U.S. Supreme Court Declines Review of Landmark Tribune Safe Harbor Ruling

On April 19, 2021, the U.S. Supreme Court declined to hear the appeal of a landmark 2019 decision issued by the U.S. Court of Appeals for the Second Circuit regarding the applicability of the Bankruptcy Code's safe harbor for certain securities, commodity, or forward contract payments to prevent the avoidance in bankruptcy of $8.3 billion in payments made to the shareholders of Tribune Co. as part of its 2007 leveraged buyout ("LBO").

In its 2019 ruling, the Second Circuit reaffirmed an earlier decision that creditors' state law fraudulent transfer claims arising from the LBO were preempted by the safe harbor set forth in section 546(e) of the Bankruptcy Code. See In re Tribune Co. Fraudulent Conveyance Litig., 946 F.3d 66 (2d Cir. 2019), cert. denied sub nom. Deutsche Bank Trust Co. Americas v. Robert R. McCormick Foundation, No. 20-8 (U.S. Apr. 19, 2021). However, the Second Circuit also concluded that a debtor may itself qualify as a "financial institution" covered by the safe harbor, as implied in the U.S. Supreme Court's decision in Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018), by retaining a bank or trust company as an agent to handle LBO payments, redemptions, and cancellations. Certain Tribune Co. noteholders and pensioners asked the Supreme Court to review the decision on July 6, 2020.

In Merit, the Supreme Court held that, because the selling shareholder in the LBO challenged as a constructive fraudulent transfer was not a financial institution (even though the conduit banks through which the payments were made met that definition), the payments fell outside of the section 546(e) safe harbor. In a footnote, however, the Court acknowledged that the Bankruptcy Code defines "financial institution" broadly to include not only entities traditionally viewed as financial institutions, but also the "customers" of those entities, when financial institutions act as agents or custodians in connection with a securities contract. The selling shareholder in Merit was a customer of one of the conduit banks yet never raised the argument that it therefore also qualified as a financial institution for purposes of section 546(e). For this reason, the Court did not address the possible impact of the shareholder transferee's customer status on the scope of the safe harbor.

The Second Circuit addressed this possibility directly in its 2019 ruling in Tribune.

In the aftermath of Tribune, several courts, principally in the Southern District of New York, but also elsewhere, relied on the decision in ruling that various transactions were shielded from avoidance by the safe harbor because the debtor involved met the Bankruptcy Code's definition of a "financial institution" due to its use of an agent bank to effectuate a transaction.

These rulings included:

• In re Boston Generating LLC, 617 B.R. 442 (Bankr. S.D.N.Y. 2020) (payments made to the members of limited liability company debtors as part of a recapitalization transaction were protected from avoidance under section 546(e) because the debtors were "financial institutions" as customers of banks that acted as their depositories and agents in connection with the transaction).
• In re Nine W. LBO Sec. Litig., 482 F. Supp. 3d 187, 206 (S.D.N.Y. 2020), appeal filed, 20-3290 (2d Cir. Sept. 25, 2020) ("When, as here, a bank is acting as an agent in connection with a securities contract, the customer qualifies as a financial institution with respect to that contract, and all payments in connection with that contract are therefore safe harbored under Section 546(e).")
• Kelley v. Safe Harbor Managed Acct. 101, Ltd., 2020 WL 5913523, *4 (D. Minn. Oct. 6, 2020) (transfers to a subsequent transferee were protected from avoidance by the safe harbor because the transferor qualified as a financial institution by effecting the transfers through an agent bank).
• SunEdison Litigation Trust v. Seller Note, LLC (In re SunEdison, Inc.), 620 B.R. 505, 517 (Bankr. S.D.N.Y. Nov. 2, 2020) (because an integrated two-step transaction involved a financial institution as the debtor's agent, the entire transaction was protected from avoidance under section 546(e)).
• Fairfield Sentry Limited (In Liquidation) v. Theodoor GGC Amsterdam (In re Fairfield Sentry Ltd.), 2020 WL 7345988, *7 (Bankr. S.D.N.Y. Dec. 14, 2020) (ruling in a chapter 15 case that redemption payments made to investors in foreign funds were safe-harbored because the funds were "financial institutions," as the customers of the banks that made the redemption payments as the funds' agent).
• In re Samson Res. Corp., 625 B.R. 291, 301 (Bankr. D. Del. 2020) (noting that "the plain text and structure of the Code's definition of financial participant does not exclude debtors," but ruling that issues of material fact as to whether the debtor had agreements or transactions in the requisite amount to meet the definition precluded entry of summary judgment on constructive fraudulent transfer avoidance claims asserted by the trustee as allegedly barred by the safe harbor).

However, at least one court rejected the Tribune "workaround." See, e.g., In re Greektown Holdings, LLC, 621 B.R. 797, 821-22 (Bankr. E.D. Mich. Oct. 21, 2020) (payments made in connection with a pre-bankruptcy recapitalization transaction that involved the issuance of unsecured notes underwritten by a financial institution were not safe-harbored by section 546(e) because the underwriter did not act as either the transferor's agent or custodian in connection with the transaction, such that the transferor itself was not a financial institution).

By its denial of certiorari in Tribune, the Supreme Court ended speculation, at least for now, that it might weigh in on the Tribune workaround and the controversy created by its provenance in the Court's dicta in Merit. The absence of any split in the circuits on the issue may have prompted the Court's decision not to review the case.

Justice Samuel Alito took no part in the consideration or decision of the Tribune petition for certiorari.