Second Circuit Doubles Down on Broad Interpretation of 546(e) Safe Harbor

January 15, 2020

The 2007 leveraged buyout (“LBO”) of the Tribune Media Company (“Tribune“) has been the subject of years of litigation and a number of court decisions, which have shaped the scope of fraudulent transfer claims and defenses in subsequent unrelated litigations. A recent decision from the Second Circuit continues this trend, and will likely impact how companies structure transactions in the future. The relevant background and a discussion of the Second Circuit’s decision is set out below.


As part of the LBO, Tribune borrowed capital secured by its assets, which it used to cash out its shareholders at a premium. After Tribune filed for bankruptcy in 2008, unsecured creditors sought to recover over $8 billion in shareholder LBO payments. These creditor lawsuits have been defended in a variety of ways, and are the subject of numerous appellate decisions.

In 2016, the Second Circuit issued a decision (“Tribune I“)1 where it held that unsecured creditors’ state law constructive fraudulent transfer claims were subject to the “safe harbor” defense of section 546(e) of the Bankruptcy Code. In relevant part, section 546(e) provides that transfers by the debtor to specified financial intermediaries (e.g., a securities clearing agency or financial institution) that constitute transfers in connection with a securities contract are exempt from avoidance as constructively fraudulent transfers (the “546(e) Safe Harbor”). The Bankruptcy Code defines a “financial institution,” to include “an entity that is a commercial or savings bank, . . . trust company, . . . and, when any such . . . entity is acting as agent or custodian for a customer . . . in connection with a securities contract . . . such customer.” The Court in Tribune I found that because the transfers to shareholders passed through financial intermediaries (i.e., Tribune directed funds to a securities clearing agency or other financial institution that in turn paid the funds to shareholders in exchange for their shares that were then returned to Tribune), they were insulated from avoidance as constructive fraudulent transfers under the 546(e) Safe Harbor.

In 2018, the Supreme Court, in a separate case, clarified the test for determining if a transaction falls within the 546(e) Safe Harbor.2 There, the Supreme Court ruled that a transfer is not protected by the 546(e) Safe Harbor simply because a financial institution served as a “component part” of a transaction, but rather held that the “overarching transaction” between the debtor and the intended final recipient must fall within the 546(e) Safe Harbor. However, the Supreme Court expressly left open the issue of whether a debtor-transferor itself could qualify as a “financial institution” by virtue of its status as a “customer,” thus still subjecting the transaction to the 546(e) Safe Harbor. In light of this ruling, two Supreme Court Justices suggested that the Second Circuit reexamine its Tribune I decision. The Second Circuit obliged, amending its decision on December 19, 2019 (“Tribune II”).3

The Second Circuit’s Holding

In Tribune II, the Second Circuit reaffirmed its prior conclusion that the 546(e) Safe Harbor sheltered Tribune’s transfers to shareholders from the unsecured creditors’ state law constructive fraudulent transfer claims. Specifically, the Court found that when Tribune transferred funds to Computershare—a trust company and bank that agreed to act as a depositary to receive tendered shares and pay tendering shareholders for Tribune—it became Computershare’s “customer,” given the plain meaning of the term which includes “someone who buys goods or services” as well as “a person . . . for whom a bank has agreed to collect items.” Moreover, the Court found that Computershare plainly met the common law definition of “agent” because it acted on behalf of and subject to the control of Tribune. Thus, the Court ultimately held that Tribune was a “financial institution” based on its “customer” status. Therefore, the 546(e) Safe Harbor applied and barred the underlying constructive fraudulent transfer claims. In reaching its decision, the Second Circuit relied on the “broad language” of section 546(e), which it noted “protects transactions rather than firms, reflecting a purpose of enhancing the efficiency of securities markets in order to reduce the cost of capital to the American economy.”


Despite the Supreme Court’s recent apparent limitation of the scope of the 546(e) Safe Harbor, the holding in Tribune II reaffirms that constructive fraudulent transfer claims attacking LBOs and similar transactions face difficult barriers since banks or trust companies are typically utilized as agents in connection with such transactions.

If you have any questions regarding the Tribune II decision, or any other bankruptcy-related litigation, please do not hesitate to contact any member of our Corporate Restructuring and Bankruptcy Practice.


1 In re Tribune Co. Fraudulent Conveyance Litig., 818 F.3d 98 (2d Cir. 2016).
2 Merit Management Group, LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018).
3 In re Tribune Co. Fraudulent Conveyance Litig., Nos. 13-3992-cv, 13-3875-cv, 13-4178-cv, 13-4196-cv, 2016 U.S. App. LEXIS 24482 (2d Cir. Dec. 19, 2019).