Tribune’s plan of reorganization transferred the UCC’s claims to a litigation trust certain disclaimed state law avoidance claims, however, expressly were not transferred to the litigation trust. The UCC in turn filed a complaint that included an intentional fraudulent transfer claim. The Bankruptcy Court granted standing to the official committee of unsecured creditors of Tribune (UCC) to assert claims against various defendants on behalf of Tribune’s estate. Soon after the LBO, Tribune experienced financial difficulty and ultimately filed for bankruptcy. To effect the exchange, Tribune transferred the cash required to repurchase its shares to Computershare Trust Company (CTC), which remitted payment to Tribune’s shareholders in exchange for their stock. In 2007, Tribune completed a two-step LBO, in which Tribune purchased all of its outstanding stock from then existing shareholders for approximately $8 billion. 6 However, neither party raised the issue, and the Supreme Court ultimately left open the question of whether the Bankruptcy Code’s inclusion of customers in the definition of “financial institution” might leave open a customer’s ability to avail itself of the safe harbor. In particular, “financial institutions” are among the types of transfer parties covered under Section 546(e), and the Bankruptcy Code’s definition of “financial institution” includes a “customer” of one of several enumerated types of entities when such entity “is acting as agent or custodian” for such customer “in connection with a securities contract.” 5 During oral arguments in Merit, Justice Stephen Breyer suggested that this definition may be dispositive of the question before the Court. Notwithstanding its ruling in Merit, the Supreme Court identified another potential tool for defending against fraudulent conveyance actions - the “customer” defense. The Merit decision thus eliminated the “conduit” defense for fraudulent conveyance actions.
#Safe harbour 2007 code#
Merit Management’s Curtailment of the Safe Harborīankruptcy Code Section 546(e) bars a bankruptcy trustee from avoiding “a transfer that is … a settlement payment … made by or to (or for the benefit of) … a financial institution … in connection with a securities contract.” 4 On February 27, 2018, the Supreme Court unanimously held in Merit that “the only relevant transfer for purposes of the safe harbor is the transfer that the trustee seeks to avoid.” In ruling that courts should focus on the “overarching transfer” - the one subject to a trustee’s challenge - the Supreme Court effectively made any intermediate “component transactions” irrelevant for the purposes of the Section 546(e) safe harbor. 3 As we previously noted in an earlier client alert, (" Bankruptcy Code’s Safe Harbor ‘Conduit’ Defense Eliminated by Supreme Court Variant Defense May Survive") the Bankruptcy Code’s definition of “financial institution” revitalizes the Section 546(e) safe harbor defense for fraudulent conveyance defendants. Supreme Court’s 2018 decision in Merit Mgmt. Judge Cote’s decision in Tribune is the first published decision (outside of proceedings related to Merit) applying the U.S. 2 In so holding, Judge Cote found that Tribune was a “financial institution” covered by the safe harbor due to its status as a “customer” of a bank/trust company acting as its “agent” in the challenged LBO transactions, which were “in connection with” a securities contract.
1 Judge Denise Cote of the Southern District of New York denied a motion brought by the litigation trustee (the trustee) for the Tribune Company (Tribune) litigation trust, which sought to add federal constructive fraudulent transfer claims related to the 2007 leveraged buyout (LBO) of Tribune, holding that such claims were barred by the safe harbor provided in Bankruptcy Code Section 546(e).
District Court for the Southern District of New York has breathed new life into the Bankruptcy Code Section 546(e)’s securities transaction safe harbor for fraudulent conveyance actions.
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