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Former Tribune Shareholders Still Merit Safe Harbor Upon Revision

We have noodled on the impact that the Supreme Court’s decision in Merit Management Group, LP v. FTI Consulting, Inc.,[1] which held that the safe harbor provided in Section 546(e) of the Bankruptcy Code does not apply when the financial institutions[2] involved in a transaction are mere conduits or intermediaries, might have on “[t]he long-running litigation spawned by the leveraged buyout of Tribune Company . . . and the subsequent bankruptcy case.”[3]  So far, after a December decision by the Court of Appeals for the Second Circuit, the answer is: not much.

In 2016 the Court of Appeals had dismissed a fraudulent conveyance avoidance action commenced by creditors against former Tribune shareholders (among others) by applying its pre-Merit expansive interpretation of Section 546(e) under which the presence of a financial institution (as defined in note 2) even as a mere conduit would suffice.  Post-Merit, it has now issued an amended decision reaching the same result--the safe harbor of Section 546(e) shelters the defendants from liability.[4]

How did it reach that outcome despite Merit?  The Section 546(e) safe harbor applies to

a transfer made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, in connection with a securities contract . . ., commodity contract . . . or forward contract

and the financial institution (as defined in note 2) is not acting as a mere conduit or intermediary.[5]  “[F]inancial institution,” in turn, is defined in Section 101(22)(A) in relevant part as--

an entity that is a commercial . . . bank . . . [or] trust company . . . and, when any such . . . entity is acting as agent or custodian for a customer . . . in connection with a securities contract . . . such customer . . . .[6]

In other words, the customer for which a bank or trust company is acting as agent or custodian in connection with a securities contract is a “financial institution” (as defined in Section 101) for the purpose of satisfying the requirement for the application of Section 546(e) that a financial institution (as defined in note 2) be a party to or beneficiary of the “overarching transfer.”[7]

Tribune, the Court held, was exactly such a customer.  It contracted with an entity that was both a bank and a trust company to act as its agent[8] to hold and then disburse the LBO consideration in exchange for the shares it was acquiring.[9]  But was such use of an agent “in connection with a securities contract”?  Appellants argued that the approximately half of the LBO consideration that was used to redeem shares (rather than to purchase them in a more conventional sense) was not disbursed “in connection with a securities contract.”  The Court disagreed.  A redemption of shares is a repurchase of those shares, so a contract to redeem shares easily fits within the Code’s broad definition of a “securities contract,” and the redemption payments are sheltered in the safe harbor to the same extent as the ordinary purchase payments.[10]


[1]  583 U.S. __, 138 S. Ct. 883 (2018).

[2]  “Financial institution” is used here and sometimes elsewhere in this post as my shorthand for § 546(e)’s “commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency.”

[3]  Quotation from "Something New Under the Sun?" September 8, 2017.  See Major Section 546(c) Safe Harbor Issue Resolved by the Supreme Court February 28, 2018.

[4]  In re Tribune Co. Fraudulent Conveyance Litigation, 946 F.3d 66 (2d Cir. Dec. 19, 2019).  The Court also held that defendants in an avoidance adversary proceeding in which the plaintiff is not a trustee or trustee surrogate may benefit from the safe harbor; that issue is not further discussed in this post.

[5]  Many of the terms used in § 546(e) are defined elsewhere in the Code.

[6]  Section 101(22)(A) incorporates the definition of “securities contract” from § 741 but expressly rejects the application of the definition of “customer” also found in § 741, thereby requiring use of the “ordinary meaning” of that word.  946 F.3d at 78.

[7]  Merit Management, 138 S. Ct. at 888, 892-93, 897.

[8]  “Agent” is not defined in the Code, so the Court applied the “common-law meaning” of that term.  946 F.3d at 79.

[9]  Id. at 78-80.

[10]  Id. at 80-81.