Second Circuit Holds Bankruptcy Code Safe Harbors Bar State Law Fraudulent Conveyance Claims Brought By Individual Creditors

On March 24, 2016, the United States Court of Appeals for the Second Circuit issued an opinion, concluding that the “safe harbor” provision of the Bankruptcy Code for settlement payments and payments in connection with a securities contract bars fraudulent conveyance claims brought not only by a bankruptcy “trustee” (as stated in Section 546(e) of the Code), but also by creditors seeking to assert state law claims that Section 544 of the Code empowers a bankruptcy trustee to bring. In re Tribune Co. Fraudulent Conveyance Litig., No. 13-3992, slip op. (2d Cir. Mar. 24, 2016), as reissued (Mar. 29, 2016) (the “Tribune Opinion”).  In a separate summary order, the Court also reached a similar non-precedential ruling with respect to the Section 546(g) safe harbor applicable to swap transactions. Whyte v. Barclays Bank PLC, No. 13-2653, summ. ord. (2d Cir. Mar. 24, 2016) (the “Whyte Summary Order,” and together with the Tribune Opinion, the “Second Circuit Decisions”).

The Second Circuit Decisions are significant for at least three reasons:  first, they further clarify and confirm the expansive scope of the Section 546(e) securities safe harbor; second, they reaffirm that the Section 546(e) securities safe harbor applies to protect shareholder payments in the context of leveraged buy-out (“LBO”) transactions just as it does with respect to other types of securities transactions; and, third, they raise but leave for another day the question of whether creditors may bring state law fraudulent conveyance claims that are vested in a bankruptcy trustee by Section 544 of the Code if such claims are not barred by the securities safe harbor defense.  The Second Circuit Decisions are particularly relevant to investors and others engaged in structuring transactions for which safe harbor protection may be contemplated.