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`19-3049-cv; 19-449-cv
`In re: Tribune Co. Fraudulent Conv. Litig.
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`UNITED STATES COURT OF APPEALS
`FOR THE SECOND CIRCUIT
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`August Term 2020
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`(Argued: August 24, 2020 Decided: August 20, 2021)
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`Docket Nos. 19-3049-cv; 19-449-cv
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`IN RE: TRIBUNE COMPANY FRAUDULENT CONVEYANCE LITIGATION
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`MARC S. KIRSCHNER, AS LITIGATION TRUSTEE FOR THE TRIBUNE LITIGATION TRUST,
`Plaintiff-Appellant,
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`LARGE SHAREHOLDERS, FINANCIAL ADVISORS, FINANCIAL INSTITUTION HOLDERS,
`FINANCIAL INSTITUTION CONDUITS, PENSION FUNDS, INDIVIDUAL BENEFICIAL
`OWNERS, MUTUAL FUNDS,
`Defendants-Appellees.
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`MARC S. KIRSCHNER, AS LITIGATION TRUSTEE FOR THE TRIBUNE LITIGATION TRUST,
`Plaintiff-Appellant,
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`CITIGROUP GLOBAL MARKETS INC., MERRILL LYNCH, PIERCE, FENNER & SMITH
`INCORPORATED,
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`Defendants-Appellees.
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`ON APPEAL FROM THE UNITED STATES DISTRICT COURT
`FOR THE SOUTHERN DISTRICT OF NEW YORK
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`Before:
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`RAGGI and CHIN, Circuit Judges.*
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`Appeals from a judgment and orders of the United States District
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`Court for the Southern District of New York (Sullivan and Cote, JJ.) dismissing
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`claims arising out of the leveraged buyout of the Tribune Company in 2007 and
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`its bankruptcy filing in 2008. The bankruptcy litigation trustee contends on
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`Our late colleague Judge Ralph K. Winter was originally assigned to this panel.
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`The two remaining members of the panel, who are in agreement, have decided this case
`in accordance with Second Circuit Internal Operating Procedure E(b). See 28 U.S.C.
`§ 46(d); United States v. Desimone, 140 F.3d 457, 458–59 (2d Cir. 1998).
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`appeal that the district court erred in dismissing his claims against the Tribune
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`Company's shareholders and financial advisors for fraudulent transfer, breach of
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`fiduciary duty, and related causes of action. The bankruptcy litigation trustee
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`also contends that the district court erred in denying leave to amend his
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`complaint.
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`AFFIRMED IN PART, VACATED IN PART, AND REMANDED.
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`LAWRENCE S. ROBBINS (Roy T. Englert, Jr., on the brief),
`Robbins, Russell, Englert, Orseck, Untereiner &
`Sauber LLP, Washington, DC; Robert J. Lack,
`Jeffrey R. Wang, Friedman Kaplan Seiler &
`Adelman LLP, New York, New York; David M.
`Zensky, Akin Gump Strauss Hauer & Feld LLP,
`New York, New York, for Plaintiff-Appellant.
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`DOUGLAS HALLWARD-DRIEMEIR, (Jonathan Ference-
`Burke on the brief), Ropes & Gray LLP,
`Washington, DC; Andrew Devore, Joshua Sturm,
`Ropes & Gray LLP, Boston, MA; Philip D. Anker,
`Alan E. Schoenfeld, Ryan Chabot, Wilmer Cutler
`Pickering Hale & Dorr LLP, New York, New
`York; Joel W. Millar, Wilmer Cutler Pickering
`Hale & Dorr LLP, Washington, DC; Matthew L.
`Fornshell, Ice Miller LLP, Columbus, Ohio;
`Andrew J. Entwistle, Entwistle & Cappucci LLP,
`New York, New York; Mark A. Neubauer,
`Carlton Fields, LLP, Los Angeles, California; P.
