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No Abuse of Discretion in District Court’s Denial of Leave to Amend

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August 20, 2021, Southern District of New York – The United States Court of Appeals for the Second Circuit recently ruled on the appeal from a judgment and orders of the United States District Court for the Southern District of New York in the Tribune Company “Fraudulent Conveyance” case.

By way of background, in 2007, the Tribune Company (“Tribune”), then publicly-traded, executed a leveraged buyout (the “LBO”) to go private. Less than a year later, Tribune filed for Chapter 11 bankruptcy. Plaintiff-appellant Marc Kirschner, the bankruptcy litigation trustee (the “Trustee”) for the Tribune Litigation Trust brought “fraudulent conveyance” and other claims on behalf of creditors against shareholders who sold their stock in the LBO and against the financial advisors that helped Tribune navigate and complete the LBO. In several orders and decisions, the district court dismissed the Trustee’s claims for failure to state a claim under Rule 12(b)(6) of FRCP.

On appeal, the Litigation Trustee contended that the district court erred in dismissing his claims against the Tribune Company’s shareholders and financial advisors for intentional “fraudulent transfer” claims under 11 U.S.C.S. § 548(a)(1)(A), breach of fiduciary duty, and related causes of action. The bankruptcy litigation trustee also contends that the district court erred in denying leave to amend his complaint. The Court held that the Trustee was required to plausibly allege actual “fraudulent” intent on the part of the members of the special committee but failed to do so. Further, the Court ruled that the district court did not err in dismissing the Trustee’s aiding and abetting “breach of fiduciary duty” and professional malpractice claims against the financial advisors. The Court found that although the Trustee lodged numerous allegations of misconduct on the financial advisors’ part, there was little to suggest that their conduct created an informational gap leading to the board’s “breaches of fiduciary duties.” The court also concluded that the complaint did not sufficiently allege that the transfers to certain defendants as financial advisors were made with an “actual intent to hinder, delay, or defraud” creditors.

The Court of appeals found no abuse of discretion in the district court’s denial of leave to amend the Trustee’s intentional “fraudulent transfer” claims. The Court reasoned that the Trustee had ample opportunity to plead a viable claim in the district court, especially when the operative pleading was the Fifth Amended Complaint. However, the Trustee neither proposed any amendments that could cure the pleading defects nor identified on appeal any additional factual allegations that could give rise to a strong inference of “fraudulent” intent on the part of the special committee. Accordingly, the Court of appeals affirmed the judgment and orders of the district court, except as to actual and constructive “fraudulent conveyance” claims against certain defendants, which were vacated in part.

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