Canada: LBO Investors Shielded From Creditors' State Law Fraudulent Conveyance Claims

On March 29, the United States Court of Appeals for the Second Circuit issued an opinion holding that the safe harbor provision in Section 546(e) of the Bankruptcy Code, which bars constructive fraudulent conveyance claims against settlement payments brought by a "trustee" in bankruptcy, also bars state law constructive fraudulent conveyance claims asserted by creditors against shareholders to recover settlement payments made in the context of a leveraged buyout (LBO) of a company that subsequently commences a bankruptcy case (Tribune).1 In a related appeal, the Court upheld the safe harbor provision applicable to swap transactions in Section 546(g) (Whyte).2

What You Need To Know

  • Section 546(e) securities safe harbor provision protects shareholder settlement payments in LBO transactions from constructive fraudulent conveyance attack by individual or collective creditors.
  • Second Circuit broadly interprets the safe harbor provisions of the Bankruptcy Code to protect the securities markets.
  • State law constructive fraudulent conveyance claims are preempted by the federal Bankruptcy Code.

Whyte Appeal

The Whyte case involved an appeal from the decision of Judge Rakoff of the United States District Court for the Southern District of New York where he held that the Section 546(g) safe harbor provision for swap transactions impliedly preempted state law causes of action brought by the litigation trustee (Litigation Trustee) of a litigation trust formed pursuant to the chapter 11 reorganization plan of SemGroup. Certain individual creditors in SemGroup assigned their claims to the trust wherein the Litigation Trustee asserted a fraudulent transfer claim under New York state laws against Barclays and other defendants. The Litigation Trustee posited that because Section 546(g) expressly applies to a "trustee" exercising federal avoidance powers under Section 544 of the Bankruptcy Code, the safe harbor provision did not apply to creditor claims brought under state laws after the termination of the bankruptcy case. Judge Rakoff based his decision on a theory of implied preemption that allowing such state law fraudulent conveyance actions to proceed in a litigation trust would frustrate Congress's intent in protecting swap transfers from avoidance.

Tribune Appeal

The Official Committee of Unsecured Creditors of the Tribune Company commenced a lawsuit (the Committee Action) on behalf of the bankruptcy estate of Tribune Company against former shareholders alleging fraudulent conveyance claims based upon federal bankruptcy law. The Committee was replaced by a litigation trustee for the Tribune Litigation Trust. The Committee Action involves claims for intentional fraudulent conveyance but not constructive fraudulent conveyance which would have been barred by Section 546(e).

In a separate action, certain other creditors of Tribune Company including Deutsche Bank, Wilmington Trust, Law Debenture, and William A. Niese, et al. on behalf of the Tribune Company Retirees commenced lawsuits (Individual Creditor Actions) against defendants alleging claims based on state law constructive fraudulent conveyance causes of action. Both the Committee Action and all of the Individual Creditor Actions were transferred to the Southern District of New York for coordination under multidistrict litigation. The Individual Creditor Actions were dismissed on September 23, 2013 by Judge Sullivan of the United States District Court for the Southern District of New York, a decision subsequently appealed to the Second Circuit.

Judge Sullivan had ruled that individual creditors seeking to avoid payments made to former shareholders of the Tribune Company during the Company's 2007 leveraged buyout were precluded from asserting such fraudulent conveyance actions as long as the litigation trustee which represents Tribune's bankruptcy estate continues to assert his avoidance powers. The Court, however, held that Section 546(e) of the Bankruptcy Code, the statute that provides a safe harbor from a trustee's avoidance claims for settlement payments in securities transactions, does not preempt individual creditors' state law constructive fraudulent conveyance claims. 

Judge Sullivan's Tribune opinion conflicted with Judge Rakoff's Whyte opinion that the section 546(g) safe harbor provision shielding swap transactions from federal avoidance actions by bankruptcy trustees also preempts state-law claims commenced by creditors or their representatives. Judge Sullivan distinguished Whyte on the basis that the plaintiff in Whyte served in the capacity of both the bankruptcy trustee and the representative of outside creditors, whereas Tribune, the plaintiffs were individual creditors. These conflicting decisions prompted the Second Circuit to consider the appeals of Whyte and Tribune together. 


The Second Circuit affirmed the dismissal of the state law constructive fraudulent conveyance claims in Tribune based upon Section 546(e) of the Bankruptcy Code and not a theory of standing relied on by Judge Sullivan. The Second Circuit noted that when the Tribune reorganization plan was confirmed, the automatic stay was lifted and individual creditors were not barred from bringing claims outside of bankruptcy which were expressly preserved in the plan. While the state law claims were preempted during the case, at issue was whether the Individual Creditor Actions were restored or reverted to creditors once the official committee of creditors with the powers of a trustee did not pursue them. The Second Circuit found no support for this reversionary theory and found no reason why  the Bankruptcy Code safe harbor provisions would bar such claims during a bankruptcy case but then allow them to proceed in multiple forums against multiple defendants. The Court then looked to the statutory interpretation of Section 546(e) and its legislative history. The Second Circuit emphasized the purpose of the safe harbors to provide certainty, speed, finality and stability to the securities markets to attract capital. Allowing the Individual Creditor Actions to proceed would undermine this Congressional intent. In a summary order in the Whyte Appeal, the Second Circuit affirmed the dismissal of the actions involving the swap transactions under the Section 546(g) safe harbor provision for substantially the same reasons as in Tribune.

The Second Circuit decision provides an expansive view of the safe harbor provisions protecting investors from constructive fraudulent conveyance attacks. Financial institutions, pension funds and other investors can take comfort in the Court's robust defense of the stability and security of the financial markets as a basis for limiting creditor lawsuits. While the insiders involved in a leveraged buyout transaction may still face intentional fraudulent conveyance litigation, those shareholders who merely received settlement payments may breathe a sigh of relief.


1 In re Tribune Co. Fraudulent Conveyance Litig., No. 13-3992, slip op. (2d Cir. Mar. 29, 2016).

2 Whyte v. Barclays Bank PLC, No. 13-2653, summ. ord. (2d Cir. Mar. 24, 2016).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.