Tribune Co. Creditors' Fraudulent Conveyance Claims Preempted by 546(e) ... or Not Reverted?
After a delay of nearly 15 months, the Second Circuit this past Friday finally released its opinion in the Tribune Co. Fraudulent Conveyance Litigation. Briefly, the case concerned attempts by creditors to claw back payments to former shareholders in the Tribune Company's ill-fated LBO, which led to its 2008 bankruptcy. The theory of recovery was that buyout payments to former shareholders were made for less than reasonably equivalent value (to the company) while the company was insolvent (or thus rendered insolvent), so contemporaneous creditors could sue the former shareholders for return of the value they received as constructively fraudulent transfers. While the bankruptcy trustee (in this case, the Creditors Committee, by delegation) had the power to pursue these claims (under section 544(b)), it chose not to, most likely because section 546(e) prohibited it from doing so. But when the two-year statute of limitations for pursuing those actions passed, the claims supposedly reverted to the individual creditors (more on this below), who took up those claims with the explicit permission of the bankruptcy court. Fast-forward to last week ... I am not surprised that the Second Circuit stuck to its historically broad construction of the "settlement payment" safe harbor in section 546(e) and held that state law fraudulent conveyance actions by creditors are barred by that provision just as a similar action by a "trustee" would be. More interesting, in my view, is the "why are we even talking about this" discussion of whether those creditors had any right to be pursuing those claims in the first place.
In any event, the long wait is over, and old equity can breath a sigh of relief. LBOs and fraudulent conveyance litigation are looking more and more like oil and water.
UPDATE: Apparently 15 months is not a sufficient delay for the Second Circuit. It abruptly withdrew the opinion without explanation yesterday, though I can hardly imagine the newly issued opinion will differ materially from the "erroneous" one. When I was a law clerk there, I don't ever remember the Third Circuit delaying an opinion for so long or withdrawing an opinion like this. How odd.
FURTHER UPDATE: The new opinion, with only very minor tweaks here and there, is posted on the Second Circuit's site here.