`Sabin Willett, Michael C. D'Agostino, Morgan,
`Lewis & Bockius LLP, Boston, Massachusetts;
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`Michael S. Doluisio, Dechert LLP, Philadelphia,
`Pennyslvania, for Defendants-Appellees Pension
`Funds, Financial Institution Holders, Individual
`Beneficial Owners, Mutual Funds, Certain Large
`Shareholders, and Financial Institution Conduits.
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`ERIN E. MURPHY, Kirkland & Ellis LLP, Washington,
`DC; Gabor Balassa, Brian Borchard, Kirkland &
`Ellis LLP, Chicago, Illinois; Oscar Garza, Douglas
`G. Levin, Gibson, Dunn & Crutcher LLP, Irvine,
`California; Matthew D. McGill, Gibson, Dunn &
`Crutcher LLP, Washington, D.C., for Defendants-
`Appellees Large Shareholders.
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`KANNON K. SHANMUGAM (Masha G. Hansford, Joel S.
`Johnson, on the brief), Paul, Weiss, Rifkind,
`Wharton & Garrison LLP, Washington, D.C.;
`Andrew G. Gordon, Kira A. Davis, Paul, Weiss,
`Rifkind, Wharton & Garrison LLP, New York,
`New York; Daniel L. Cantor, Daniel S. Shamah,
`O'Melveny & Myers LLP, New York, New York,
`for Defendants-Appellees Citigroup Global Markets,
`Inc. and Merrill Lynch, Pierce, Fenner & Snith Inc.
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`JONATHAN D. POLKES (Gregory Silbert, Stacy Nettleton,
`on the brief), Weil, Gotshal & Manges LLP, New
`York, New York; George E. Mastoris, Winston &
`Strawn LLP, New York, New York, for
`Defendants-Appellees Financial Advisors.
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`CHIN, Circuit Judge:
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`In 2007, the Tribune Company ("Tribune"), then-publicly traded,
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`executed a leveraged buyout (the "LBO") to go private. Less than a year later,
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`Tribune filed for Chapter 11 bankruptcy. Plaintiff-appellant Marc Kirschner, the
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`bankruptcy litigation trustee (the "Trustee"), brought fraudulent conveyance and
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`other claims on behalf of creditors against shareholders who sold their stock in
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`the LBO and against the financial advisors that helped Tribune navigate and
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`complete the LBO. In several orders and decisions, the district court dismissed
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`the Trustee's claims for failure to state a claim pursuant to Rule 12(b)(6) of the
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`Federal Rules of Civil Procedure.
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`For the reasons set forth below, we AFFIRM in part, VACATE in
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`part, and REMAND for further proceedings.
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`BACKGROUND
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`I.
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`The Facts
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`The facts alleged in the operative complaints are assumed to be true
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`for purposes of this appeal.2
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`Prior to its bankruptcy in 2008, Tribune was a media company that
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`owned numerous radio and television stations and major national newspapers,
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`including The Chicago Tribune, The Los Angeles Times, and The Baltimore Sun. In
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`2005, the newspaper publishing industry faced severe decline and, by 2006,
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`Tribune, which derived approximately 75% of its total revenues from such
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`publishing, started faltering financially. In September 2006, Tribune's board of
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`directors (the "Board") created a special committee (the "Special Committee") to
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`consider ways to return value to Tribune's shareholders. The Special Committee
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`was comprised of all seven of the Board's independent directors (the
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`"Independent Directors").
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`In Appeal No. 19-3049, the operative complaint is the Fifth Amended Complaint
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`in No. 12-CV-2652, referred to by the district court as the FitzSimons action. In Appeal
`No. 19-449, the operative complaint is the First Amended Complaint in No. 12-CV-6055,
`referred to by the district court as the Citigroup action.
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`A.
