In Re: Tribune Company Fraudulent Conveyance Litigation ( 2019 )

13-3992-cv(L)
In re: Tribune Company Fraudulent Conveyance Litigation
In the
United States Court of Appeals
For the Second Circuit
________________________
August Term, 2014
Nos. 13-3992-cv; 13-3875-cv; 13-4178-cv; 13-4196-cv
IN RE: TRIBUNE COMPANY FRAUDULENT CONVEYANCE LITIGATION
NOTE HOLDERS, Deutsche Bank Trust Company Americas, Law Debenture
Trust Company of New York, Wilmington Trust Company, INDIVIDUAL
RETIREES, William A. Niese, on behalf of a putative class of Tribune Company
retirees,
Plaintiffs-Appellants-Cross-Appellees,
MARK S. KIRSCHNER, as Litigation Trustee for the Tribune Litigation Trust,
Plaintiff,
TENDERING PHONES HOLDERS, Citadel Equity Fund Ltd., Camden Asset
Management LLP and certain of their affiliates,
Plaintiffs-Intervenors,
v.
LARGE PRIVATE BENEFICIAL OWNERS, FINANCIAL INSTITUTION
HOLDERS, FINANCIAL INSTITUTION CONDUITS, Merrill Lynch, Pierce,
Fenner & Smith, Inc., on behalf of a putative class of former Tribune Company
shareholders, PENSION FUNDS, including public, private, and Taft Hartley
Funds, INDIVIDUAL BENEFICIAL OWNERS, Mario J. Gabelli, on behalf of a
putative class of former Tribune Company shareholders, MUTUAL FUNDS, AT-
1
LARGE, ESTATE OF KAREN BABCOCK, PHILLIP S. BABCOCK, DOUGLAS
BABCOCK, DEFENDANTS LISTED ON EXHIBIT B,
Defendants-Appellees-Cross-Appellants,
CURRENT AND FORMER DIRECTORS AND OFFICERS, Betsy D. Holden,
Christopher Reyes, Dudley S. Taft, Enrique Hernandez, Jr., Miles D. White,
Robert S. Morrison, William A. Osborn, Harry Amsden, Stephen D. Carver,
Dennis J. FitzSimons, Robert Gremillion, Donald C. Grenesko, David Dean Hiller,
Timothy J. Landon, Thomas D. Leach, Luis E. Le, Mark Hianik, Irving Quimby,
Crane Kenney, Chandler Bigelow, Daniel Kazan, Timothy Knight, Thomas Finke,
SAM ZELL AND AFFILIATED ENTITIES, EGI-TRB, LLC, Equity Group
Investments, LLC, Sam Investment Trust, Samuel Zell, Tower CH, LLC, Tower
DC, LLC, Tower DL, LLC, Tower EH, LLC, Tower Gr, LARGE
SHAREHOLDERS, Chandler Trusts and their representatives, FINANCIAL
ADVISORS, Valuation Research Corporation, Duff & Phelps, LLC, Morgan
Stanley & Co. Inc. and Morgan Stanley Capital Services, Inc., GreatBanc Trust
Company, Citigroup Global Markets, Inc., CA PUBLIC EMPLOYEE
RETIREMENT SYSTEM, CALPERS, UNIVERSITY OF CA REGENTS, T. ROWE
PRICE ASSOCIATES, INC., MORGAN KEEGAN & COMPANY, INC., NTCA,
DIOCESE OF TRENTON-PENSION FUND, FIRST ENERGY SERVICE
COMPANY, MARYLAND STATE RETIREMENT AND PENSION SYSTEM, T
BANK LCV QP, T BANK-LCV-PT, JAPAN POST INSURANCE, CO., LTD.,
SERVANTS OF RELIEF FOR INCURABLE CANCER (AKA DOMINICAN
SISTERS OF HAWTHORNE), NEW LIFE INTERNATIONAL, NEW LIFE
INTERNATIONAL TRUST, SALVATION ARMY, SOUTHERN TERRITORIAL
HEADQUARTERS, CITY OF PHILADELPHIA EMPLOYEES, OHIO
CARPENTERS’ MIDCAP (AKA OHIO CARPENTERS’ PENSION FUND),
TILDEN H. EDWARDS, JR., MALLOY AND EVANS, INC., BEDFORD OAK
PARTNERS, LP, DUFF AND PHELPS LLC, DURHAM J. MONSMA, CERTAIN
TAG-ALONG DEFENDANTS, MICHAEL S. MEADOWS, WIRTZ
CORPORATION,
Defendants.
________________________
2
Appeal from the United States District Court
for the Southern District of New York
No. 1:11-md-02296
________________________
ARGUED: NOVEMBER 5, 2014
DECIDED: MARCH 29, 2016
AMENDED: DECEMBER 19, 2019
________________________
Before: WINTER, DRONEY, Circuit Judges, and HELLERSTEIN, District Judge.*
________________________
Appeal from a dismissal by the United States District Court for the
Southern District of New York (Richard J. Sullivan, Judge), of state law,
constructive fraudulent conveyance claims brought by creditors’ representatives
against the Chapter 11 debtor’s former shareholders, who were cashed out in an
LBO. The district court held that plaintiffs lacked statutory standing under the
Bankruptcy Code. We hold that appellants have statutory standing but affirm on
the ground that appellants’ claims are preempted by Section 546(e) of that Code.
________________________
ROY T. ENGLERT, JR. (Lawrence S.
Robbins, Ariel N. Lavinbuk, Daniel N.
Lerman, Shai D. Bronshtein, Robbins,
Russell, Englert, Orseck, Untereiner &
*
Judge Alvin K. Hellerstein, of the Southern District of New York, sitting by
designation.
3
Sauber LLP, Washington, DC, Pratik A.
Shah, James E. Tysse, Z.W. Julius Chen,
Akin Gump Strauss Hauer & Feld LLP,
Washington, DC, David M. Zensky,
Mitchell Hurley, Deborah J. Newman, Akin
Gump Strauss Hauer & Feld LLP, New
York, NY, Robert J. Lack & Hal Neier,
Friedman Kaplan Seiler & Adelman LLP,
New York, NY, Daniel M. Scott & Kevin M.
Magnuson, Kelley, Wolter & Scott, P.A.,
Minneapolis, MN, David S. Rosner &
Sheron Korpus, Kasowitz Benson Torres &
Friedman LLP, New York, NY, Joseph
Aronauer, Aronauer Re & Yudell, LLP,
New York, NY, on the brief), Robbins,
Russell, Englert, Orseck, Untereiner &
Sauber LLP, Washington, DC, for Plaintiffs-
Appellants-Cross-Appellees Note Holders.
Jay Teitelbaum, Teitelbaum & Baskin LLP,
White Plains, NY, for Plaintiffs-Appellants-
Cross-Appellees Individual Retirees.
Joel A. Feuer & Oscar Garza, Gibson, Dunn
& Crutcher LLP, Los Angeles, CA, David C.
Bohan & John P. Sieger, Katten Muchin
Rosenman LLP, Chicago, IL, for
Defendants-Appellees-Cross-Appellants
Large Private Beneficial Owners.
PHILIP D. ANKER (Alan E. Schoenfeld,
Adriel I. Cepeda Derieux, Pablo G.
