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A New York Court Grants Defendants’ Motions to Dismiss Because Trustee Failed to Sufficiently Allege that the Debtor Entered the LBO with Actual Intent to Hinder, Delay, or Defraud its Creditors

Kirschner v. Fitzsimons (In re Tribune Co. Fraudulent Conveyance Litig.), No. 11-md-2296 (RJS), 2017 U.S. Dist. LEXIS 3039 (S.D.N.Y. Jan. 6, 2017)

Debtor Tribune Company was America’s largest media and entertainment company, owning numerous radio and television stations and major newspapers. Post the 2007 leveraged buyout of the Debtor, the multi-district litigation started, and subsequently, the Debtor filed for bankruptcy in 2008. The Tribune’s litigation trustee, Marc Kirschner sought to clawback money that was distributed to various Defendants. The Defendants included various entities and individuals, including over $8 billion paid to the Tribune’s shareholders in exchange for their shares in Tribune. The Defendants filed motions to dismiss the Trustee’s actual fraudulent conveyance claim related to the transfers. The Court found that there was no dispute that the alleged transfers occurred in the two years preceding Tribune’s bankruptcy filing on December 8, 2008. Accordingly, the sole issue was whether the Trustee had alleged sufficient facts to support a strong inference that Tribune, as the transferor, acted with an actual intent to hinder, delay, or defraud its creditors.

The Court found that the Trustee failed to plead facts sufficient to allege that its directors possessed actual intent to hinder, delay, or defraud Tribune’s creditors through the LBO. The Court concluded that the Trustee’s attempt to impute the officer Defendants’ intent to the corporation was unjustified. There was no showing whether the Debtor’s directors knew or were consciously indifferent to the fact that the LBO would render Tribune insolvent. Further, the Trustee did not sufficiently allege strong circumstantial evidence of conscious misbehavior or recklessness on the independent directors’ part. The Trustee also failed to make any allegations of financial or other personal ties between the independent directors and the parties that received special incentives upon completion of the LBO that could have affected the impartiality of the independent directors. The Court concluded that the badges of fraud alleged by the Trustee were insufficient to raise a strong inference that the independent directors acted with an actual intent to hinder, delay, or defraud Tribune’s creditors. Accordingly, the Court ruled that the Trustee failed to raise a strong inference of fraudulent intent on the part of the independent directors under the traditional badges-of-fraud analysis and also failed to state a claim upon which relief may be granted. The Court granted the Defendants’ motion to dismiss