phantom Equity” payments highlighted in Exhibits A and B to the Cho Decl. were made to individuals who had been involuntarily terminated from their prior positions. (See Cho Decl., Ex. C (Tribune Company 2007 Form 10-K, Exhibit 10.7, at 1).) The Court is permitted to take judicial notice of those SEC filings. See Fed. R. Evid. 201; Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (for purposes of a motion to dismiss, a complaint is deemed to include public disclosure documents required by law to be filed with the SEC); Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991) (same).
5 Although the actions against Tag-Along defendants Gary Weitman [Case No. 13-CV-03740], Pamela S. Pearson [Case No. 13-CV-03745] and Vincent R. Giannini [Case No. 13-CV-03748] were consolidated in this MDL Proceeding, the Trustee did not file and serve First Amended Complaints with respect to these individuals. Accordingly, the only actions pending against these individuals are the adversary complaints filed by the Official Committee of Unsecured Creditors of the Tribune Company in December 2012. To the extent the Trustee is pursuing actions against these Tag-Along Defendants, these defendants join in the arguments of the Tag-Along Defendants who were served with the Trustee’s First Amended Complaint.
Case 1:11-md-02296-RJS Document 5930 Filed 05/23/14 Page 6 of 10
-7- 1661795
used in Count 35 of the Main Adversary Action, the Trustee abandons it in the Tag-Along
Actions. Instead, he alleges in paragraph 97 of each Tag-Along Complaint that:
Defendant . . . was an insider as defined by Section 101(31) of the Bankruptcy Code at the time the transfer occurred and/or was arranged.
He does not include any factual allegation to support the alleged insider status of any Tag-Along
Defendant.
The Trustee’s new formulation fails as well. His revamped timing allegation, i.e., that
the defendant was an insider “at the time the transfer occurred and/or was arranged,” is
insufficient on at least two levels. First, the seemingly artful use of “and/or” means that there is
no actual allegation that any specific transferee was an insider on the date of any transfer. The
Trustee’s ambiguous phrasing thus fails to meet the Twombly/Iqbal standard. Count 1 of the
Tag-Along Actions may be dismissed on that basis alone. Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555 (2007). Separately, if the Trustee’s “and/or” allegation is intended to mean that a
transferee might have been an insider when a transfer was “arranged,” it is entirely irrelevant.
As discussed above, the “Arranged Transfer” approach has no vitality today.
More importantly, there is an entirely distinct, overarching defect in the “insider”
allegation made in the Tag-Along Actions. As noted, the Trustee’s sole allegation with respect
to the insider status of each Tag-Along Defendant with regard to any date is that he or she was
“an insider within the meaning of Section 101(31).” (Tag-Along Action Compl. ¶ 97).
Although the Trustee plainly recognizes that insider status is an essential element of his claim, he
fails to include a single factual allegation to support his conclusory labeling of each Tag-Along
Defendant as an “insider.” This tactic is plainly insufficient as a matter of law.
As the Supreme Court has made clear in recent years, a plaintiff cannot plead an essential
element of his claim by resorting to labels, conclusions, or a “formulaic recitation of the
Case 1:11-md-02296-RJS Document 5930 Filed 05/23/14 Page 7 of 10
-8- 1661795
elements of a cause of action.” If he does so, his claim cannot survive a motion to dismiss.
Twombly, 550 U.S. at 555; Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). This principle has been
applied in cases similar to the one now before the Court, resulting in the dismissal of preference
claims that do not include factual allegations supporting the essential point that a particular
transferee was an insider at the time of the transfer. See, e.g., Capmark Fin. Grp., Inc. v.
Goldman Sachs Credit Partners LP, 491 B.R. 335, 351-52 (S.D.N.Y. 2013); In re Caremerica,
409 B.R. 737, 753 (Bankr. E.D.N.C. 2009).
Caremerica is directly on point. The plaintiff there sought to bring a Subsection B claim
but merely alleged that the defendants were “insiders as that term is defined in § 101(31) and
used in § 547(b).” This is virtually the same language used by the Trustee here. (Tag-Along
Action Compl. ¶ 97). The Court granted the defendants’ motion to dismiss, holding that simply
labeling transferees as insiders did not qualify under Iqbal as an actual allegation of insider
status. In re Caremerica, 409 B.R. at 753 (where insider status is an essential element of a
claim, the plaintiff must include factual allegations showing that the transferee was an insider).
Because the Trustee here relied solely on the “insider” label and included no factual allegations,
he failed to allege an essential element of his claim under Subsection B. Count 1 of each Tag-
Along Action should therefore be dismissed.