Kapusta, Wilmer Cutler Pickering Hale and
Dorr LLP, New York, NY, Sabin Willett &
Michael C. D’Agnostino, Bingham
4
McCutchen LLP, Boston, MA, Joel W.
Millar, Washington, DC, on the brief),
Wilmer Cutler Pickering Hale and Dorr
LLP, New York, NY, for Defendants-
Appellees-Cross-Appellants Financial
Institution Holders.
Elliot Moskowitz, Davis Polk & Wardwell
LLP, New York, NY, Daniel L. Cantor,
O'Melveny & Myers LLP, New York, NY,
Gregg M. Mashberg & Stephen L. Ratner,
Proskauer Rose LLP, New York, NY, for
Defendants-Appellees-Cross-Appellants
Financial Institution Conduits.
DOUGLAS HALLWARD-DRIEMEIER,
Ropes & Gray LLP, Washington, DC, D.
Ross Martin, Ropes & Gray LLP, New
York, NY, Matthew L. Fornshell, Ice Miller
LLP, Columbus, OH, for Defendants-
Appellees-Cross-Appellants Pension
Funds.
Andrew J. Entwistle, Entwistle & Cappucci,
LLP, New York, NY, David N. Dunn, Potter
Stewart, Jr. Law Offices, Brattleboro, VT,
Mark A. Neubauer, Steptoe & Johnson LLP,
Los Angeles, CA, for Defendants-
Appellees-Cross-Appellants Individual
Beneficial Owners.
Michael S. Doluisio & Alexander Bilus,
Dechert LLP, Philadelphia, PA, Steven R.
Schoenfeld, Robinson & Cole LLP, New
5
York, NY, for Defendants-Appellees-Cross-
Appellants Mutual Funds.
Alan J. Stone & Andrew M. LeBlanc,
Milbank, Tweed, Hadley & McCloy LLP,
New York, NY, for Defendant-Appellee-
Cross-Appellant At-Large.
Gary Stein, David K. Momborquette,
William H. Gussman, Jr., Schulte Roth &
Zabel LLP, New York, NY, for Defendants-
Appellees-Cross-Appellants Defendants
Listed on Exhibit B.
Kevin Carroll, Securities Industry and
Financial Markets Association, Washington,
DC, Holly K. Kulka, NYSE Euronext, New
York, NY, Marshall H. Fishman, Timothy P.
Harkness, David Y. Livshiz, Freshfields
Bruckhaus Deringer US LLP, New York,
NY, for Amici Curiae Securities Industry
and Financial Markets Association,
International Swaps and Derivatives
Association, Inc., and the NYSE Euronext.
Michael A. Conley, John W. Avery, Tracey
A. Hardin, Benjamin M. Vetter, Securities
and Exchange Commission, Washington,
DC, for Amicus Curiae Securities and
Exchange Commission.
6
WINTER and DRONEY, Circuit Judges:
Representatives of certain unsecured creditors of the Chapter 11 debtor
Tribune Company appeal from Judge Sullivan’s grant of a motion to dismiss
their state law, constructive fraudulent conveyance claims brought against
Tribune’s former shareholders. Appellants seek to recover an amount sufficient
to satisfy Tribune’s debts to them by avoiding (recovering) payments by Tribune
to shareholders that purchased all of its stock. The payments occurred in a
transaction commonly called a leveraged buyout (“LBO”),1 soon after which
Tribune went into Chapter 11 bankruptcy. Appellants appeal the district court’s
dismissal for lack of statutory standing, and appellees cross-appeal from the
district court’s rejection of their argument that appellants’ claims are preempted.2
We address two issues: (i) whether appellants are barred by the
Bankruptcy Code’s automatic stay provision from bringing state law,
constructive fraudulent conveyance claims while avoidance proceedings against
1
In a typical LBO, a target company is acquired with a significant portion of the
purchase price being paid through a loan secured by the target company’s assets.
2
Because the issue has no effect on our disposition of this matter, we do not pause to
consider whether a cross-appeal was necessary for appellees to raise the preemption issues in
this court, but, for convenience purposes, we sometimes refer to those issues by the term cross-
appeal.
7
the same transfers brought by a party exercising the powers of a bankruptcy
trustee on an intentional fraud theory are ongoing; and (ii) if not, whether the
creditors’ state law, constructive fraudulent conveyance claims are preempted by
Bankruptcy Code Section 546(e).
On issue (i), we hold that appellants are not barred by the Code’s
automatic stay because they have been freed from its restrictions by orders of the
bankruptcy court and by the debtors’ confirmed reorganization plan. On issue
(ii), the subject of appellees’ cross-appeal, we hold that appellants’ claims are
preempted by Section 546(e). That Section shields certain transactions from a
bankruptcy trustee’s avoidance powers, including, inter alia, transfers by or to a
financial institution in connection with a securities contract, except through an
intentional fraudulent conveyance claim.3
We therefore affirm.
3
As discussed infra, after we previously issued an opinion in this appeal, In re Tribune
Co. Fraudulent Conveyance Litig. (“Tribune I”), 818 F.3d 98 (2d Cir. 2016), the Supreme Court
clarified the test for determining whether a transaction falls within Section 546(e), see Merit
Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018), causing us to recall the mandate
and issue this amended opinion.
8
BACKGROUND
a) The LBO
Tribune Media Company (formerly known as “Tribune Company”) is a
multimedia corporation that, in 2007, faced deteriorating financial prospects.
Appellee Samuel Zell, a billionaire investor, proposed to acquire Tribune through
an LBO. In consummating the LBO, Tribune borrowed over $11 billion secured
by its assets. The $11 billion plus, combined with Zell’s $315 million equity
contribution, was used to refinance some of Tribune’s pre-existing bank debt and
to cash out Tribune’s shareholders for over $8 billion at a premium price –- above
its trading range –- per share.
It is undisputed that Tribune transferred the over $8 billion to a “securities
clearing agency” or other “financial institution,” as those terms are used in
Section 546(e), acting as intermediaries in the LBO transaction.4 Those
intermediaries in turn paid the funds to the shareholders in exchange for their
shares that were then returned to Tribune. Appellants seek to satisfy Tribune’s
4
Appellees contend that, with respect to the LBO transaction, Tribune also qualified as
a “financial institution,” but appellants disagree. We describe the facts relevant to that dispute
infra.
9
debts to them by avoiding Tribune’s payments to the shareholders. Appellants
do not seek money from the intermediaries. See Note 15, infra.
b) Bankruptcy Proceedings
On December 8, 2008, with debt and contingent liabilities exceeding its
assets by more than $3 billion, Tribune and nearly all of its subsidiaries filed for
bankruptcy under Chapter 11 in the District of Delaware. A trustee was not
appointed, and Tribune and its affiliates continued to operate the businesses as
debtors in possession. See 11 U.S.C. § 1107(a) (“Subject to any limitations on a
trustee . . . a debtor in possession shall have all the rights . . . , and powers, and
shall perform all the functions and duties . . . of a trustee . . . .”). In discussing the
powers of a bankruptcy trustee that can be exercised by a trustee or parties
designated by a bankruptcy court, we shall refer to the trustee or such parties as
the “trustee et al.”
