SDNY Distinguishes Supreme Court, Holds Tribune Company's Leveraged Buyout Falls Within Section 546(e) Safe Harbor Provision

The District Court for the Southern District of New York has ruled that a trustee could not amend a complaint to add federal constructive fraudulent transfer claims because those claims were preempted by the safe harbor provision of the Bankruptcy Code.[1] The District Court found, under a plain language reading of the safe harbor provision, 11 U.S.C. § 546(e), that Tribune Company ("Tribune") was protected as a "financial institution" because it was a "customer" of a "financial institution."[2] In so finding, the District Court distinguished Merit Management Group, LP v. FTI Consulting, Inc., in which the Supreme Court held that a court must look to the overarching transfer to evaluate whether it meets the safe-harbor criteria and rejected the idea that a bank or trust company acting as an intermediary for a financial transaction could invoke the safe harbor provision.[3]

Background

This case arises from Tribune's longstanding Chapter 11 bankruptcy that began in 2008.[4] In 2007, Tribune participated in a two-step leveraged buyout in which it purchased all of its outstanding stock from its shareholders for about $8 billion.[5] Tribune used Computershare Trust Company, N.A. ("CTC") as an intermediary in the transactions.[6] Shortly thereafter, Tribune and many of its subsidiaries experienced financial difficulties, and filed Chapter 11 bankruptcy in December 2008.[7]

In June 2011, the Bankruptcy Court granted creditors relief from the automatic stay to allow them to pursue state law constructive fraudulent conveyance claims against Tribune's shareholders.[8] In response, multiple classes of creditors initiated suits against the shareholders to claw back funds transferred to the shareholders during the leveraged buyout.[9] The suits were consolidated by the Judicial Panel on Multidistrict Litigation in front of Judge Richard Sullivan of the District Court for the Southern District of New York, who granted Tribune's motion to dismiss the state-law fraudulent conveyance claims on the grounds that section 362(a)(1) of the Bankruptcy Code deprives individual creditors of standing to challenge the same transactions that the Official Committee of Unsecured Creditors of Tribune (the "UCC") was simultaneously seeking to avoid.[10] The Second Circuit affirmed Judge Sullivan's decision, but on different grounds, holding that the fraudulent conveyance claims were preempted by the section 546(e) safe harbor provision of the Bankruptcy Code.[11]

Months...