In January 2020 we reported that, after the reconsideration suggested by two Supreme Court justices and revisions to account for the Supreme Court’s Merit Management decision,[1] the Court of Appeals for the Second Circuit stood by its original holding,[2] in an appeal that was first argued in 2014, that the payments to former Tribune shareholders that Tribune creditors were seeking to avoid were protected from avoidance by the “safe harbor” provided by Code Section 546(e).[3]  The creditors filed a petition for certiorari with the Supreme Court, and extensive briefing by the parties and several amici ensued. 

In October the Supreme Court requested the views of the Department of Justice whether cert. should be granted, a not uncommon occurrence.  The DoJ’s Office of the Solicitor General has now filed its recommendation that, despite the SG’s disagreement with the Court of Appeals on the merits, the petition be denied.[4]

The two issues on appeal are preemption and the exact degree to which Merit Management has limited the Section 546(e) “safe harbor.”

Preemption.  Section 546(e) says that “the trustee may not avoid a transfer that is . . . .”  It is well-accepted that it limits not only bankruptcy trustees but also other parties that are exercising the powers of a trustee, such as debtors-in-possession, creditors’ committees and post-confirmation trusts.  But the plaintiffs-appellants are none of those things.  They are simply creditors of Tribune seeking to exercise their creditors’ remedies under non-bankruptcy law (state fraudulent transfer laws) on their own behalf against former shareholders of Tribune.  Why should they be barred by a limitation that, on its face, applies only to “the trustee”?

The court held that, once a case has commenced under the Code, Section 546(e) preempts the state-law remedies of an individual creditor and, even though the creditor has obtained relief from the automatic stay, the creditor is barred from avoiding a transfer that would be protected from avoidance by a trustee by Section 546(e).  The preemption is of the “implied” variety, but it nonetheless carries the full force of the Supremacy Clause of the U.S. Constitution.  The court’s analysis is intricate and plumbs the intent of Congress in enacting Section 546(e).[5]

The SG says that the court flat-out “erred” in its preemption holding.[6]  Its analysis of the issue is thorough and nuanced (as is the court’s).  Nevertheless, it recommends that Supreme Court “review is not warranted at this time”:

Petitioners do not contend that any other circuit has reached a different conclusion regarding Section 546(e)’s preemptive effect on creditors’ state-law fraudulent-transfer claims.  The absence of a circuit conflict suggests both that the [Supreme] Court’s eventual review of this issue would benefit from further analysis by other courts of appeals, and that the preemption question may not frequently arise.[7]

It is hard to argue with the SG’s logic or its tongue-in-cheek statement that “the preemption question may not frequently arise.”  It has apparently never arisen previously in the forty-year history of Section 546(e), and it took an extremely rare set of procedural circumstances to have it arise in Tribune.  At least in the Second Circuit, implied preemption by Section 546(e) is likely to be settled law for many years to come.

Merit.  The SG found the Court’s holding that the challenged payments to shareholders were protected from avoidance by Section 546(e) notwithstanding Merit Management to be “questionable”[8] and to render Merit Management “a virtual nullity.”[9]  However, the SG suggested that “this case would be a poor vehicle for clarification”[10] for several procedural reasons.  Unlike the implied preemption issue, the exact scope of the Section 546(e) “safe harbor” after Merit Management is likely to arise frequently, and the Supreme Court is therefore likely to have other opportunities to provide greater clarity in the relatively near future.