The bankruptcy court appointed an Official Committee of Unsecured
Creditors (the “Committee”) to represent the interests of unsecured creditors. In
November 2010, alleging that the LBO-related payments constituted intentional
fraudulent conveyances, the Committee commenced an action under Code
Section 548(a)(1)(A) against the cashed out Tribune shareholders, various
10
officers, directors, financial advisors, Zell, and others alleged to have benefitted
from the LBO. An intentional fraudulent conveyance is defined as one in which
there was “actual intent to hinder, delay, or defraud” a creditor. 11 U.S.C. §
548(a)(1)(A).
In June 2011, two subsets of unsecured creditors filed state law,
constructive fraudulent conveyance claims in various federal and state courts.
The plaintiffs, the appellants before us, were: (i) the Retiree Appellants, former
Tribune employees who hold claims for unpaid retirement benefits and (ii) the
Noteholder Appellants, the successor indenture trustees for Tribune’s pre-LBO
senior notes and subordinated debentures. A constructive fraudulent
conveyance is, generally speaking, a transfer for less than reasonably equivalent
value made when the debtor was insolvent or was rendered so by the transfer.
See Picard v. Fairfield Greenwich Ltd., 762 F.3d 199, 208-09 (2d Cir. 2014).
Before bringing these actions, appellants moved the bankruptcy court for
an order stating that: (i) after the expiration of the two-year statute of limitations
period during which the Committee was authorized to bring avoidance actions
under 11 U.S.C. § 546(a), eligible creditors had regained the right to prosecute
their creditor state law claims; and (ii) the automatic stay imposed by Code
11
Section 362(a) was lifted solely to permit the immediate filing of their complaint.
In support of that motion, the Committee argued that, under Section 546(a), the
“state law constructive fraudulent conveyance transfer claims ha[d] reverted to
individual creditors” and that the “creditors should consider taking appropriate
actions to preserve those claims.” Statement of the Official Committee of
Unsecured Creditors in Supp. of Mot. at 3, In re Tribune Co., No 08-13141 (KJC)
(Bankr. D. Del. Mar. 17, 2011).
In April 2011, the bankruptcy court lifted the Code’s automatic stay with
regard to appellants’ actions. The court reasoned that because the Committee
had elected not to bring the constructive fraudulent conveyance actions within
the two-year limitations period following the bankruptcy petition imposed by
Section 544, fully discussed infra, the unsecured creditors “regained the right, if
any, to prosecute [such claims].” J. App’x at 373. Therefore, the court lifted the
Section 362(a) automatic stay “to permit the filing of any complaint by or on
behalf of creditors on account of such Creditor [state law fraudulent conveyance]
Claims.” Id. The court clarified, however, that it was not resolving the issues of
whether the individual creditors had statutory standing to bring such claims or
whether such claims were preempted by Section 546(e).
12
On March 15, 2012, the bankruptcy court set an expiration date of June 1,
2012 for the remaining limited stay on the state law, fraudulent conveyance
claims. In July 2012, the bankruptcy court ordered confirmation of the proposed
Tribune reorganization plan. The plan terminated the Committee and
transferred responsibility for prosecuting the intentional fraudulent conveyance
action to an entity called the Litigation Trust. The confirmed plan also provided
that the Retiree and Noteholder Appellants could pursue “any and all
LBO-Related Causes of Action arising under state fraudulent conveyance law,”
except for the federal intentional fraudulent conveyance and other LBO-related
claims pursued by the Litigation Trust. J. App’x at 643. Under the plan, the
Retiree and Noteholder Appellants recovered approximately 33 cents on each
dollar of debt. The plan was scheduled to take effect on December 31, 2012, the
date on which Tribune emerged from bankruptcy.
c) District Court Proceedings
Appellants’ various state law, fraudulent conveyance complaints alleged
that the LBO payments, made through financial intermediaries as noted above,
were for more than the reasonable value of the shares and made when Tribune
was in distressed financial condition. Therefore, the complaints concluded, the
13
payments were avoidable by creditors under the laws of various states. These
actions were later consolidated with the Litigation Trust’s ongoing federal
intentional fraud claims in a multi-district litigation proceeding that was
transferred to the Southern District of New York. In re: Tribune Co. Fraudulent
Conveyance Litig., 831 F. Supp. 2d 1371 (J.P.M.L. 2011).
After consolidation, the Tribune shareholders moved to dismiss appellants’
claims. The district court granted the motion on the ground that the Bankruptcy
Code’s automatic stay provision deprived appellants of statutory standing to
pursue their claims so long as the Litigation Trustee was pursuing the avoidance
of the same transfers, albeit under a different legal theory. In re Tribune Co.
Fraudulent Conveyance Litig., 499 B.R. 310, 325 (S.D.N.Y. 2013). The court held
that the bankruptcy court had only “conditionally lifted the stay.” Id. at 314.
The district court rejected appellees’ preemption argument based on
Section 546(e). That Section bars a trustee et al. from exercising its avoidance
powers under Section 544 to avoid certain transactions including, inter alia,
transfers “by or to . . . a financial institution . . . in connection with a securities
contract,” except through an intentional fraudulent conveyance claim. 11 U.S.C.
§ 546(e). The district court held that Section 546(e) did not bar appellants’ actions
14
because: (i) Section 546(e)’s prohibition on avoiding the designated transfers
applied only to a bankruptcy trustee et al., id. at 315-16; and (ii) Congress had
declined to extend Section 546(e) to state law, fraudulent conveyance claims
brought by creditors, id. at 318.
d) Appellate Proceedings
Appellants appealed the dismissal for lack of statutory standing, and
appellees cross-appealed the rejection of their argument that appellants’ claims
are preempted. In a prior opinion, In re Tribune Co. Fraudulent Conveyance
Litig. (“Tribune I”), 818 F.3d 98 (2d Cir. 2016), we affirmed the dismissal of
appellants’ claims on the ground that Section 546(e) preempts “fraudulent
conveyance actions brought by creditors whose claims are [] subject to Section
546(e).” Id. at 118, 123-24. At the time, it was the law in this Circuit, under In re
Quebecor World (USA) Inc. (“Quebecor”), 719 F.3d 94, 100 (2d Cir. 2013), that the
payments at issue fell within Section 546(e) because entities covered by Section
546(e) had served as intermediaries. See Tribune I, 818 F.3d at 120 (“Section
546(e)’s language clearly covers payments, such as those at issue here, by
commercial firms to financial intermediaries to purchase shares from the firm’s
shareholders.”).
15
Appellants petitioned for rehearing en banc, which was denied, and we
issued the mandate. Appellants then petitioned for certiorari, presenting the
following question, among others: “Whether the Second Circuit correctly held . .
. that a fraudulent transfer is exempt . . . under 11 U.S.C. § 546(e) when a financial
institution acts as a mere conduit for fraudulently transferred property.” Petition
for a Writ of Certiorari, Deutsche Bank Trust Co. Ams. v. Robert R. McCormick
Found., No. 16-317 (U.S. Sept. 9, 2016), 2016 WL 4761722, at *1.
While that petition was pending, the Supreme Court in Merit Mgmt. Grp.,
LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018), rejected Quebecor's interpretation
of Section 546(e)’s scope, holding that Section 546(e) does “not protect transfers in
which financial institutions served as mere conduits.” Merit Mgmt., 138 at 892.