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`Tribune Retains Advisors
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`Before the formation of the Special Committee, the Board hired two
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`financial advisors, defendant-appellee Merrill, Lynch, Pierce, Fenner, and Smith,
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`Inc. ("Merrill Lynch") on October 17, 2005 and defendant-appellee Citigroup
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`Global Markets, Inc. ("Citigroup") on October 26, 2005, to conduct a strategic
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`review and to recommend possible responses to the ongoing changes in the
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`media industry. Both Merrill Lynch and Citigroup signed engagement letters,
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`which promised each a "Success Fee" of $12.5 million if a "Strategic Transaction"
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`was completed. The engagement letters also allowed each firm to play a role in
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`helping to finance any such "Strategic Transaction," despite the potential conflict
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`of interest inherent in the firms' distinct roles in any such deal. The engagement
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`letters further specified that neither Merrill Lynch nor Citigroup was a fiduciary.
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`On October 17, 2006, the Special Committee hired Morgan Stanley &
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`Co. LLC f/k/a Morgan Stanley & Co. Inc. ("Morgan Stanley") to serve as its
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`independent financial advisor. Morgan Stanley's engagement letter specified
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`that the firm owed no fiduciary duty to Tribune.
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`B.
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`Proposed LBO
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`In early 2007, Sam Zell, an investor, proposed to take Tribune
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`private. At this time, defendants-appellees Chandler Trust No. 1, Chandler Trust
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`No. 2, and certain Chandler sub-trusts (collectively, the "Chandler Trusts") held
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`approximately 20% of Tribune's publicly-held shares. The Robert R. McCormick
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`Foundation and the Cantigny Foundation (collectively, the "Foundations") held
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`another 13% of shares. The Special Committee sought the views of the Chandler
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`Trusts and the Foundations (together, the "Large Shareholders") on Zell's
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`proposal. Concerned that Tribune's stock price would fall before they could sell
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`their shares, the Large Shareholders indicated that they would only vote for a
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`two-step LBO that allowed them to cash out during the first step. In response,
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`Zell suggested a two-step LBO, in which, at Step One, Tribune would borrow
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`money to buy back roughly half of its shares and, at Step Two, Tribune would
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`borrow more money to purchase all remaining shares. Tribune would then
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`merge with a specially created shell corporation. The new entity would become
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`an S Corporation, resulting in nearly $1 billion in anticipated tax savings. In
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`considering whether to approve the LBO, the Board consulted Citigroup and
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`Merrill Lynch.
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`To secure financing for the LBO, Tribune needed an opinion stating
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`that it would be solvent after each step of the proposed LBO. On February 13,
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`2007, the Board hired Duff & Phelps to provide such a solvency opinion. Toward
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`that end, Tribune gave Duff & Phelps financial projections predicting that
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`Tribune would fare better in the second half of 2007 as compared to the same
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`period from the year prior (the "February Projections"). These figures were
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`created by Tribune's management team, which, according to the Trustee, had a
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`conflict of interest because its members stood to cash out Tribune shares worth
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`$36 million and reap other gains if an LBO were executed.
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`After conducting its analysis, Duff & Phelps concluded it could not
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`provide a solvency opinion without considering the $1 billion in tax savings that
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`Tribune expected at Step Two. Duff & Phelps, however, also determined that
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`considering such tax savings in a solvency opinion was not appropriate.
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`Accordingly, on April 1, 2007, Duff & Phelps instead provided a "viability
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`opinion," which concluded that the fair market value of Tribune's assets would
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`exceed its liabilities after the close of the LBO.
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`The same day, Morgan Stanley and Merrill Lynch issued fairness
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`opinions that the price to be paid for Tribune's stock was fair. These opinions
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`were filed with the SEC as proxy statements. Also, on April 1, 2007, the Special
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`Committee unanimously voted to recommend the two-step LBO, which the
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`Board ultimately approved.
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`C.
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`Implementation of LBO
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`Still in need of a solvency opinion to secure financing for the
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`approved LBO, Tribune approached Houlihan Lokey, which declined, on March
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`29, 2007, to bid for the engagement. On April 11, 2007, Tribune retained
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`Valuation Research Company ("VRC") to provide two solvency opinions, one for
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`Step One and one for Step Two. To secure the engagement, VRC, "a virtually
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`unknown firm," agreed to use a non-standard approach in formulating its
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`solvency opinions. 3049 Appellant's Br. at 12–13.3 VRC charged Tribune $1.5
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`million -- VRC's highest fee ever for such an engagement -- to issue the solvency
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`opinions.
