United States: 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 connection with the LBO (e.g., shareholders of Tribune who received payment for their shares).4 The Committee sought to avoid these transfers and certain related LBO obligations on the basis that they constituted intentional fraudulent conveyances (e.g., transfers were made with actual intent to hinder, delay or defraud creditors).5 In its action, the Committee, however, did not assert a claim for constructive fraudulent conveyance (e.g., transfers made while the debtor was insolvent or that rendered the debtor insolvent in exchange for less than reasonably equivalent value). As a result, certain individual creditors (the "Individual Creditors") moved the Bankruptcy Court for relief from the automatic stay to file state-law constructive fraudulent conveyance claims outside of the bankruptcy case (such claims and actions, respectively, the "SLCFC claims" and the "SLCFC actions").6 The Bankruptcy Court granted the relief by lifting the stay, because it found the Committee had not asserted the SLCFC claims within the applicable two-year period after the filing of the Chapter 11 case for bringing such action under Section 546(a). However, the Bankruptcy Court expressly indicated that it was making no ruling as to (i) whether the Individual Creditors would have standing to assert the SLCFC claims or (ii) whether such claims had been preempted by Section 546(e). Upon the lifting of the automatic stay, the Individual Creditors commenced the SLCFC actions in more than 20 state and federal courts. These actions were consolidated by the Judicial Panel on Multidistrict Litigation in the Southern District of New York. The targeted defendants (the "Defendants") promptly moved to dismiss the Individual Creditors' SLCFC actions.

The Ruling and Its Supporting Rationale

The Defendants made two key arguments in their motion to dismiss. First, they argued that the Individual Creditors' claims were barred by the safe harbor in Section 546(e). Second, they argued, on three separate bases, that the Individual Creditors lacked standing to assert the SLCFC claims.

In addressing the Defendants' first argument, the Tribune court examined the plain language of Section 546(e). The Individual Creditors argued that (i) Section 546(e), by its terms, only limits avoidance of transfers by the trustee (and by extension the debtor (or other representative of the debtor's estate)) and (ii) state-law fraudulent conveyance claims belonged to the Individual Creditors once the two-year statute of limitations period under Section 546(a) of the Bankruptcy Code to bring such claims had elapsed. Looking at the plain language of Section 546(e), the Tribune court found that "[b]ecause Congress has spoken so clearly with respect to the object of the limitation in Section 546(e), [it] discerns no basis for barring SLCFC claims brought by Individual Creditors who have no relation to the bankruptcy trustee."

The Defendants next argued that, even if not expressly barred, the Tribune court should find that the SLCFC claims were preempted by the enactment of Section 546(e). Pointing to the legislative history and prior recent applications of Section 546(e), the Defendants urged the court to find that the SLCFC claims were impliedly preempted by Section 546(e) because recognition of the SLCFC claims would directly and effectively frustrate the expressed purposes of Section 546(e). However, the Tribune court found that the legislative history provided the counterpoint. The court noted that (i) Congress declined to expressly preempt the SLCFC claims even though certain parties petitioned for such an amendment, (ii) from the court's review, "Congress [had] repeatedly indicated that it did not enact Section 546(e) to protect market stability to the exclusion of all other policies," and (iii) on the eight separate occasions when Section 546(e) was amended, Congress never added language expressly preempting the SLCFC claims, even after one bankruptcy court decision, PHP Liquidating, LLC v. Robbins,7 had found that, under certain circumstances, Section 546(e) permits creditors to assert the SLCFC claims. Additionally, the Tribune court cited another section of the Bankruptcy Code to demonstrate that Congress knows how to and is willing to expressly preempt an individual creditor's state law claims. Finding intent in Congress's inaction, the Tribune court believed that Congress had "struck some balance between" the policy of market stability and preservation of an individual creditor's right to commence fraudulent conveyance actions under certain circumstances. Consequently, the Tribune court held that Section 546(e)'s safe harbor did not bar the claims of the Individual Creditors under state-law fraudulent conveyance theories.

Ultimately, however, the Defendants prevailed on the ground that, pursuant to Section 362(a)(1) of the Bankruptcy Code, the Individual Creditors lacked standing to bring the SLCFC claims because the Committee brought intentional fraudulent conveyance claims to avoid the same transactions, and such actions are still pending.8 Thus, the Tribune court concluded that "[u]nless and until the Committee actually and completely abandons [the] claims, the Individual Creditors lack standing to bring" the SLCFC claims.

The Tribune court's Section 546(e) ruling is seemingly at odds with the recent holding of another Southern District of New York decision in Whyte v. Barclays Bank PLC, a decision arising out of the bankruptcy of SemGroup and its affiliates.9 The SemGroup court held that state-law fraudulent conveyance claims brought by creditors are preempted by the Bankruptcy Code's financial contract anti-avoidance safe harbors, specifically Section 546(g) of the Bankruptcy Code, notwithstanding the lack of an explicit reference in such anti-avoidance safe harbor preempting such state-law fraudulent conveyance claims. The SemGroup court reasoned that allowing such suits by creditors would effectively permit an end run around the Code's safe harbors from avoidance (e.g., debtors could simply abandon their fraudulent conveyance claims and allow creditors to bring suit). The Tribune court was not persuaded by the SemGroup court's reasoning and distinguished SemGroup on the basis that, rather than individual creditors, the plaintiff in SemGroup was both the trustee for the estate and a representative of outside creditors and was "a creature of [SemGroup's] Chapter 11 plan." The trustee in SemGroup had waited until the limitations period in Section 546(a) for the estate to bring avoidance claims had expired and then sought to bring constructive fraudulent conveyance claims in its capacity as a representative for outside creditors. As a consequence, the Tribune court noted, the trustee "could not simply take off its trustee hat, put on its creditor hat and file an avoidance claim that Section 546(g) prohibited it from filing." In contrast, the Tribune court found that the Individual Creditors are not creatures of Tribune's Chapter 11 plan, and are in no way identical to a bankruptcy trustee. As such, the Tribune court could not find a reason why Section 546(e) should apply to limit the SLCFC claims of the Individual Creditors.

