Second Circuit Holds that State Law Constructive Fraudulent Transfer Claims Brought By Individual Creditors are Preempted under Section 546(e) of the Bankruptcy Code

On March 24, 2016, the U.S. Court of Appeals for the Second Circuit (the “Court”) ruled that former shareholders of the debtor Tribune Media Company (“Tribune”), who were cashed out in a leveraged buyout (“LBO”), would be protected from state law constructive intent fraudulent conveyance claims by virtue of the “safe harbor” protection of Section 546(e) of the Bankruptcy Code. The Court discussed federal preemption principles to extend the safe harbor shareholder protection to lawsuits brought by creditor groups who were authorized to bring such claims by the Bankruptcy Court.

Background and Applicable Statutes -

In 2007, Tribune’s LBO resulted in the cash out of its’ shareholders. The funds were first transferred to financial intermediaries who then made distributions to shareholders for their shares. In 2008, Tribune filed for bankruptcy. The Creditors Committee timely brought an “actual intent” fraudulent transfer claim under federal bankruptcy law against the shareholders and others. It did not sue the shareholders for such transfers under state law “constructive intent” fraudulent conveyance statutes.