The question presented in Merit Mgmt. was whether, “in the context of a transfer
that was executed via one or more transactions,” such as a transfer from Party A
to Party D that included Parties B and C as intermediaries, the relevant transfer
for purposes of Section 546(e) is the overarching transfer from Party A to Party D
or “any component part[] of the overarching transfer,” such as the transfer from
Party B to Party C. Id. at 888. The Court concluded, based on the “plain
meaning” of Section 546(e), that the relevant transfer is the overarching transfer,
16
and therefore abrogated the relevant portion of Quebecor. Id. at 888, 897; see also
id. at 892 n.6 (identifying Quebecor as one of the decisions in conflict with its
holding).
Soon thereafter, Justices Kennedy and Thomas issued a statement
suggesting that this Court might wish to recall its mandate or provide other relief
in light of Merit Mgmt. See Statement of Justice Kennedy and Justice Thomas
Respecting the Petition for Certiorari, Deutsche Bank Trust Co. Ams., No. 16-317
(Apr. 3, 2018), 2018 WL 1600841. Appellants subsequently filed a motion to recall
the mandate, and we recalled the mandate in anticipation of further panel
review.
We have since agreed on changes to our prior opinion, which are reflected
in this amended opinion. Upon the filing of this amended opinion, the original
opinion is vacated. See, e.g., Brown v. City of Oneonta, New York, 221 F.3d 329,
336 (2d Cir. 2000), amending and superseding 195 F.3d 111 (2d Cir. 1999).
DISCUSSION
We review de novo the district court’s grant of appellees’ motion to
dismiss. See Mary Jo C. v. N.Y. State & Local Ret. Sys., 707 F.3d 144, 151 (2d Cir.
17
2013). The relevant facts being undisputed for purposes of this proceeding, only
issues of law are before us.5
a) Statutory Standing to Bring the Claims
We first address the district court’s dismissal of appellants’ claims on the
ground that they lacked standing to bring them because of Section 362(a)(1).6 In
re Tribune, 499 B.R. at 325. When a bankruptcy action is filed, any “action or
proceeding against the debtor” is automatically stayed by Section 362(a). The
5
Appellants argue that one of the issues we address infra -- whether Tribune’s
payments to shareholders remain subject to Section 546(e) following Merit Mgmt. -- requires
resolving two factual disputes “never before tested in this case,” thus precluding a
determination as a matter of law and necessitating a remand to the district court. Appellants’
Reply in Support of Motion to Recall the Mandate at 9-11. Neither of the disputes identified by
appellants is factual in nature, however. Appellants first contend that certain documents cited
by appellees do not suffice to establish that Computershare Trust Company, N.A. was
Tribune’s “agent” in connection with the LBO payments. But that argument does not present a
factual dispute about the content or accuracy of those documents; instead, it only challenges
the legal significance of the documents, raising a pure question of law. Second, appellants
argue that a contract to redeem shares is not a “securities contract” within the meaning of 11
U.S.C. § 101(22)(A). But that argument, too, is plainly legal. Thus, there are no factual disputes
precluding our consideration of whether Tribune’s payments to shareholders remain subject to
Section 546(e) following Merit Mgmt., and a remand is unnecessary.
6
The term “standing” has been used to describe issues arising in bankruptcy
proceedings when individual creditors sue to recover funds from third parties to satisfy
amounts owed to them by the debtor, and that action is defended on the ground that the
recovery seeks funds that are recoverable under the Code only by a representative of all
creditors. St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 696-97 (2d Cir. 1989),
disapproved of on other grounds by In re Miller, 197 B.R. 810 (W.D.N.C. 1996). The use of the
term “standing” is based on the suing creditors’ need to demonstrate an injury other than one
redressable under the Code only by the trustee et al. Id. at 704.
18
purpose of the stay is “to protect creditors as well as the debtor,” Ostano
Commerzanstalt v. Telewide Sys., Inc., 790 F.2d 206, 207 (2d Cir. 1986) (per
curiam), by avoiding wasteful, duplicative, individual actions by creditors
seeking individual recoveries from the debtor’s estate, and by ensuring an
equitable distribution of the debtor’s estate. See In re McMullen, 386 F.3d 320,
324 (1st Cir. 2004) (noting that Section 362(a)(1), among other things,
“safeguard[s] the debtor estate from piecemeal dissipation . . . ensur[ing] that the
assets remain within the exclusive jurisdiction of the bankruptcy court pending
their orderly and equitable distribution among the creditors”). Although
fraudulent conveyance actions are against third parties rather than a debtor,
there is caselaw, discussed infra, stating that the automatic stay applies to such
actions.7 See In re Colonial Realty Co., 980 F.2d 125, 131 (2d Cir. 1992).
The district court ruled that Section 362’s automatic stay provision
deprived appellants of statutory standing to bring their claims because the
Litigation Trustee was still pursuing an intentional fraudulent conveyance action
challenging the same transfers under Section 548(a)(1)(A). In re Tribune, 499 B.R.
7
The implications of applying the automatic stay to fraudulent conveyance actions are
discussed infra.
19
at 322-23. We disagree. The Bankruptcy Code empowers a bankruptcy court to
release parties from the automatic stay “for cause” shown. In re Bogdanovich,
292 F.3d 104, 110 (2d Cir. 2002) (quoting 11 U.S.C. § 362(d)(1)). Once a creditor
obtains “a grant of relief from the automatic stay” under Section 362(d), it may
“press its claims outside of the bankruptcy proceeding.” St. Paul Fire & Marine
Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 702 (2d Cir. 1989), disapproved of on other
grounds by In re Miller, 197 B.R. 810 (W.D.N.C. 1996).
In the present matter, the bankruptcy court granted appellants relief from
the automatic stay on three occasions. On April 25, 2011, the bankruptcy court
granted appellants relief “to permit the filing of any complaint by or on behalf of
creditors on account of such Creditor [state law fraudulent conveyance] Claims.”
J. App’x at 373. A second order, entered on June 28, 2011, clarified that “neither
the automatic stay of [Section 362] nor the provisions of the [original lift-stay
order]” barred the parties in the state law actions from consolidating and
coordinating these actions. J. App’x at 376. And the bankruptcy court’s third
order, entered on March 15, 2012, set an expiration date of June 1, 2012, for the
“stay imposed on the state law constructive fraudulent conveyance actions.” J.
App’x at 521. None of the Tribune shareholders filed objections to these orders.
20
Finally, the reorganization plan, confirmed by the bankruptcy court and in
all pertinent respects an order of that court, expressly allowed appellants to
pursue “any and all LBO-Related Causes of Action arising under state fraudulent
conveyance law.” J. App’x at 643. Section 5.8.2 of the plan provided that
“nothing in this Plan shall or is intended to impair” the rights of creditors to
attempt to pursue disclaimed state law avoidance claims. J. App’x at 695.
Thus, under both the bankruptcy court’s orders and the confirmed
reorganization plan, if appellants had actionable state law, constructive
fraudulent conveyance claims, assertion of those claims was no longer subject to
Section 362’s automatic stay. See, e.g., In re Heating Oil Partners, LP, 422 F.
App’x 15, 18 (2d Cir. 2011) (holding that the automatic stay terminates at
discharge); United States v. White, 466 F.3d 1241, 1244 (11th Cir. 2006) (similarly
recognizing that the automatic stay terminates when “a discharge is granted”).
For the foregoing reasons, we hold that appellants’ claims are not barred
by Section 362.
b) Section 546(e) and Preemption
We turn now to the issue raised by the cross-appeal: whether appellants’
claims are preempted because they conflict with Code Section 546(e).