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`On May 24, 2007, VRC issued an opinion that Tribune would be
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`solvent after completing Step One. According to the Trustee, however, after
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`References to "3049 Appellant's Br." and "449 Appellant's Br." refer to the
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`Trustee's briefs in Appeal Nos. 19-3049 and 19-449, respectively.
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`VRC issued this solvency opinion, Tribune's management team realized that the
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`February Projections, upon which VRC's opinion was based, were no longer an
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`accurate forecast of Tribune's 2007 second half performance. No one alerted
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`VRC that Tribune was unlikely to meet the February Projections. Indeed, the
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`Trustee alleges that Citigroup and Merrill Lynch reviewed VRC's solvency
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`analysis but "failed to fulfill their responsibilities as 'gatekeepers' retained to
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`objectively analyze the LBO." 449 Appellant's Br. at 8.
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`Despite the issue with VRC's solvency opinion, Tribune delivered it
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`to the financing banks on June 4, 2007. That same day, Step One closed. Tribune
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`borrowed $7 billion to pay off its existing bank debt and to complete a tender
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`offer, buying back just over half of its publicly held shares. The Large
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`Shareholders sold all their shares, and the members of the Board appointed by
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`those shareholders resigned. After Step One, Tribune issued a proxy statement,
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`which explained that while the LBO was in the company's best interest, it was
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`risky and might not create the anticipated value.
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`In October 2007, management again updated its financial projections
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`(the "October Projections") in preparation for Step Two. The October Projections
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`still forecasted that Tribune's performance would improve, but not as quickly as
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`the February Projections had predicted.
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`Even with the October Projections, VRC was reluctant to author a
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`second solvency opinion because it did not appear that Tribune would be able to
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`repay its debts without refinancing its existing debts. Tribune management
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`represented to VRC that Morgan Stanley -- the Special Committee's financial
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`advisor -- believed that Tribune would be able to refinance its debts, even though
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`Morgan Stanley had not drawn that conclusion. On December 18, 2007, VRC
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`issued a solvency opinion stating that Tribune would be solvent after Step Two.
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`The Board's retained financial advisors did not agree with VRC's
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`second solvency opinion. In fact, analyses from Citigroup and Merrill Lynch
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`showed that, at the close of Step Two, Tribune would be insolvent by more than
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`$1.4 billion and $1.5 billion respectively, but neither advisor tried to stop the
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`transaction. On December 20, 2007, Step Two closed, and Tribune borrowed an
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`additional $3.7 billion, which it used to buy back its remaining publicly held
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`shares.
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`After the close of Step Two, Tribune had roughly $13 billion in debt.
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`Tribune's directors and officers received approximately $107 million from selling
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`their stock and from bonuses. Citigroup and Merrill Lynch were each paid their
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`$12.5 million success fee because they helped effectuate a "Strategic Transaction."
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`A group of pension funds (the "Pension Funds"), who are defendants-appellees
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`in this case, also received cash proceeds in connection with the LBO.
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`II.
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`Procedural History
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`On December 8, 2008 -- less than one year after Step Two closed --
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`Tribune filed for Chapter 11 bankruptcy in Delaware. Claims were eventually
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`filed in the Delaware Bankruptcy Court on behalf of creditors, including for
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`fraudulent conveyance. Tribune emerged from bankruptcy in 2012; pursuant to
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`Tribune's plan of reorganization, the claims were transferred to the Tribune
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`Litigation Trust, and the Trustee was appointed to pursue the claims on behalf of
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`Tribune's creditors.
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`In the meantime, some seventy-four federal and state lawsuits
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`asserting fraudulent conveyance and related claims were filed around the
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`country by Tribune's creditors. Eventually, the Judicial Panel on Multidistrict
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`Litigation transferred the bankruptcy claims as well as the federal and state
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`actions to the Southern District of New York, where they were consolidated on
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`the basis that the claims all arose out of the LBO and Tribune's 2008 Chapter 11
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`bankruptcy filing. See In re: Tribune Co. Fraudulent Conv. Litig., 831 F. Supp. 2d
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`1371, 1372 (J.P.M.L. 2011).
