In re Tribune Co.

499 B.R. 310

In re TRIBUNE COMPANY FRAUDULENT CONVEYANCE LITIGATION.

Multidistrict Litigation No. 11 MD 2296(RJS).

Master Case File No. 12 MC 2296(RJS).

United States District Court, S.D. New York.

Sept. 23, 2013.

Plaintiffs' Liaison Counsel David Zensky, Mitchell P. Hurley, Deborah J. Newman, Jason L. Goldsmith, and Katherine P. Scully, Akin Gump Strauss Hauer & Feld LLP, Park, New York, NY, for the Individual Creditors in the Note Holder Actions.

Jay Teitelbaum, Teitelbaum & Baskin LLP, White Plains, NY, for the Individual Creditors in the Retiree Actions.

Executive Committee Members P. Sabin Willett, Bingham McCutchen LLP, Boston, MA, Elliot Moskowitz, Davis Polk & Wardwell, New York, NY, Michael S. Dolusio, Dechert LLP, Philadelphia, PA, Andrew J. Entwistle, Entwistle & Capucci LLP, New York, NY, Joel A. Feuer, Gibson, Dunn & Crutcher LLP, Los Angeles, CA, Matthew L. Fornshell, Ice Miller LLP, Columbus, OH, David C. Bohan, Katten Munchin Rosenman LLP, Chicago, IL, Alan J. Stone, Millbank, Tweed, Hadley & McCoy LLP, New York, NY, Daniel L. Cantor, O'Melveny & Myers LLP, Times Square Tower, New York, NY, David N. Dunn, Potter Stewart Jr. Law Offices, P.C., Suite 8, Brattleboro, VT, Gregg Mashberg, Proskauer Rose LLP, New York, NY, Steven R. Schoenfeld, Robinson & Cole LLP, New York, NY, D. Ross Martin, Ropes & Gray LLP, New York, NY, Mark A. Neubauer, Steptoe & Johnson LLP, Los Angeles, CA, Philip D. Anker, Wilmer Cutler Pickering Hale & Dorr LLP, New York, NY, for Defendants.

Memorandum and order

RICHARD J. SULLIVAN, District Judge.

This multidistrict litigation (“MDL”), which consolidates state and federal cases from across the country, arises out of the leveraged buyout (“LBO”) of the Tribune Company (“Tribune”) in 2007 and its subsequent bankruptcy in 2008. Plaintiffs in these cases—the Official Committee of Unsecured Creditors (the “Committee”), which represents Tribune's bankruptcy estate, and hundreds of individual creditors of Tribune (the “Individual Creditors” or “Creditors” ¹)—seek to claw back funds that were distributed to individuals and entities bought out in the course of the LBO (“Defendants”). The Creditors' suits (the “Individual Creditor Actions”) target transactions that the Committee's suits (the “Committee Actions”) are already seeking to unwind; however, the Creditors and the Committee assert different claims in pursuit of their shared end.

Now before the Court is Defendants' consolidated motion to dismiss the Individual Creditor Actions pursuant to Federal Rule of Civil Procedure 12(b)(6). The narrow questions raised by the motion are whether Section 546(e) of the Bankruptcy Code prohibits the Creditors' state law constructive fraudulent conveyance claims now that Tribune has filed for bankruptcy, and, if not, whether the Creditors are deprived of standing to proceed with their constructive fraudulent conveyance claims outside of bankruptcy while the Committee simultaneously asserts different fraudulent conveyance claims to unwind the same transactions.² For the reasons set forth below, the Court concludes that Section 546(e) does not prohibit the Individual Creditors' fraudulent conveyance claims, but that Section 362(a)(1) nonetheless deprives the Individual Creditors of standing to avoid the same transactions that the Committee is simultaneously suing to avoid.

I. Background³

Tribune is a 166–year–old media corporation that publishes the Chicago Tribune and the Los Angeles Times and also operates business units in radio, television, and the Internet. In the mid–2000s, this storied company's financial condition was deteriorating, so on April 1, 2007, Tribune's board of directors approved a buyout plan proposed by private equity investor Sam Zell (“Zell”). (NH Compl. ¶¶ 2–3; see Retiree Compl. ¶ 34.) The LBO paid out more than $8.2 billion to thousands of public shareholders in exchange for their Tribune shares. (NH Compl. ¶¶ 62, 66; Retiree Compl. ¶¶ 37, 40.) Although the company operated for a year after it was taken private, when the economy and the publishing industry entered a steep decline in 2008, Tribune commenced bankruptcy proceedings pursuant to Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101, et seq. (NH Compl. ¶ 112; Retiree Compl. ¶ 13.)

