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Safe Harbor Shields Shareholders In Tribune Fraudulent Transfer Litigation
The U.S. District Court for the Southern District of New York, on April 23, 2019, denied a litigation trustee's motion for leave to file a sixth amended complaint that would have asserted constructive fraudulent transfer claims against 5,000 Tribune Company (Tribune) shareholders. In re Tribune Co. Fraudulent Conveyance Litigation, 2019 WL 1771786 (S.D.N.Y. Apr. 23, 2019). The safe harbor of Bankruptcy Code (Code) §546(e) barred the trustee's proposed claims, held the court. Id. at 12. Based on undisputed facts, it reasoned that the debtor, Tribune Company (Tribune) “was a 'customer' of CTC” [Computershare Trust Company, N.A.]; CTC was “acting as Tribune's 'agent or custodian' … 'in connection with a securities contract'”; and that both entities were a “financial institution” as defined by the Code. Id. at 9. Also, held the court, “at this stage of the litigation,” allowing the trustee to amend his complaint “would result in undue prejudice to the [defendant] Shareholders.” Id. at 12.
This decision means, as a practical matter, that: a) the trustee cannot assert federal constructive fraudulent transfer claims against the shareholders; b) the court has now resolved all of the trustee's other claims in the action; and c) separate individual creditor suits asserting state law constructive fraudulent transfer claims, the subject of the Second Circuit's related decision, 818 F.3d 98 (2d Cir. 2016) (state law claims “preempted by” §546(e)), will also probably be barred. In any event, the court has now effectively dismissed all of the trustee's federal claims against the shareholder defendants.
Relevance
Code §546(e), the so-called “safe harbor” defense, “shields from [a bankruptcy trustee's] avoidance proceedings [e.g., fraudulent transfer, preferential transfers]” based on “transfers by or to financial intermediaries effectuating settlement payments in securities transactions or made in connection with a securities contract, except through an intentional fraudulent [transfer] claim.” In re Tribune Co. Fraudulent Conveyance Litigation, 818 F.3d 98, 105 (2d Cir. 2016).
Section 546(e) “is a very broadly-worded safe harbor provision that was enacted to minimize the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries.” In re Bernard L. Madoff Inv. Sec. LLC, 773 F.3d 411, 416 (2d Cir. 2014) (citation omitted). “The safe harbor limits this risk by prohibiting the avoidance of 'settlement payments' made by, to, or on behalf of a number of participants in the financial markets.” Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329, 334 (2d Cir. 2011) (debtor's early redemption payments to hundreds of commercial paper holders, made through a bank, its securities affiliates and a stockbroker, were “settlement payments” and insulated under §546(e)). Accord, Peterson v. Somers Dublin Ltd., 729 F.3d 741, 748 (7th Cir. 2013); Grede v. FC Stone, LLC, 746 F.3d 244, 252 (7th Cir. 2014).
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