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`On September 23, 2013, the district court (Sullivan, J.) dismissed
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`several state law constructive fraudulent conveyance claims that were brought
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`against Tribune. The parties appealed, and on March 29, 2016, this Court
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`affirmed the district court's dismissal of the state law fraudulent conveyance
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`claims. See In re Tribune Co. Fraudulent Conv. Litig., 818 F.3d 98, 105 (2d Cir. 2016)
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`("Tribune I"). After further proceedings in this Court and the Supreme Court, we
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`issued an amended opinion on December 19, 2019, affirming the district court's
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`dismissal of the state law constructive fraudulent conveyance claims on the basis
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`that these claims were preempted by section 546(e) of the Bankruptcy Code,
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`which provides that a trustee may not avoid a transfer made by or to a "financial
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`institution" in connection with "a securities contract." In re Tribune Co. Fraudulent
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`Conv. Litig., 946 F.3d 66, 78, 96 (2d Cir. 2019) ("Tribune II").4
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`On July 22, 2016, this Court denied rehearing en banc, and our mandate issued on
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`August 1, 2016. On September 9, 2016, the Trustee petitioned for certiorari to the
`Supreme Court. In April 2018, the Supreme Court advised the parties that their petition
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`In the meantime, the district court proceeded to consider defendants'
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`motions to dismiss the remaining claims. On January 6, 2017, the district court
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`(Sullivan, J.) dismissed the Trustee's intentional fraudulent conveyance claims
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`with prejudice because it found that the complaint failed to allege that Tribune
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`had the actual intent to defraud its creditors when it bought back shares from
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`shareholders at both steps of the LBO. In particular, the district court concluded
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`that the intent of the Tribune officers who created the February and October
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`Projections could not be attributed to the Special Committee, which approved the
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`LBO. The district court also declined to grant the Trustee leave to amend its
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`complaint in the FitzSimons action, "without prejudice to renewal in the event of
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`an intervening change in the law." 3049 S. App'x at 28.
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`On November 30, 2018, the district court (Sullivan, J.) dismissed the
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`Trustee's state law claims for breach of fiduciary duty asserted in the FitzSimons
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`for certiorari as to Tribune I would be deferred to allow this Court to consider whether
`to recall the mandate in light of the Supreme Court's decision in Merit Mgmt. Grp., LP v.
`FTI Consulting, Inc., 138 S. Ct. 883, 892 (2018), which held, inter alia, that Section 546(e)
`does not protect transfers in which financial institutions served as mere conduits. See
`Deutsche Bank Tr. Co. Americas v. Robert R. McCormick Found., 138 S. Ct. 1162, 1163 (2018)
`(statement of Justices Kennedy and Thomas). As a result, this Court recalled its
`mandate and eventually issued Tribune II.
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`Complaint and certain "tag-along" actions. In particular, the district court
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`declined to collapse the two-step LBO into a unitary transaction, thereby
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`concluding that (1) Tribune was solvent at Step One, and (2) the Large
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`Shareholders were not liable at Step Two because they had relinquished their
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`board seats and Tribune stock by that point.
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`On December 1, 2018, the case was reassigned to Judge Cote. On
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`January 23, 2019, the district court (Cote, J.) granted Citigroup and Merrill
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`Lynch's motions to dismiss certain claims in the FitzSimons and Citigroup actions.
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`As relevant here, the district court dismissed the aiding-and-abetting and
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`professional malpractice claims under the in pari delicto doctrine and it dismissed
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`the fraudulent conveyance claims on the ground that the advisory fees received
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`did not constitute actual or constructive fraudulent conveyances. On April 23,
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`2019, the district court denied the Trustee's request to amend his complaint in the
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`FitzSimons action, denying leave to file what would have been a Sixth Amended
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`Complaint.
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`These appeals followed.