21
1. The Scope of Section 546(e)
The threshold question in our preemption inquiry is whether, in the
aftermath of Merit Mgmt., 138 S. Ct. 883, Tribune’s payments to the shareholders
remain subject to Section 546(e). As discussed above, it was previously the law in
this Circuit that the payments were subject to Section 546(e) because entities
covered by Section 546(e) had served as intermediaries. See Tribune I, 818 F.3d at
120; Quebecor, 719 F.3d at 100. Now, however, the parties agree that Merit
Mgmt. “forecloses” that basis for finding the payments covered by Section 546(e).
Appellees’ Opposition to Appellants’ Motion to Recall the Mandate at 16; see also
Merit Mgmt., 138 S. Ct. at 892 (holding that Section 546(e) does “not protect
transfers in which financial institutions served as mere conduits”). Accordingly,
we must determine whether there is an alternative basis for finding that the
payments are covered. For the reasons that follow, we find that such a basis
exists.
(i) Tribune is a Covered Entity
Under Merit Mgmt., the payments at issue can be subject to Section 546(e)
only if (1) Tribune, which made the payments, was a covered entity; or (2) the
shareholders, who ultimately received the payments, were covered entities. See
22
Merit Mgmt., 138 S. Ct. at 893 (“[T]he relevant transfer for purposes of the §
546(e) safe-harbor inquiry is the overarching transfer[.]”). According to
appellees, that requirement is satisfied because appellants’ complaints,
transaction documents that are integral to those complaints, and materials subject
to judicial notice establish that Tribune was a “financial institution” for the
purposes of Section 546(e).8 See Appellees’ Opposition to Appellants’ Motion to
Recall the Mandate at 16-20. Tribune was a “financial institution,” appellees
maintain, because it was a “customer” of Computershare Trust Company, N.A.
(“Computershare”), and Computershare was its agent in the LBO transaction. Id.
at 17-18. We agree with appellees that Tribune was a “financial institution” and
therefore a covered entity.
Section 546(e) provides in relevant part that “the trustee may not avoid . . .
a transfer made by or to (or for the benefit of) a . . . financial institution, . . . in
connection with a securities contract, as defined in section 741(7),” except
through an intentional fraudulent conveyance claim. 11 U.S.C. § 546(e). Section
101(22) of the Code defines “financial institution,” to include, inter alia, “an entity
8
Appellees also argue that Tribune was a covered entity because it was a “financial
participant,” and that the shareholders were likewise covered entities. Having agreed with
appellees that Tribune was a “financial institution,” we do not reach either of appellees’
alternative arguments.
23
that is a commercial or savings bank, . . . trust company, . . . and, when any such .
. . entity is acting as agent or custodian for a customer (whether or not a
‘customer’, as defined in section 741) in connection with a securities contract (as
defined in section 741) such customer.”9 11 U.S.C. § 101(22)(A) (emphasis
added).
Here, Tribune retained Computershare to act as “Depositary” in
connection with the LBO tender offer. See Tribune Offer to Purchase at 13, 113,
In re Tribune Co., No. 08-13141 (KJC) (Bankr. D. Del. Aug. 20, 2010), ECF Nos.
5437-5, 5437-6. Computershare is a “financial institution” for the purposes of
Section 546(e) because it is a trust company and a bank. See Office of the
Comptroller of the Currency, Trust Banks Active as of November 30, 2019, at
https://www.occ.treas.gov/topics/charters-and-licensing/financial-institution-lists
/trust-by-name.pdf; Office of the Comptroller of the Currency, National Banks
Active as of November 30, 2019, at
https://www.occ.treas.gov/topics/charters-and-licensing/financial-institution-lists
9
As the Court noted in Merit Mgmt., “[t]he parties [t]here d[id] not contend that either
the debtor or petitioner in th[at] case qualified as a ‘financial institution’ by virtue of its status
as a ‘customer’ under § 101(22)(A). Petitioner Merit Management Group, LP, discussed th[at]
definition only in footnotes and did not argue that it somehow dictate[d] the outcome in th[e]
case.” Merit Mgmt., 138 S. Ct. at 890 n.2. 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.” Id.
24
/national-by-name.pdf. Therefore, Tribune was likewise a “financial institution”
with respect to the LBO payments if it was Computershare’s “customer,” and
Computershare was acting as its agent. See 11 U.S.C. § 101(22)(A).
In its role as Depositary, Computershare performed multiple services for
Tribune. First, Computershare received and held Tribune’s deposit of the
aggregate purchase price for the shares. See Examiner’s Report, Vol. 1, at 206, In
re Tribune Co., No. 08-13141 (KJC) (Bankr. D. Del. Aug. 3, 2010), ECF No. 5247.
Then, Computershare received tendered shares, retained them on Tribune’s
behalf, and paid the tendering shareholders. Id.; see also Tribune Offer to
Purchase at 81, In re Tribune Co., No. 08-13141 (KJC) (Bankr. D. Del. Aug. 20,
2010), ECF Nos. 5437-5, 5437-6.
Given these facts, we conclude that Tribune was Computershare’s
“customer” with respect to the LBO payments. Although Section 741 of the Code
provides a specialized definition of “customer” for certain purposes, see 11
U.S.C. § 741(2), the relevant section for these purposes, Section 101(22), plainly
states that its definition of “customer” is not limited by Section 741’s definition,
see 11 U.S.C. § 101(22)(A) (defining “financial institution” to include certain
entities when such entities are “acting as agent . . . for a customer (whether or not
25
a ‘customer,’ as defined in section 741)”). Moreover, Section 101(22) does not
provide any alternative specialized definition. Thus, we must give the term its
“ordinary meaning.”10 Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 69 (2011).
We have previously recognized that the “core” ordinary definition of “customer”
is “someone who buys goods or services.” UBS Fin. Servs., Inc. v. W. Virginia
Univ. Hosps., Inc., 660 F.3d 643, 650 (2d Cir. 2011) (citing multiple dictionary
definitions). Black’s Law Dictionary, which provides more granular definitions,
defines “customer” to include “a person . . . for whom a bank has agreed to
collect items.” Black’s Law Dictionary (10th ed. 2014). Regardless of which
definition we apply, Tribune would qualify as Computershare’s customer.
10
Appellants suggest that we should apply the specialized definition of “customer”
given in Section 761(9), see Appellants’ Reply in Support of Motion to Recall the Mandate at
10-11, which appears in a subchapter dealing with commodity broker liquidations. See 11
U.S.C. § 761(9). Section 761(9)’s definition, unlike the definition of “customer” from Section
741(2), is not explicitly disclaimed in Section 101(22). Nonetheless, we believe it is clear that the
definitions from Section 761(9) and Section 101(22) are not intended to be coextensive. First,
there is no indication in Section 101(22)’s text that Section 761(9)’s limited definition of
“customer” should apply. Moreover, Section 101(22)’s explicit disclaimer of Section 741(2)’s
definition suggests that “customer” should be given a broad meaning, so it would be odd to
hold – without any textual indication – that the definition in Section 761(9) circumscribes
Section 101(22). In addition, other subsections of Section 101 explicitly incorporate definitions
from Section 761, including its definition of “customer” specifically. See, e.g., 11 U.S.C. § 101(6)
(“The term ‘commodity broker’ means futures commission merchant, foreign futures
commission merchant, clearing organization, leverage transaction merchant, or commodity
options dealer, as defined in section 761 of this title, with respect to which there is a customer,
as defined in section 761 of this title.”). Thus, if Congress had intended to import Section
761(9)’s definition into Section 101(22), it clearly knew how (yet declined) to do so.