Practical Points

For practitioners, some solace should be taken in the fact that the SemGroup court is not alone in blocking end runs around the safe harbors.10 In addition, perhaps the Tribune court's ruling on Section 546(e) may be distinguished, for now, as mere dicta since the Individual Creditors were ultimately denied standing and the decision itself, seen as an outlier in the overall body of decisions that address the Bankruptcy Code's financial contract anti-avoidance safe harbors. Nevertheless, the Tribune court's interpretation of Section 546(e) has potentially emboldened individual creditors to commence numerous SLCFC actions in multiple forums instead of a single action brought by committees or litigation trusts or trustees in one forum. This ruling may also encourage debtors and committees to carefully consider abandoning (or at least not bringing within the Bankruptcy Code's two-year statute of limitations period) SLCFC claims that would otherwise be exempt from avoidance so that they can be brought by individual creditors. Cnsidered along with the PHP Liquidating decision, the Tribune ruling indicates that there is some inherent uncertainty in determining whether a particular transaction that would otherwise be safe harbored would be exempt from avoidance even where the estate does not bring the claim within the Bankruptcy Code's two-year statute of limitations period. Because the Defendants prevailed, the Tribune court's interpretation of Section 546(e) is unlikely to be appealed.11 If, however, the Tribune ruling is followed by other courts, the ruling could be a stepping-stone on the path to substantially narrowing the applicability of safe harbors such as Section 546(e) that, to date, have generally been construed quite broadly. Therefore, the Tribune ruling meaningfully underscores the need for potential defendants in avoidance actions to seek to carefully craft releases and assignments of claims to litigation trusts in Chapter 11 plans so that they may limit, to the greatest extent possible, the ability of individual creditors to bring SLCFC actions. Moreover, financial market participants may wish to seek congressional action to expressly close what may be a loophole in the effectiveness of the Bankruptcy Code's anti-avoidance safe harbors with respect to financial transactions.

Originally published September 27, 2013

Footnotes

1 In re Tribune Company – Fraudulent Conveyance Litigation, Memorandum and Order, 1:12-mc-02296, Docket No. 159 (S.D.N.Y. September 23, 2013) ("Tribune decision" and the "Tribune court").

2 See, e.g., 11 U.S.C. §546(g), which is applies to swap agreements.

3 See, e.g., Enron Creditors Recovery Corp. v. ALFA, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011) (applying plain meaning of Section 546(e) and holding that payments made to redeem commercial paper early were non-avoidable settlement payments under Section 546(e) and rejecting notion that safe harbor should be limited because transactions at issue "did not involve a financial intermediary that took title to the transacted securities and thus did not implicate the risks that prompted Congress to enact the safe harbor.").

4 The Committee claims were assigned to a litigation trust (the "Litigation Trust") by virtue of the terms of Tribune's confirmed Chapter 11 plan.

5 Section 546(e) of the Bankruptcy Code would have barred the Committee, as a representative of the estate, from successfully bringing constructive fraudulent conveyance claims.

6 Section 362(a)(1) of the Bankruptcy Code automatically stays, among other things, actions against the debtor that arose before the commencement of the bankruptcy case. Case law has construed the stay to apply to fraudulent conveyance claims, even though the claims are asserted against the debtor's transferee and not the debtor.

7 291 B.R. 603, 607 (Bankr. D. Del. 2003) ("PHP Liquidating").

8 The Tribune court also left open the possibility of the Litigation Trust amending its complaint to abandon the intentional fraudulent conveyance claims, which would effectively allow the Individual Creditors to have standing to bring the SLCFC claims.

9 494 B.R. 196 (S.D.N.Y. 2013) ("SemGroup" and the "SemGroup court"). In SemGroup, a litigation trust had been established in furtherance of the debtors' confirmed Chapter 11 plan. Under its terms, certain creditors and the relevant debtors and debtors' estates had assigned all of their claims to a trust. The trust was empowered to commence any and all actions arising under Chapter 5 of the Bankruptcy Code and state law avoidance claims that could have otherwise been brought by the parties who had transferred their claims to the trust. Since the subject transaction, as agreed by both sides, was a "swap agreement" and the defendant, a "financial participant," it was entitled to the protections of the safe harbor under Section 546(g) of the Bankruptcy Code. To avoid application of the safe harbor, the trustee waited until the statute of limitations period under Section 546(a) expired and then sought to proceed as a representative of creditors to bring a state-law constructive fraudulent conveyance claim. The SemGroup court held, however, that the trustee could not pursue such claims, as allowing such claims would frustrate the protections of the Section 546(g) safe harbor.

10 See also, In re U.S. Mortg. Corp. & CU Nat. Mortg. Inc., 492 B.R. 784 (Bankr. D. N.J. 2013) (trustee's attempt to "re-label" the avoidance actions as state law claims for conspiracy and conversion blocked by safe harbors); AP Services LLP v. Silva, 483 B.R. 63, 69 (S.D.N.Y. 2012) (finding that plain language of Section 546(e) should be "construed 'extremely broadly,'" the court found that an unjust enrichment claim that was merely a repackaging of an avoidance claim was preempted by the safe harbor, but the court found that the safe harbor did not preempt claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty).

11 The Individual Creditors could also appeal the stay now in place by challenging the Tribune court's determination on their lack of standing to proceed but they would not seek to upset their favorable 546(e) ruling.

Learn more about our Restructuring, Bankruptcy & Insolvency practice.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2013. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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

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

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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