"The Unsafe Harbor: The Tribune Decision and the Erosion of Bankruptcy Code Section 546(e)"

by Skadden, Arps, Slate, Meagher & Flom LLP
Contact

A 2013 court decision has cast doubts over the future scope of the U.S. Bankruptcy Code’s safe harbor protections against the reversal of settled securities transactions. If the ruling stemming from the Tribune Company bankruptcy is applied to future cases, the Chapter 11 process may no longer be viewed as the method to address prebankruptcy claims conclusively.

Fraudulent Transfers and Bankruptcy Code Section 546(e) Safe Harbor

Fraudulent transfer causes of action allow creditors to unwind transactions that unfairly or improperly deplete a debtor’s assets. Every state has enacted a fraudulent transfer statute that gives creditors a right to assert claims to recover fraudulent transfers. In addition, the Bankruptcy Code permits the bankruptcy trustee to undo fraudulent transfers. After a bankruptcy filing, a bankruptcy trustee (generally, a debtor-in-possession in Chapter 11 cases) has the exclusive right to assert fraudulent transfer claims (including those authorized by the Bankruptcy Code).1 These claims can be based either on actual fraud (where the transferor had intent to hinder, defraud or delay recovery to its creditors) or constructive fraud (where the unfairness stems not from intent but from the debtor not receiving reasonably equivalent value in exchange for what it transferred).

The Bankruptcy Code, however, also places some limits on the debtor-in-possession's ability to bring avoidance actions. For example, Section 546(e) prevents a bankruptcy trustee from avoiding settlement payments made by a debtor in a securities transaction. Section 546(e) does not, however, provide a safe harbor for such settlement payments if they are shown to be an intentionally fraudulent transfer, which can be challenging, as it requires proof of the transferor’s intent to harm its creditors (thus, generally requiring wrongdoing).

Prior to the September 2013 decision in In re Tribune,2 courts generally had expanded the scope of the Section 546(e) safe harbor by interpreting it broadly to cover a wide range of transactions.

The Tribune Company Bankruptcy

The Tribune debtors are a media company that publishes newspapers and operates radio, television stations and Internet businesses. In the mid-2000s, Tribune’s financial conditions were deteriorating, and the company agreed to go private through a leveraged buyout (LBO) that paid more than $8.2 billion to thousands of public shareholders in exchange for their Tribune shares. After the payouts were made and, as the publishing industry began to decline, Tribune was forced to file for bankruptcy in 2008;3 the company emerged from Chapter 11 in late 2012.

Under Tribune’s Chapter 11 plan of reorganization, intentional fraudulent transfer claims, which are not barred by Section 546 (e), were transferred to a litigation trustee for a litigation trust created under the plan.4 Because the estate representative was limited to bringing actual fraudulent transfer claims against shareholders in this context, under Tribune’s Chapter 11 plan, the debtors’ estates disclaimed the right to assert constructive fraudulent conveyance claims against Tribune shareholders who received LBO payments for their shares. As a result, those claims would allegedly revert back to individual creditors, who subsequently filed numerous state law constructive fraudulent conveyance claims against former Tribune shareholders nationwide. In theory, thousands of creditors could sue thousands of shareholders all over the country to seek to recover more than $8 billion in payouts from the LBO. The state law constructive fraudulent conveyance suits that were filed were consolidated into a multidistrict litigation in the U.S. District Court for the Southern District of New York.

The Court’s Decision

In the multidistrict litigation, the shareholder defendants argued that Section 546(e) preempted the creditors’ state law constructive fraudulent conveyance claims. However, the district court held that, by its plain language, the Section 546(e) safe harbor for securities transaction settlement payments applies only to protect such payments against fraudulent transfer avoidance actions brought by a bankruptcy trustee and does not preclude state law constructive fraudulent conveyance claims asserted by individual creditors.

The court held that individual creditors’ state law constructive fraudulent conveyance claims against former Tribune shareholders were automatically stayed by Bankruptcy Code Section 362, which, among other things, provides for a broad stay of litigation upon the filing of a bankruptcy case. According to the court, the state law claims were stayed because an estate representative (in this case, the litigation trustee) already was asserting actual fraudulent conveyance claims targeting the same LBO shareholder payment transactions. The court reasoned that unless and until the estate representative actually and completely abandoned its claims, the individual creditors lacked standing to bring their own fraudulent conveyance claims targeting the same transactions. The litigation trustee has stated that it intends to proceed with its intentional fraudulent conveyance claim, but reserves its right to amend its complaint to abandon those claims.

Implications

Prior to Tribune, courts had expanded the Bankruptcy Code Section 546(e) safe harbor giving shareholders who received payouts in an LBO (and others participating in settled secured transactions) more comfort that their recoveries could not be avoided. The Tribune decision leaves open the possibility that that safe harbor provision will now be routinely circumvented.

It follows that in the wake of Tribune, settlement of fraudulent transfer actions by an estate representative will become more complicated. While Chapter 11 bankruptcy plans are meant to address all prebankruptcy claims conclusively, the Tribune ruling may impede that goal if certain claims may now be asserted outside the bankruptcy process.

__________________

1 At least some courts have held that this exclusive right to assert fraudulent transfer claims does not last forever, and that state law claims revert back to creditors when the bankruptcy trustee relinquishes the claim or no longer has a viable cause of action. See, e.g., In re Integrated Agri Inc., 313 B.R. 419, 427-28 (Bankr. C.D. Ill. 2004).

2 In re Tribune Company Fraudulent Conveyance Litigation, 11 MD 2296 (RJS) (S.D.N.Y. Sept. 23, 2013).

3 Skadden currently represents, among others, certain of the selling shareholders and the members of the special committee for the board of directors.

4 In this case, the official committee of unsecured creditors obtained derivative standing to stand in the shoes of the debtor-in-possession to file certain claims, including intentional fraudulent conveyance claims against the selling shareholders.

* This article appeared in the firm's sixth annual edition of Insights on January 16, 2014.

Download PDF

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Skadden, Arps, Slate, Meagher & Flom LLP | Attorney Advertising

Written by:

Skadden, Arps, Slate, Meagher & Flom LLP
Contact
more
less

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!