26
Computershare agreed to collect items for Tribune by receiving the tendered
shares and retaining them, and Tribune bought Computershare’s services by
retaining Computershare to act as Depositary.
It is likewise plain that Computershare was Tribune’s agent. “[S]tatutes
employing common-law terms,” such as agent, “are presumed . . . ‘to incorporate
the established meaning of th[o]se terms,’” absent a contrary indication. U.S. ex
rel. O'Donnell v. Countrywide Home Loans, Inc., 822 F.3d 650, 657 (2d Cir. 2016)
(quoting Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322 (1992)). Here, the
parties have not identified any reason why the term “agent,” for the purposes of
Section 101(22), should be given anything other than its common-law meaning,
and we have identified none. Thus, we will apply its common-law meaning.
At common law, “[a]gency is the fiduciary relationship that arises when
one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the
agent shall act on the principal’s behalf and subject to the principal’s control, and
the agent manifests assent or otherwise consents so to act.” Restatement (Third)
of Agency § 1.01 (2006); see also Commercial Union Ins. Co. v. Alitalia Airlines,
S.p.A., 347 F.3d 448, 462 (2d Cir. 2003) (“Establishment of [an agency]
relationship requires facts sufficient to show (1) the principal’s manifestation of
27
intent to grant authority to the agent, and (2) agreement by the agent. In
addition, the principal must maintain control over key aspects of the
undertaking.”) (internal citations omitted). Generally, “[w]hether an agency
relationship exists is a mixed question of law and fact.” Commercial Union Ins.,
347 F.3d at 462. However, the existence of an agency relationship can be resolved
“as a matter of law” if: ”(1) the facts are undisputed; or (2) there is but one way
for a reasonable jury to interpret them.” Garanti Finansal Kiralama A.S. v. Aqua
Marine & Trading Inc., 697 F.3d 59, 71 (2d Cir. 2012).
Here, Tribune manifested its intent to grant authority to Computershare by
depositing the aggregate purchase price for the shares with Computershare and
entrusting Computershare to pay the tendering shareholders. Computershare, in
turn, manifested its assent by accepting the funds and effectuating the
transaction. Then, as the transaction proceeded, Tribune maintained control over
key aspects of the undertaking. See Tribune Offer to Purchase at 81, In re Tribune
Co., No. 08-13141 (KJC) (Bankr. D. Del. Aug. 20, 2010), ECF Nos. 5437-5, 5437-6
(“For purposes of the Tender Offer, [Tribune] will be deemed to have accepted
payment . . . shares that are properly tendered and not properly withdrawn only
when, as and if we give oral or written notice to [Computershare] of our
28
acceptance of the shares for payment pursuant to the Tender Offer . . .”).
Accordingly, the undisputed facts establish that Computershare was Tribune’s
agent,11 and we conclude that Tribune was a “financial institution” with respect
to the LBO payments.
That conclusion does not end our assessment of whether the payments are
subject to Section 546(e), however, because we must also determine whether all
of the payments were made “in connection with a securities contract.” See
Appellees’ Opposition to Appellants’ Motion to Recall the Mandate at 20;
Appellants’ Reply in Support of Motion to Recall the Mandate at 10.
(ii) The Payments were Made in Connection with a
“Securities Contract”
As stated above, Section 546(e) covers transfers “made by or to (or for the
benefit of) a . . . financial institution, . . . in connection with a securities contract,
as defined in section 741(7)[.]”12 11 U.S.C. § 546(e). Appellants do not dispute
11
The decision cited by appellants, Manufacturers Hanover Tr. Co. v. Yanakas, 7 F.3d
310 (2d Cir. 1993), see Appellants’ Reply in Support of Motion to Recall the Mandate at 10, is
inapposite. That decision involved the application of the rule that, under normal
circumstances, a creditor-debtor relationship does not amount to a fiduciary relationship.
Manufacturers Hanover Tr., 7 F.3d at 319. Tribune and Computershare were not in a creditor-
debtor relationship.
12
Section 546(e) also covers certain “settlement payments,” which need not be “in
connection with a securities contract,” see 11 U.S.C. § 546(e), but appellees’ theory is that the
29
that “approximately half” of the payments were made in connection with a
securities contract because they involved the purchase of shares. See Appellants’
Reply in Support of Motion to Recall the Mandate at 10 (acknowledging that the
term “securities contract,” for these purposes, “encompasses contracts ‘to
purchase shares’”) (emphasis removed). However, they contend that the
remaining payments were not made in connection with a securities contract
because they involved the redemption, rather than the purchase, of shares. See
id.
We disagree with appellants. The term “redemption,” in the securities
context, means “repurchase.” See Quebecor, 719 F.3d at 99 (“Generally, ‘to
redeem is defined as to purchase back; to regain possession by payment of a
stipulated price; to repurchase; to regain, as mortgage property, by paying what
is due; to receive back by paying the obligation.’”) (quoting In re United Educ.
Co., 153 F. 169, 171 (2d Cir. 1907)); Merriam-Webster’s Collegiate Dictionary 1042
(11th ed. 2003) (defining “redeem” as “to buy back” or “repurchase”). Section
741(7) defines “securities contract” capaciously to include, inter alia, a "contract
payments are covered because they were transfers made in connection with a securities
contract. See Appellees’ Opposition to Appellants’ Motion to Recall the Mandate at 20. Thus,
we are not deciding whether the payments at issue qualify as “settlement payments” under
Section 546(e).
30
for the purchase [or] sale . . . of a security, . . . including any repurchase . . .
transaction on any such security,” 11 U.S.C. § 741(7)(A)(i) (emphasis added), as
well as “any other agreement or transaction that is similar to an agreement or
transaction referred to in this subparagraph.” 11 U.S.C. § 741(7)(A)(vii); see also
In re Bernard L. Madoff Inv. Sec. LLC, 773 F.3d 411, 417 (2d Cir. 2014) (observing
that Section 741(7)“defines ‘securities contract’ with extraordinary breadth”).
Thus, we have no trouble concluding, based on Section 741(7)’s plain language,
that all of the payments at issue, including those connected to the redemption of
shares, were “in connection with a securities contract.”
(iii) Conclusion
For the foregoing reasons, we agree with appellees that the payments at
issue remain subject to Section 546(e) following Merit Mgmt.
2. Conflict-Preemption Law
Under the Supremacy Clause, Article VI, Clause 2 of the Constitution,
federal law prevails when it conflicts with state law. Arizona v. United States,
132 S. Ct. 2492, 2500 (2012).
As discussed throughout this opinion, Section 546(e)’s reference to limiting
avoidance by a trustee provides appellants with a plain language argument that
31
only a trustee et al., and not creditors acting on their own behalf, are barred from
bringing state law, constructive fraudulent avoidance claims. However, as
discussed infra, we believe that the language of Section 546(e) does not
necessarily have the meaning appellants ascribe to it. Even if that meaning is one
of multiple reasonable constructions of the statutory scheme, it would not
necessarily preclude preemption because a preemptive effect may be inferred
where it is not expressly provided.