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`DISCUSSION
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`Three categories of claims are at issue: (1) intentional fraudulent
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`conveyance claims against the shareholders based on the buy-back of their
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`shares; (2) breach of fiduciary duty and aiding and abetting breach of fiduciary
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`claims against the allegedly controlling shareholders; and (3) aiding and abetting
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`breach of fiduciary duty, professional malpractice, intentional fraudulent
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`conveyance, and constructive fraudulent conveyance claims against Citigroup,
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`Merrill Lynch, Morgan Stanley, and VRC (collectively, the "Financial Advisors").
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`We discuss these claims in turn, as well as the district court's denial of leave to
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`amend.
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`We review de novo a district court's grant of a motion to dismiss
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`under Rule 12(b)(6) for failure to state a claim, "accepting the complaint's factual
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`allegations as true and drawing all reasonable inferences in the plaintiff's favor."
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`Carpenters Pension Tr. Fund of St. Louis v. Barclays PLC, 750 F.3d 227, 232 (2d Cir.
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`2014) (internal quotation marks omitted). "We review the district court's denial
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`of leave to amend for abuse of discretion." Broidy Cap. Mgmt. LLC v. Benomar, 944
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`F.3d 436, 447 (2d Cir. 2019) (internal quotation marks omitted). If, however, "the
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`denial was based on futility, . . . we review that legal conclusion de novo." City of
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`Pontiac Policemen's & Firemen's Ret. Sys. v. UBS AG, 752 F.3d 173, 188 (2d Cir.
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`2014).
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`I.
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`Intentional Fraudulent Conveyance Claims
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`We first consider whether the district court erred in dismissing the
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`Trustee's intentional fraudulent transfer claims against the shareholders based on
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`the buy-back of their shares.
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`A.
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`Applicable Law
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`The Bankruptcy Code allows a bankruptcy trustee to recover
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`fraudulent transfers where a transfer has been made with "actual intent to
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`hinder, delay, or defraud" creditors. 11 U.S.C. § 548(a)(1)(A). An intentional
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`fraudulent conveyance claim must be pled with specificity, as required by Fed. R.
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`Civ. P. 9(b). See In re Sharp Int'l Corp., 403 F.3d 43, 56 (2d Cir. 2005). The alleged
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`fraud must relate to the specific payment or transfer the plaintiff is seeking to
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`avoid, rather than to the overall course of business. See id. (differentiating
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`between alleged fraud in obtaining funding from noteholders and subsequent
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`payment of some proceeds to defendant). And by "actual intent," the statute
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`contemplates intent "existing in fact or reality" and not merely the imputed intent
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`that would suffice for a constructive fraudulent conveyance claim. Intel Corp.
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`Inv. Pol'y Comm. v. Sulyma, 140 S. Ct. 768, 776 (2020) (holding, in context of
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`ERISA, that "actual" means "existing in fact or reality," more than "potential,
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`possible, virtual, conceivable, theoretical, hypothetical, or nominal") (citations
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`and internal quotation marks omitted); compare 11 U.S.C. § 548(a)(1)(A)
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`(intentional fraudulent conveyance) with id. § 548(a)(1)(B) (constructive
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`fraudulent conveyance); see also United States v. Finkelstein, 229 F.3d 90, 95 (2d Cir.
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`2000) ("[T]he should-have-known alternative connotes a concept more akin to
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`negligence than to knowledge.").
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`Because of the difficulties in proving intent to defraud, a pleader
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`may rely on "badges of fraud," i.e., circumstances so commonly associated with
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`fraudulent transfers that their presence gives rise to an inference of intent. In re
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`Kaiser, 722 F.2d 1574, 1582 (2d Cir. 1983). Courts have inferred intent to defraud
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`from the "concealment of facts and false pretenses by the transferor," "reservation
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`by [the transferor] of rights in the transferred property," the transferor's
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`"absconding with or secreting the proceeds of the transfer immediately after their
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`receipt," "the existence of an unconscionable discrepancy between the value of
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`property transferred and the consideration received therefor," the oppressed
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`debtor's creation "of a closely-held corporation to receive the transfer of his
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`property," as well as the oppressed debtor's transfer of property while insolvent.
