In re Tribune Company Fraudulent Conveyance Litigation (April 2019)
U.S. DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK RULED THAT PAYMENTS IN A LEVERAGED BUYOUT TO THOUSANDS OF SHAREHOLDERS ARE PROTECTED BY SAFE HARBOR BECAUSE HAVING A TRADITIONAL FINANCIAL INSTITUTION AS AN INTERMEDIARY IN THE TRANSACTION CAN QUALIFY THE COMPANY MAKING THE PAYMENTS AS A FINANCIAL INSTITUTION WITHIN THE MEANING ON BANKRUPTCY CODE SECTION 546(E).
The Tribune litigation arose out of the 2007 leveraged buyout of the Tribune Company and its subsequent bankruptcy in 2008. In 2010, the unsecured creditors committee on Tribune’s bankruptcy estate (“Committee”) filed a suit seeking to recover over $8 billion of payments made to over 5,000 former shareholder defendants. The Committee, however, asserted only “intentional” fraudulent transfer claims because at that time, prior to Merit Management, it was clear under applicable law that the Section 546(e) safe harbor barred constructive fraudulent transfer claims for payments made through banks or trust companies. Following Merit Management’s narrowing of the Section 546(e) safe harbor, the litigation trustee, as successor to the Committee, moved to amend the complaint to add constructive fraudulent transfer claims. Judge Cote denied the motion for two independent reasons: (i) amendment would be futile because Section 546(e) continues to bar constructive fraudulent transfer claims, and (ii) amending the complaint at this time, more than ten years after the transactions at issue, would be prejudicial to thousands of defendants. The same Section 546(e) argument has already been briefed in the Second Circuit Court of Appeals in a related litigation initiated under state law by Tribune’s individual creditors.
The Tribune decision provides a road map to secure bankruptcy safe harbor defenses for payments made in leveraged buyouts, certain leveraged recapitalizations, and other similar transactions. The Supreme Court’s Merit Management decision disrupted a widely recognized interpretation of the Bankruptcy Code that protected many transactions from constructive fraudulent transfer risk if they were effected through financial institutions as intermediaries. Judge Cote’s opinion reaffirms the Bankruptcy Code’s previous protection from constructive fraudulent transfer claw back claims as long as the company making the payments is a “customer” of a traditional financial institution, and that financial institution acts as the company’s agent in making the payments. Although not specifically addressed, the reasoning of Judge Cote’s decision would similarly protect transfers where the recipient meets those same “financial institution” criteria (it is a “customer” of a traditional financial institution and that financial institution acts as the recipient’s agent).
The Tribune decision is the first significant decision to consider how the safe harbor applies in the wake of Merit Management. While Judge Cote’s reasoning is persuasive and the S.D.N.Y. District Court is influential, the ruling is not binding on other District Court judges.