In Re Tribune: Defendants Successfully Challenge Individual Creditors Standing But District Court Rules That Section 546(e) Safe Harbor Does Not Bar Individual Creditors’ State Law Based Constructive Fraudulent Conveyance Claims

Keywords: district court, New York, creditors, multidistrict litigation, conveyance claims, bankruptcy code

On September 23, 2013, the US District Court for the Southern District of New York in In re Tribune1 held that the individual creditor suits at issue were stayed because the Creditors' Committee was in the process of prosecuting claims for intentional fraudulent conveyance that overlapped with such suits. But on the way to that ultimate holding, the Tribune court also ruled that the right of individual creditors in a multidistrict litigation to assert claims for constructive fraudulent conveyance under state law was not preempted by the safe harbor provision of Section 546(e) of the Bankruptcy Code (the "Tribune ruling"). This ruling is somewhat troubling as it could provide a path for debtors and creditors to do an end run around the Bankruptcy Code's safe harbors that exempt certain pre-bankruptcy financial transactions from avoidance as constructive fraudulent transfers (e.g., constructive fraudulent transfers that constitute "settlement payments" or transfers in connection with swaps) by permitting individual creditors to bring claims that would otherwise be barred under the Bankruptcy Code if they were brought by the debtor, a trustee, a creditors' committee or other representative of the bankruptcy estate. It remains to be seen whether other courts will decide to follow the Tribune court's interpretation of Section 546(e) (which, given the identical nature of the relevant statutory language, would, by extension, apply to other financial contract anti-avoidance safe harbors).2 Recognizing the importance of the Bankruptcy Code safe harbors to the financial markets, if the Tribune ruling is followed, it is possible that a legislative solution to address the potential loophole in safe harbor coverage may be required.

Section 546(e) - A Key Safe Harbor Provision

Designed to minimize systemic risk and maintain the liquidity of the financial markets, Section 546 of the Bankruptcy Code contains certain safe harbors that limit a trustee's power to avoid certain transfers made by, to or for the benefit of certain identified financial market participants in connection with certain financial transactions, such as margin or settlement payments, securities contracts, swap agreements, forward contracts, repurchase agreements and commodity contracts. Section 546(e) protects "margin payments," "settlement payments" and transfers in connection with "securities contracts," "forward contracts" and "commodity contracts" made by, to or for the benefit of certain parties such as stockbrokers and financial institutions from avoidance by "the trustee" as preferences or constructive fraudulent conveyances. Over the course of time, Section 546(e)'s financial contract safe harbors have been expanded to embrace more transactions. Courts interpreting Section 546(e) have acknowledged the breadth of the coverage of this safe harbor and have largely applied the plain language of the provision to broadly immunize enumerated transactions from avoidance even where the transactions at issue arguably did not impact the financial markets.3

Background of the Multidistrict Litigation

One year before the Tribune Company ("Tribune") filed for bankruptcy, it completed a leveraged buyout (the "LBO") that paid more than $8.2 billion to public shareholders for their shares. In 2008, Tribune sought relief under Chapter 11 of the Bankruptcy Code in the US Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), due in large part to its heavy debt load and the steep decline of the publishing industry.

The Official Committee of Unsecured Creditors in the Chapter 11 case (the "Committee") obtained the Bankruptcy Court's authorization to stand in the shoes of the bankruptcy trustee and to file adversary proceedings for the benefit of Tribune's creditors against certain parties who received transfers in...