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`Id. (citation omitted); see also Sharp, 403 F.3d at 56.
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`A corporation can only act through its directors and officers, and we
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`look to state law to determine who has the authority to act on behalf of a
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`corporation (and therefore whose actions to review to see whether there was
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`fraudulent intent or badges of fraud). See Burks v. Lasker, 441 U.S. 471, 478 (1979)
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`("[T]he first place one must look to determine the powers of corporate directors is
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`in the relevant State's corporation law."). Under Delaware law -- Tribune's state
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`of incorporation -- only the board of directors (or a committee to which the board
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`has delegated its authority) has the power to approve an extraordinary
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`transaction such as a merger or consolidation. See Del. Gen. Corp. Law §§ 141(a),
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`(c), 160(a), 251(b). Here, the Board delegated its authority to approve a merger
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`and redemption of Tribune's stock to the Special Committee, and thus the
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`Trustee was required to plead allegations that gave rise to a strong inference that
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`the Special Committee had the "actual intent to hinder, delay, or defraud"
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`Tribune's creditors, as required by 11 U.S.C. § 548(a)(1)(A).
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`The Trustee does not argue that the members of the Special
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`Committee had "actual intent" to harm Tribune's creditors but instead contends
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`that Tribune's senior management had the necessary fraudulent intent, and that
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`this intent must be imputed to the Special Committee. The issue of whether a
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`company's officers' intent to defraud creditors can be imputed to an independent
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`special committee for purposes of a fraudulent conveyance claim under the
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`Bankruptcy Code is a question of first impression in this Circuit. The First
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`Circuit has addressed the issue and applied a "control" test -- a court "may
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`impute any fraudulent intent of [an actor] to the transferor . . . [if the actor] was
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`in a position to control the disposition of [the transferor's] property." In re Roco
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`Corp., 701 F.2d 978, 984 (1st Cir. 1983). The district court here applied the control
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`test, holding that "this test appropriately accounts for the distinct roles played by
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`directors and officers under corporate law, while also factoring in the power
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`certain officers and other actors may exercise over the corporation's decision to
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`consummate a transaction." 3049 S. App'x at 9.
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`The Trustee argues that the district court erred in applying the
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`control test, and that the correct standard is either a scope-of-employment
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`agency standard or a "proximate cause" standard. We are not persuaded. In the
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`circumstances here, we affirm the district court's use of a "control" test for
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`imputation. We agree that for an intentional fraudulent transfer claim, which
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`requires "actual intent," a company's intent may be established only through the
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`"actual intent" of the individuals "in a position to control the disposition of [the
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`transferor's] property." Roco, 701 F.2d at 984; see also In re Lehman Bros. Holdings,
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`Inc., 541 B.R. 551, 576 (S.D.N.Y. 2015) ("[T]he Court's analysis regarding
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`imputation must turn on actual control of [the debtor].").5
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`B.
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`Application
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`The Trustee makes two arguments in support of his intentional
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`fraudulent transfer claims. First, he argues that Tribune's senior management
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`possessed actual intent to defraud, and that intent should be imputed to the
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`Special Committee. Second, even assuming the imputation argument fails, the
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`Trustee maintains that Independent Directors on the Special Committee had the
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`required intent as demonstrated by "badges of fraud."
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`In arguing for a lesser imputation standard, the Trustee relies heavily on Staub v.
`5
`Proctor Hospital, 562 U.S. 411 (2011). That case, however, applied a "motivating factor"
`standard under the Uniformed Services Employment and Reemployment Rights Act, id.
`at 417–18, and we are not persuaded that it carries much weight in a case requiring
`"actual intent" under the Bankruptcy Code.
`- 22 -
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`1.
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`Imputation of Intent
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`We conclude that the Trustee failed to plausibly allege that the intent
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`of Tribune's senior management should be imputed to the Special Committee
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`because the Trustee failed to allege that Tribune's senior management controlled
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`the transfer of the property in question.