After Tribune filed for bankruptcy, the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) created the Committee to stand in the shoes of the bankruptcy trustee and to file adversary proceedings for the benefit of Tribune's creditors. ( In re Tribune Co., 08–13141 (Bankr.D.Del.), Docket (“Bankr. Doc.”) Nos. 5668 and 6150.) ⁴ In this capacity, the Committee filed suit against cashed-out Tribune shareholders, Tribune's officers and directors, financial advisors, Zell, and others who benefited from the buyout. ( Official Comm. of Unsecured Creditors of Tribune Co. v. Fitzsimons, No. 10–ap–54010 (KJC) (Bankr.D.Del.), Doc. (“Committee SH Action Doc.”) No. 1; Official Comm. of Unsecured Creditors of Tribune Co. v. Citigroup Global Mkts., Inc., No. 12–ap–50446 (KJC) (Bankr.D.Del.), Doc. No. 1.) Among other claims, the Committee sought to unwind the LBO by asserting that the shareholder buyouts constituted intentional fraudulent conveyances. (Committee SH Action Doc. No. 1 ¶¶ 317–320.)

However, for reasons that will be made apparent below, the Committee did not assert a claim for constructive fraudulent conveyance. Consequently, on March 1, 2011, the Individual Creditors moved the Bankruptcy Court to permit them to file state-law constructive fraudulent conveyance (“SLCFC”) claims outside of bankruptcy.⁵ (Bankr.Doc. No. 8201.) The Bankruptcy Court conditionally lifted the stay because it found that, although the estate had filed intentional fraudulent conveyance claims, it had not asserted SLCFC claims within the applicable time period under 11 U.S.C. § 546(a) for trustee-filed fraudulent conveyance actions. (Bankr.Doc. No. 8740 (“Bankr.Decision”) ¶ 2.) The Bankruptcy Court expressly limited its decision, however, stating that it “made no finding and issue[d] no ruling determining the standing of [creditors] to assert SLCFC Claims or whether such claims are preempted or otherwise impacted by 11 U.S.C. § 546(e),” thus leaving those determinations for this Court. (Bankr.Decision ¶ 8 n. 2.)

Based on the Bankruptcy Court's decision to conditionally lift the stay on the SLCFC claims, starting on June 2, 2011, Individual Creditors across the country initiated SLCFC actions in more than twenty state and federal courts to unwind the buyouts of Tribune shareholders. ( See e.g., NH Compl. ¶¶ 115–160; Retiree Compl. ¶¶ 314–329; see also Mem. at 7.) By December 19, 2011, the filings related to the LBO had become sufficiently voluminous that the Judicial Panel on Multidistrict Litigation consolidated the Individual Creditor Actions and the Committee Actions here in the Southern District of New York. In re Tribune Co. Fraudulent Conveyance Litig., 831 F.Supp.2d 1371, 1371 (J.P.M.L.2011).

Defendants filed their motion to dismiss and memorandum of law on November 6, 2012 (Doc. Nos. 1670, 1671 ⁶), and the Individual Creditors responded on December 21, 2012 (Doc. No. 2086). The motion was fully briefed as of February 4, 2013. (Doc. No. 2293.) On March 27, 2013, this MDL was transferred to my docket (Doc. No. 2419), and on May 23, the Court heard oral argument on the motion (Doc. No. 2560).

II. Discussion

In order to survive a motion to dismiss pursuant to Rule 12(b)(6), a plaintiff must “provide the grounds upon which his claim rests.” ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.2007). He must also allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

Defendants assert two reasons why the Individual Creditor Actions are barred as a matter of law. First, Defendants argue that creditors' claims under state law are prohibited by 11 U.S.C. § 546(e), which bars a bankruptcy trustee from asserting constructive fraudulent conveyance claims to unwind “settlement payments” such as shareholder buyouts in an LBO. (Mem. at 9–21.) Second, Defendants argue that, because of Tribune's ongoing bankruptcy and the Committee's pursuit of intentional fraudulent conveyance claims, the Individual Creditors lack standing to assert constructive fraudulent conveyance claims that duplicate the Committee's claims. ( Id. at 22–35.) The Court will address each argument in turn.

A. The Effect of Section 546(e) on State–Law Claims

Defendants contend that 11 U.S.C. § 546(e) bars not only the Committee from asserting constructive fraudulent conveyance claims, but the Individual Creditors as well. (Mem. at 9–21.) Before turning to that provision, a brief overview of trustee avoidance powers may be helpful.

A bankruptcy trustee is empowered to assert various fraudulent conveyance claims under the Bankruptcy Code. Section 544(b)(1) gives a trustee power to “avoid any transfer of an interest of the debtor in property ... that is voidable under applicable law by a creditor.” This provision empowers the trustee to utilize, on behalf of the estate, any legal theory of recovery that a creditor could assert under state law. Section 548(a)(1) also permits a trustee to avoid fraudulent transfers by the debtor, but this Section creates a federal cause of action in the trustee's own name. Under Section 548(a)(1), there are two different avenues by which a trustee may avoid a transaction. Subsection (A) permits a trustee to:

avoid any transfer ... of an interest of the [bankrupt] debtor in property ... that was made ... on or within 2 years before the date of the filing of the [bankruptcy], if the debtor voluntarily or involuntarily made such transfer ... with actual intent to hinder, delay, or defraud any entity....

11 U.S.C. § 548(a)(1)(A) (emphasis added). In contrast to Subsection (A)' s avoidance power for...