Post-Merit Decision Finds that Section 546(e) Safe Harbor Protection for Leveraged Buyouts is Alive and Well

On February 27, 2018, the Supreme Court unanimously affirmed the Seventh Circuit's decision in Merit Management Group, LP v. FTI Consulting, Inc. that section 546(e) of the Bankruptcy Code does not protect "transfers that are simply conducted through financial institutions ... where the [financial institution] is neither the debtor nor the transferee but only the conduit." The Meritdecision reversed settled law in the Second, Third, Sixth, Eighth, and Tenth Circuits holding that section 546(e) bars a bankruptcy trustee from pursuing constructive fraudulent transfer claims challenging transfers involving a financial institution or other entity named in the statute, regardless of whether the financial institution or other enumerated entity acted only as a conduit. The Merit decision thus seemingly revived a bankruptcy estate's ability to pursue constructive fraudulent transfer claims arising out of a leveraged buyout or similar securities transaction gone wrong in those circuits. The Supreme Court left open the possibility that section 546(e) might still preclude such claims, however, noting that the parties in Merit had not contended "that either the debtor or petitioner ... qualified as a 'financial institution' by virtue of its status as a 'customer' under § 101(22)(A)" of the Bankruptcy Code, and that the Court "therefore d[id] not address what impact, if any, § 101(22)(A) would have in the application of the § 546(e) safe harbor."

That question was addressed for the first time last week, when Judge Denise Cote of the Southern District of New York denied a request by the trustee for the Tribune Litigation Trust (the "Litigation Trustee") for leave to amend his complaint to add constructive fraudulent transfer claims seeking to avoid and recover the payments Tribune made to its former shareholders in connection with its 2007 leveraged buyout (the "LBO"). In re Tribune Co. Fraudulent Conveyance Litig., No. 11MD2296 (DLC), 2019 WL 1771786 (S.D.N.Y. Apr. 23, 2019). The Tribune court ruled that the Litigation Trustee was barred from pursuing such claims notwithstanding Merit, because Tribune was itself a "financial institution" that qualified for protection under section 546(e). The Tribune decision may have wide-ranging implications, and suggests that the perceived revitalization of constructive fraudulent transfer claims occasioned by Merit may well have been short lived.

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