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`As discussed above, the Board created an independent Special
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`Committee to evaluate the LBO. The Special Committee, in turn, hired Morgan
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`Stanley to serve as its independent financial advisor. As the district court
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`observed, the Trustee failed to allege that senior management inappropriately
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`pressured the Independent Directors -- who included former senior officers of
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`major corporations -- to approve the transactions or that senior management
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`dominated the Special Committee.
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`The Trustee failed to allege any financial or personal ties between
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`senior management and the Independent Directors that could have affected the
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`impartiality of the Special Committee. And to the extent that the officers misled
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`the Special Committee by presenting it with the February Projections and a
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`flawed viability and solvency opinions, Morgan Stanley and the Special
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`Committee itself checked these figures. Therefore, to impute the officers' intent
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`onto the Special Committee, which was working independently with an outside
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`financial advisor and independently reviewed opinions provided by Duff &
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`Phelps and VRC, would stretch the "actual intent" requirement as set forth in
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`§ 548(a)(1)(A) to include the merely possible or conceivable or hypothetical as
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`opposed to existing in fact and reality.
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`2.
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`The Badges of Fraud
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`On appeal, the Trustee contends that five of the traditional "badges
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`of fraud" weigh in favor of finding actual intent -- (1) lack of consideration for the
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`shareholder transfers; (2) Tribune's financial condition; (3) the relationship
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`among the parties; (4) the "pattern of transactions"; and (5) the "general
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`chronology" of the events. 3049 Appellant's Br. at 37–38. While some of these
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`factors arguably weigh in favor of the Trustee, in the end we conclude that the
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`district court correctly held that the Trustee failed to plead "badges of fraud"
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`sufficient to raise a strong inference of actual fraudulent intent on the part of the
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`Special Committee. See Kaiser, 722 F.2d at 1582–83.
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`The Trustee's assertion that Independent Directors stood to earn
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`$6 million for selling their shares if they approved the LBO is insufficient to
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`satisfy the stringent pleading standard of Rule 9(b). First, it would be
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`unreasonable to assume actual fraudulent intent whenever the members of a
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`board of directors (or a committee created by that board) stood to profit from a
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`transaction they recommended or approved. See, e.g., Kalnit v. Eichler, 264 F.3d
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`131, 139 (2d Cir. 2001) ("Motives that are generally possessed by most corporate
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`directors and officers do not suffice [to demonstrate fraud]. . . . Insufficient
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`motives, we have held, can include (1) the desire for the corporation to appear
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`profitable and (2) the desire to keep stock prices high to increase officer
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`compensation."). Second, the Independent Directors owned only a small fraction
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`(0.08%) of Tribune's shares, and the Independent Directors' shares were sold at a
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`price only slightly above the price at which Tribune stock had been trading.
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`These assertions, even assuming they are true, do not give rise to a strong
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`inference of actual fraudulent intent.
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`The Trustee's arguments that the Independent Directors "knew that
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`Tribune was falling far short of projections and thus was unlikely to generate
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`enough cash to service its debt" and the risky nature of the proposed LBO were
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`indications of fraud are also unpersuasive. 3049 Appellant's Br. at 38. Even
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`assuming the Independent Directors were wrong in believing that Tribune's
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`financial condition would improve, their approval of a risky transaction when
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`Tribune and other newspaper companies were struggling would arguably
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`support a negligence or constructive fraud claim but not, in the circumstances
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`here, an intentional fraudulent transfer claim. See, e.g., In re Lehman Bros.
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`Holdings, Inc., 541 B.R. at 577 ("Indeed, there is nothing unlawful about a
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`company transacting business during unusually difficult financial times in an
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`attempt to prevent its own collapse. To find otherwise would place in question
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`any contract executed during a financial downturn and invite upheaval in the
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`financial markets."). Moreover, Tribune's contemporaneous public filings
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`warned that its projections could fall short, and the Independent Directors had
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`an obligation to try to achieve the highest price for Tribune's shareholders. See,
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