In 2018, the Supreme Court issued its decision in Merit, ruling that a buyout transaction between private parties did not qualify for "safe harbor" protection pursuant to the Bankruptcy Code simply because a "financial institution" acted as an intermediary in the transaction. The ruling is depicted as a narrowing of safe harbor protections by withdrawing non-avoidance protections from transfers to beneficial owners of privately issued securities in a buyout transaction. The question that the Supreme Court did not answer was the scope of the term "financial institution."

As explained more fully in a Cadwalader memorandum, the U.S. District Court of the Southern District of New York answered the question and restored the broad scope of avoidance protections available to parties in certain financial contracts.

In April 2019, the U.S. District Court of the Southern District of New York determined that Tribune Company ("Tribune") - the purchaser of stock from its shareholders - employed a bank to effect the two-step leveraged buyout and was a customer of the bank. As noted by the attorneys, the bankruptcy court found that Tribune itself was a financial institution under the broad statutory language of the Bankruptcy Code. According to the attorneys, the Tribune Decision may refocus the debate about the scope of safe harbor protections to the identity of the parties to a transaction, as opposed to the involvement of banks and other financial institutions.

The attorneys identified several key takeaways from the Tribune Decision, including:

  • The Tribune Decision is arguably consistent with the Merit outcome and Congressional intent, since it involved transfers of publicly issued securities.
  • In its conclusion, the Tribune Decision answered the question left open in Merit – the scope of the term "financial institution" – and may have limited Merit as a consequence.
  • Whether guidance on this question may be forthcoming from court rulings interpreting the broadly worded safe harbor provisions or requires legislative change remains to be seen. In the interim, an appeal of the Tribune Decision to the Second Circuit Court of Appeals is anticipated, a tribunal that, prior to the Merit decision, had broadly interpreted the Section 546(e) safe harbor provisions.