Under the implied preemption doctrine,13 state laws are “pre-empted to the
extent of any conflict with a federal statute. Such a conflict occurs . . . when []
state law stands as an obstacle to the accomplishment and execution of the full
purposes and objectives of Congress.” Hillman v. Maretta, 133 S. Ct. 1943,
1949-50 (2013) (citations and internal quotation marks omitted); accord In re
Methyl Tertiary Butyl Ether (MTBE) Prods. Liab. Litig., 725 F.3d 65, 97 (2d Cir.
2013) cert. denied sub nom. Exxon Mobil Corp. v. City of New York, 134 S. Ct.
13
We see no need for a full discussion of various modes of analysis used to determine
federal preemption, i.e., “express” preemption, Chamber of Commerce v. Whiting, 131 S. Ct.
1968, 1977 (2011), “field” preemption, Arizona v. United States, 132 S. Ct. 2492, 2502 (2012), or
even that branch of “implied” preemption that requires a showing of “impossibility” of
complying with both state and federal law, id. at 2501. The only relevant analysis in the
present matter is preemption inferred from a conflict between state law and the purposes of
federal law, as discussed in the text.
32
1877 (2014) (courts will find implied preemption when “state law directly
conflicts with the structure and purpose of a federal statute”) (citation and
internal quotation marks omitted). Appellants argue that a recognized
presumption against preemption limits the implied preemption doctrine. They
argue that Section 546(e) preempts creditors’ state law, fraudulent conveyance
claims only if the claims would do “‘major damage’ to ‘clear and substantial’
federal interests.” Resp. & Reply Br. of Pls.-Appellants-Cross-Appellees 45
(quoting Hillman, 133 S. Ct. 1943, 1950 (2013) (citation omitted)). The
presumption against inferring preemption is premised on federalism grounds
and, therefore, weighs most heavily where the particular regulatory area is
“traditionally the domain of state law.” Hillman, 133 S. Ct. at 1950; see also
Madeira v. Affordable Hous. Found., Inc., 469 F.3d 219, 241 (2d Cir. 2006) (“The
mere fact of ‘tension’ between federal and state law is generally not enough to
establish an obstacle supporting preemption, particularly when the state law
involves the exercise of traditional police power.”). According to appellants, the
presumption against preemption fully applies in the present context because
fraudulent conveyance claims are “among ‘the oldest [purposes] within the ambit
33
of the police power.’” Resp. & Reply Br. of Pls.-Appellants-Cross-Appellees 36
(quoting California v. Zook, 336 U.S. 725, 734 (1949)).
Preemption is always a matter of congressional intent, even where that
intent must be inferred. See Cipollone v. Liggett Grp., Inc., 505 U.S. 504, 516
(1992) (congressional intent is the “ultimate touchstone of pre-emption analysis”)
(quoting Malone v. White Motor Corp., 435 U.S. 497, 504 (1978)) (internal
quotation marks omitted); N.Y. SMSA Ltd. P’ship v. Town of Clarkstown, 612
F.3d 97, 104 (2d Cir. 2010) (“The key to the preemption inquiry is the intent of
Congress.”). As in the present matter, the presumption against preemption
usually goes to the weight to be given to the lack of an express statement
overriding state law.
The presumption is strongest when Congress is legislating in an area
recognized as traditionally one of state law alone. See Hillman, 133 S. Ct. at 1950
(stating that because “[t]he regulation of domestic relations is traditionally the
domain of state law . . . [t]here is [] a presumption against pre-emption”) (internal
quotation marks and citation omitted). However, the present context is not such
an area. To understate the proposition, the regulation of creditors’ rights has “a
34
history of significant federal presence.” United States v. Locke, 529 U.S. 89, 90
(2000).
Congress’s power to enact bankruptcy laws was made explicit in the
Constitution as originally enacted, Art. 1, § 8, cl. 4, and detailed, preemptive
federal regulation of creditors’ rights has, therefore, existed for over two
centuries. Charles Jordan Tabb, The History of the Bankruptcy Laws in the
United States, 3 Am. Bankr. Inst. L. Rev. 5, 7 (1995). Once a party enters
bankruptcy, the Bankruptcy Code constitutes a wholesale preemption of state
laws regarding creditors’ rights. See Eastern Equip. and Servs. Corp. v. Factory
Point Nat. Bank, Bennington, 236 F.3d 117, 120 (2d Cir. 2001) (“The United States
Bankruptcy Code provides a comprehensive federal system of penalties and
protections to govern the orderly conduct of debtors’ affairs and creditors’
rights.”); In re Miles, 430 F.3d 1083, 1091 (9th Cir. 2005) (“Congress intended the
Bankruptcy Code to create a whole scheme under federal control that would
adjust all of the rights and duties of creditors and debtors alike . . . .”).
Consider, for example, the present proceeding. While the issue before us is
often described as whether Section 546(e) preempts state fraudulent conveyance
laws, Resp. & Reply Br. of Pls.-Appellants-Cross-Appellees 33, that is a
35
mischaracterization. Appellants’ state law claims were preempted when the
Chapter 11 proceedings commenced and were not dismissed. Appellants’ own
arguments posit that those claims were, at the very least, stayed by Code Section
362. Whether, as appellants argue, they were restored in full after two years, see
11 U.S.C. § 546(a)(1)(A), or by order of the bankruptcy court, see 11 U.S.C. §
349(b)(3), is hotly disputed. But if they were restored, it was by force of federal
law.
Once Tribune entered bankruptcy, the creditors’ avoidance claims were
vested in the federally appointed trustee et al. 11 U.S.C. § 544(b)(1). A
constructive fraudulent conveyance action brought by a trustee et al. under
Section 544 is a claim arising under federal law. See In re Intelligent Direct
Mktg., 518 B.R. 579, 587 (E.D. Cal. 2014); In re Trinsum Grp., Inc., 460 B.R. 379,
387-88 (S.D.N.Y. 2011); In re Sunbridge Capital, Inc., 454 B.R. 166, 169 n.16
(Bankr. D. Kan. 2011); In re Charys Holding Co., Inc., 443 B.R. 628, 635-36 (Bankr.
D. Del. 2010). Although such a claim borrows applicable state law standards
regarding avoiding the transfer in question, see Universal Church v. Geltzer, 463
F.3d 218, 222 n.1 (2d Cir. 2006), the claim has its own statute of limitations, 11
U.S.C. § 546(a)(1)(A), measure of damages, see 11 U.S.C. § 550, and standards for
36
distribution, 11 U.S.C. § 726. A disposition of this federal law claim extinguishes
the right of creditors to bring state law, fraudulent conveyance claims. See St.
Paul Fire, 884 F.2d at 701 disapproved of on other grounds by In re Miller, 197
B.R. 810 (W.D.N.C. 1996) (noting that “creditors are bound by the outcome of the
trustee’s action”); see also In re PWS Holding Corp., 303 F.3d 308, 314-15 (3d Cir.