IV. Conclusion.
Rule 12(b)(6) allows a party to move to dismiss a cause of action for “failure to state a
claim upon which relief can be granted.” Here, the Trustee has failed to properly allege essential
elements of his claims under Subsection B, i.e., that the particular transfer was made to someone
who was “an insider at the time of such transfer.” Accordingly, the Trustee’s claims to avoid the
highlighted transfers in Exhibits A (Main Adversary Action) and B (Tag-Along Actions) to the
Cho Decl. should be dismissed with prejudice.
Case 1:11-md-02296-RJS Document 5930 Filed 05/23/14 Page 8 of 10
1661795
Dated: May 23, 2014
GRIPPO & ELDEN LLC
By: /s/ George R. Dougherty George R. Dougherty
John R. McCambridge (#01812378) George R. Dougherty (#6196845) Maile H. Solís (#6256696) 111 South Wacker Drive Chicago, Illinois 60606 Telephone: (312) 704-7700 Facsimile: (312) 558-1195 Email: [email protected]
Attorneys for Dennis J. FitzSimons, Donald C. Grenesko, David Dean Hiller, Timothy J. Landon, Thomas D. Leach, Luis E. Lewin, R. Mark Mallory, Richard H. Malone, John F. Poelking, John E. Reardon, Irene M.F. Sewell, Scott C. Smith, Kathleen M. Waltz
Respectfully submitted,
EDWARDS WILDMAN PALMER LLP
By: /s/ Michael R. Dockterman Michael R. Dockterman
Michael R. Dockterman Jonathan W. Young 225 West Wacker Drive, Suite 3000 Chicago, Illinois 60606-1229 Telephone: (312) 201-2000 Facsimile: (312) 201-2555
Attorneys for Betty Ellen Berlamino, Tom E. Ehlmann and Peter A. Knapp
SUGAR FELSENTHAL GRAIS AND HAMMER LLP
By: /s/ Mark S. Melickian Mark S. Melickian
Mark S. Melickian 30 North LaSalle Street Suite 3000 Chicago, Illinois 60602 Telephone: (312) 704-9400 Facsimile: (312) 372-7951
Attorneys for James L. Ellis and David P. Murphy
FRANK GECKER LLP
By: /s/ Frances Gecker Frances Gecker
Frances Gecker Reed Heiligman 325 North LaSalle Street, Suite 625 Chicago, Illinois 60654 Telephone: (312) 276-1400 Facsimile: (312) 276-0035
Attorneys for Brian F. Litman, Patrick Shanahan, Gary Weitman, Pamela S. Pearson, Vincent R. Giannini, John R. Hendricks, Gina M. Mazzaferri
Case 1:11-md-02296-RJS Document 5930 Filed 05/23/14 Page 9 of 10
1661795
HANNAFAN & HANNAFAN LTD
By: /s/ Blake T. Hannafan Blake T. Hannafan
Blake T. Hannafan One East Wacker Drive Suite 2800 Chicago, Illinois 60601 Telephone: (312) 527-0055 Facsimile: (312) 527-0220
Attorneys for Timothy P. Knight
Case 1:11-md-02296-RJS Document 5930 Filed 05/23/14 Page 10 of 10
Case 1:11-md-02296-RJS Document 5930-1 Filed 05/23/14 Page 1 of 3
EXHIBIT 1
to Motion #7: Movants' Memorandum Supporting Their
Motion to Dismiss Certain Section 547 Claims Alleged in
Count 35 of the Main Adversary Action and Count 1 of the
Tag-Along Actions
Case 1:11-md-02296-RJS Document 5930-1 Filed 05/23/14 Page 2 of 3
Exhibit 1 to Motion to Dismiss re: Section 547
'"' Case Number Case Name
12-CV-2652 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Dennis J. FitzSimons, et al.
13-CV-3736 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Brian F. Litman
13-CV-3737 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Irene M.F. Sewell
13-CV -3738 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Joseph A. Young
13-CV-3739 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Patrick Shanahan
13-CV-3740 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust with respect to Preserved Causes of Action v. Gary Weitman
13-CV-3741 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Betty Ellen Berlarnino
13-CV -3742 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. David P. Murphy
13-CV-3743 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Tom E. Ehlmann
13-CV-3744 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. John F. Poelking
13-CV -3745 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust with respect to Preserved Causes of Action v. Pamela S. Pearson
13-CV-3746 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. James L. Ellis
13-CV-3747 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Marc S. Schacher
13-CV -3748 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust with respect to Preserved Causes of Action v. Vincent R. Giannini
13-CV-3749 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. William P. Shaw
1669920
Case 1:11-md-02296-RJS Document 5930-1 Filed 05/23/14 Page 3 of 3
,, !i' .,, " Case Number Case Name
13-CV -3750 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Peter A. Knapp
13-CV-3751 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. John R. Hendricks
13-CV-3752 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v.Vincent A. Malcolm
13-CV-3753 (RJS) Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. Gina M. Mazzaferri
- 2 -