In proceedings arising out of the Tribune Company chapter 11 bankruptcy and a decision in which the United States Court of Appeals for the Second Circuit sustained the dismissal of billions of dollars in alleged fraudulent transfer claims related to a failed leveraged buyout transaction (LBO), the U.S. Supreme Court has requested input from the Acting Solicitor General as to the position of the United States.

In the LBO, Computershare Ltd, a trust company and bank, was utilized to receive tendered shares and pay the shareholders selling stock on behalf of Tribune, a public company. Once Tribune was in bankruptcy, creditors brought suit asserting that the LBO constituted a constructive fraud transfer because it left Tribune insolvent and was not in exchange for reasonably equivalent value.

The District Court for the Southern District of New York dismissed the lawsuit on standing grounds and, in 2016, the Second Circuit affirmed, but under Section 546(e), finding that the LBO payments were from Tribune to Computershare, a financial institution, which had acted as intermediary.

Section 546(e) of the Bankruptcy Code bars the avoidance of certain transfers “made by or to (or for the benefit of) a . . . financial institution . . .  in connection with a securities contract. . . ” except for intentional fraudulent transfers under Section 548(a)(1)(A).  11 U.S.C. 546(e).

While the petition for certiorari from the Second Circuit’s 2016 opinion was pending, in February 2018, the U.S. Supreme Court issued its decision in Merit Mgmt. Group, LP v. FTI Consulting, Inc., the Supreme Court construed Section 546(e) not to encompass transfers when a financial institution merely acted as a conduit between the debtor and the recipient of the transfer, explaining “the Court must look to the overarching transfer.” Id. at 19.

After the Supreme Court issued its decision in Merit Mgmt., Justices Kennedy and Thomas issued a Statement in the Tribune case regarding the pending petition for certiorari stating that the petition would be deferred to allow the Second Circuit to consider whether to recall the mandate.

In December 2019, the Second Circuit recalled their mandate and issued an amended opinion holding that 546(e) preempts state law constructive fraud claims. The Court reasoned that the purpose of Section 546(e) “is to protect a national, heavily regulated market by limiting creditors’ rights.” In re Tribune Co. Fraudulent Transfer Litigation, No. 13-3992, Doc. No. 429 at 67. The Court ultimately ruled that “Congress intended to protect from constructive fraudulent conveyance avoidance proceedings transfers by a debtor in bankruptcy that fall within Section 546(e)’s terms.” Id.  This decision is now before the Supreme Court on petition for certiorari.

In yet another interesting twist, earlier this month, the U.S. Supreme Court entered a docket entry inviting the Acting Solicitor General to file a brief expressing the views of the United States with respect to the pending petition for certiorari. It will be interesting to see whether this ultimately gets before the Supreme Court, and we will continue to following along.