Tribune Co. Creditors' Fraudulent Conveyance Claims Preempted b...

After a delay of nearly 15 months, the Second Circuit this past Friday finally released its opinion in the Tribune Co. Fraudulent Conveyance Litigation. Briefly, the case concerned attempts by creditors to claw back payments to former shareholders in the Tribune Company's ill-fated LBO, which led to its 2008 bankruptcy. The theory of recovery was that buyout payments to former shareholders were made for less than reasonably equivalent value (to the company) while the company was insolvent (or thus rendered insolvent), so contemporaneous creditors could sue the former shareholders for return of the value they received as constructively fraudulent transfers. While the bankruptcy trustee (in this case, the Creditors Committee, by delegation) had the power to pursue these claims (under section 544(b)), it chose not to, most likely because section 546(e) prohibited it from doing so. But when the two-year statute of limitations for pursuing those actions passed, the claims supposedly reverted to the individual creditors (more on this below), who took up those claims with the explicit permission of the bankruptcy court. Fast-forward to last week ... I am not surprised that the Second Circuit stuck to its historically broad construction of the "settlement payment" safe harbor in section 546(e) and held that state law fraudulent conveyance actions by creditors are barred by that provision just as a similar action by a "trustee" would be. More interesting, in my view, is the "why are we even talking about this" discussion of whether those creditors had any right to be pursuing those claims in the first place.

Presented in the context of establishing that the term "trustee" in section 546(e) does not "plainly" bar only actions brought by a trustee or DIP, the Second Circuit discusses the most important part of the case (I think) in what ends up being dictum: Do fraudulent conveyance claims really revert to individual creditors if not pursued by the trustee within two years? At pp. 26-38, the Second Circuit notes several times that it need not resolve this hotly disputed question. But it offers a persuasive argument that the answer--and a much cleaner way to resolve the case--would likely be "no!" Neither the language nor history of the Code seems to indicate that rights not exercised by the trustee revert to creditors. Rather, the strongest inference is that the trustee has the power and duty to exercise (or not) all creditors' rights on behalf of all creditors, who cede their rights to the trustee in exchange for being represented in the bankruptcy and sharing in its proceeds (at least if a plan is confirmed, as was the case for the Tribune Company). Drawing an inference of "reversion" based on the statute of limitations "might well have appeared as a leap several bridges too far" to any reader of the Code trying to figure out how section 546(e)'s safe harbor works. And as for that safe harbor, the argument here seems to be that the trustee would be allowed (encouraged!) to pass on a fraudulent transfer case not only to revert to creditors, but to be revived, since that case in the trustee's hands is barred by section 546(e). I find this discussion a much cleaner and more convincing basis for disposing of the case.

In any event, the long wait is over, and old equity can breath a sigh of relief. LBOs and fraudulent conveyance litigation are looking more and more like oil and water.