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Tribune Co. Creditors' Fraudulent Conveyance Claims Preempted by 546(e) ... or Not Reverted?

posted by Jason Kilborn

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.

Presented in the context of establishing that the term "trustee" in section 546(e) does not "plainly" bar only actions brought by a trustee or DIP, the Second Circuit discusses the most important part of the case (I think) in what ends up being dictum: Do fraudulent conveyance claims really revert to individual creditors if not pursued by the trustee within two years? At pp. 26-38, the Second Circuit notes several times that it need not resolve this hotly disputed question. But it offers a persuasive argument that the answer--and a much cleaner way to resolve the case--would likely be "no!" Neither the language nor history of the Code seems to indicate that rights not exercised by the trustee revert to creditors, the Court noted. Rather, the strongest inference is that the trustee has the power and duty to exercise (or not) all creditors' rights on behalf of all creditors, who cede their rights to the trustee in exchange for being represented in the bankruptcy and sharing in its proceeds (at least if a plan is confirmed, as was the case for the Tribune Company). Drawing an inference of "reversion" based on the statute of limitations, the Court said, "might well have appeared as a leap several bridges too far" to any reader of the Code trying to figure out how section 546(e)'s safe harbor works. And as for that safe harbor, the argument here seems to be that the trustee would be allowed (encouraged!) to pass on a fraudulent transfer case not only to revert to creditors, but to be revived, since that case in the trustee's hands is barred by section 546(e). I find this discussion a much cleaner and more convincing basis for disposing of the case.

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.


It's only one circuit--other circuits might well disagree--but I have to think that the broad interpretations of 546(e) are going to place hydraulic pressure on other areas of law. There's no getting around the fact that LBOs have real fraudulent transfer problems, and that fraudulent transfers are something that has bothered law for centuries. If the door is shut by 546(e) for constructive fraudulent transfers, isn't that going to just put more pressure on courts to be receptive to actual fraudulent transfer theories?

Alternatively, the Tribune decision seems to place pressure on the (dubious) consensus that individual creditors are stayed from bringing fraudulent transfer actions during the bankruptcy. I have never found the reasoning very convincing, as they aren't using estate assets, and any recoveries go to the estate.

I agree that other circuits might disagree, but I would expect the Second Circuit to be the most common forum for challenging LBOs, and the other likely candidates (the Third and Seventh) don't seem at all likely to me to disagree with the Second Circuit's textual or policy approach (for a nice summary of recent LBO/546(e) analysis, see http://www.stjohns.edu/sites/default/files/documents/law/bankruptcy/bank-research2012-no-16.pdf ). I'm afraid the courts are most likely to leave this up to Congress to fix (if it's broken), and we all know how probably that fix is.

1. According to Executive Benefits fraudulent transfer actions are not “core”.

2. Some Tribune stockholders (McCormick & Cantigny Foundations) submitted an amicus brief in Executive Benefits arguing “The Foundations believe that all aspects of the case [Executive Benefits] before this Court should be determined in the U.S. district court. The bankruptcy court has no proper role to play in this litigation.”

3. The Tribune fraudulent transfer actions were indeed being consolidated and litigated in District Court as multiple district litigation.

4. So if those fraudulent transfer actions were not core - how can preemption apply?

Robert, as the Second Circuit noted in its (withdrawn) opinion (see p. 17, n. 5), "preemption" isn't perhaps the best word choice here ... but they stick with it. The idea is that all fraudulent conveyance actions stemming from the LBO fell under the trustee's (read: Creditors Committee's) authority upon the filing of the case, and section 546(e) "preempts" (or perhaps better, prohibits) an action by "the trustee" to unwind "settlement payments" like those made to the LBO sellers--regardless of which court has the power to finally adjudicate the dispute. Those fraudulent conveyance actions probably did not "revert" to the creditors when the CC failed to pursue them timely, the Second Circuit suggested, and even if they did revert, they could revert only to the extent the CC could have pursued them; that is, not at all in light of 546(e). Maybe "displaced" or better yet "obliterated" would be a better word choice. :-) This is not a constitutional case at all, and it has nothing to do with Stern or Arkison; it's all about the Code's language, in particular section 546(e).

Not a constitutional issue - I agree, that is why I cited case travel in the Article III District Court.

But if fraudulent transfer is not core then it is not a bankruptcy code issue either once allowed to proceed outside bankruptcy.

At least that is what I would argue in the Supreme Court, which would probably result in a 4-4 tie.

I do however give strong deference to the confirmed plan.

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