2002) (barring creditor’s state law, fraudulent transfer claims after trustee
released § 544 claims). And, if creditors are allowed by a bankruptcy court,
trustee, or, as appellants argue, by the Bankruptcy Code, to bring state law
actions in their own name, that permission is a matter of grace granted under
federal authority. The standards for granting that permission, moreover, have
everything to do with the Bankruptcy Code’s balancing of debtors’ and creditors’
rights, In re Coltex Loop Cent. Three Partners, L.P., 138 F.3d 39, 44 (2d Cir. 1998),
or rights among creditors, United States v. Ron Pair Enters, Inc., 489 U.S. 235, 248
(1989), and nothing to do with the vindication of state police powers.
We also note here, and discuss further infra, that the policies reflected in
Section 546(e) relate to securities markets, which are subject to extensive federal
regulation. The regulation of these markets has existed and grown for over
eighty years and reflects very important federal concerns.
37
In the present matter, therefore, there is no measurable concern about
federal intrusion into traditional state domains. Our bottom line is that the issue
before us is one of inferring congressional intent from the Code, without
significant countervailing pressures of state law concerns.
3. The Language of Section 546(e)
Section 544(b) empowers a trustee et al. to avoid a “transfer . . . [by] the
debtor . . . voidable under applicable law by a[n] [unsecured] creditor.” Section
548(a) also provides the trustee et al. with independent federal intentional, 11
U.S.C. § 548(a)(1)(A), and constructive fraudulent conveyance claims, 11 U.S.C. §
548(a)(1)(B).
Section 546(e) provides in pertinent part:
Notwithstanding sections 544, . . . 548(a)(1)(B) . . . of this title, the trustee
may not avoid a transfer that is a . . . settlement payment . . . made by or to
(or for the benefit of) a . . . stockbroker, financial institution, financial
participant, or securities clearing agency, or that is a transfer made by or to
(or for the benefit of) a . . . stockbroker, financial institution, financial
participant, or securities clearing agency, in connection with a securities
contract . . . except under section 548(a)(1)(A). . . .
Id. § 546(e). Section 546(e) thus expressly prohibits trustees et al. from using their
Section 544(b) avoidance powers and (generally) Section 548 against the transfers
specified in Section 546(e). However, Section 546(e) creates an exception to that
38
prohibition for claims brought by trustee et al. under Section 548(a)(1)(A) that, as
noted, establishes a federal avoidance claim to be brought by a trustee et al.
based on an intentional fraud theory. As discussed supra, the Litigation Trust
brought a Section 548(a)(1)(A) claim against the same transfers challenged by
appellants’ actions before us on this appeal, which was still pending when
appellants’ claims were dismissed.
The language of Section 546(e) covers all transfers by or to covered entities
that are “settlement payment[s]” or “in connection with a securities contract.”
Transfers in which either the transferor or transferee is not a covered entity are
clearly included in the language, so long as one of the two is a covered entity.
The Section does not distinguish between kinds of transfers, e.g., settlements of
ordinary day-to-day trading, LBOs, or mergers in which shareholders of one
company are involuntarily cashed out. So long as the transfer sought to be
avoided is within the language quoted above, the Section includes avoidance
proceedings in which the covered entity would escape a damages judgment. But
see In re Lyondell Chem. Co., 503 B.R. 348, 372-73 (Bankr. S.D.N.Y. 2014), as
corrected (Jan. 16, 2014) (holding that Section 546(e) does not include “LBO
payments to stockholders at the very end of the asset transfer chain, where the
39
stockholders are the ultimate beneficiaries of the constructively fraudulent
transfers, and can give the money back to injured creditors with no damage to
anyone but themselves”).
4. Appellants’ Legal Theory
Appellants’ state law, constructive fraudulent conveyance claims purport
to be brought under mainstream bankruptcy procedures directly mandated by
the Code. However, an examination of the Code as a whole, in contrast with an
isolated focus on the word “trustee” in Section 546(e), reveals that appellants’
theory relies upon adhering to statutory language only when opportune and
resolving various ambiguities in a way convenient to that theory. Even then,
their legal theory results in anomalies and inconsistencies with parts of the Code.
The consequence of those ambiguities, anomalies, and conflicts is that a reader of
Section 546(e), at the time of enactment, would not have necessarily concluded
that the reference only to a trustee et al. meant that creditors may at some point
bring state law claims seeking the very relief barred to the trustee et al. by Section
546(e). Its meaning, therefore, is not plain.
40
(i) Appellants’ Theory of Fraudulent Conveyance Avoidance
Proceedings
Appellants’ theory goes as follows. When a debtor enters bankruptcy, all
“legal or equitable interests of the debtor in property,” 11 U.S.C. § 541(a)(1), vest
in the debtor’s bankruptcy estate. This property includes legal claims that could
have been brought by the debtor. See U.S. ex rel. Spicer v. Westbrook, 751 F.3d
354, 361-62 (5th Cir. 2014) (“The phrase ‘all legal or equitable interests’ includes
legal claims–whether based on state or federal law.”). Therefore, “the Trustee is
conferred with the authority to represent all creditors and the Debtor’s estate and
with the sole responsibility of bringing actions on behalf of the Debtor’s estate to
marshal assets for the estate’s creditors.” In re Stein, 314 B.R. 306, 311 (D.N.J.
2004). However, fraudulent conveyance claims proceed on a theory that an
insolvent debtor may not make what are essentially gifts that deprive creditors of
assets available to pay debts. See Grupo Mexicano de Desarrollo S.A. v. Alliance
Bond Fund, Inc., 527 U.S. 308, 322 (1999). Therefore, before a bankruptcy takes
place, fraudulent conveyance claims belong to creditors rather than to the debtor.
As a consequence, Section 544(b)(1) provides that a bankruptcy trustee may
avoid “any transfer of an interest of the debtor . . . that is voidable under
41
applicable law by a creditor holding an unsecured claim.” 11 U.S.C. § 544(b)(1).
The responsibility of the trustee et al. is to “step into the shoes of a creditor under
state law and avoid any transfers such a creditor could have avoided.” Univ.
Church v. Geltzer, 463 F.3d 218, 222 n.1 (2d Cir. 2006).
The trustee et al., however, is subject to a statute of limitations that requires
such claims to be brought within two years of the commencement of the
bankruptcy proceeding. See 11 U.S.C. § 546(a)(1)(A). Appellants infer from this
statute of limitations that if the trustee et al. fails to act to enforce such claims
during that two-year period, the claims revert to creditors who may then pursue
their own state law, fraudulent conveyance actions. Resp. & Reply Br. of Pls.-
Appellants-Cross-Appellees 1. This position assumes that, although the power to
bring such actions is clearly vested in the trustee et al. when the bankruptcy
proceeding begins, if the power is not exercised, it returns in full flower to the
creditors after the bankruptcy ends or after two years.
Appellants’ theory also is that their fraudulent conveyance claims were
only stayed under Section 362(a), rather than extinguished when assumed by the
trustee on behalf of the bankrupt estate by the trustee et al. under Section 544,
and could be asserted by them as creditors when the Section 362(a) stay was
42
lifted. Accordingly, appellants argue, when the Committee did not bring
constructive fraudulent conveyance actions against the LBO transfers by
December 8, 2010, appellants regained the right to bring their own state law
actions. See Resp. & Reply Br. of Pls.-Appellants-Cross Appellees 6. Moreover,
they correctly note that Section 362’s automatic stay was, as discussed supra,
lifted. In either case -- automatically after two years or by the bankruptcy court’s
lifting of the stay -- appellants assert that the right to bring state law actions has
reverted to them.
(ii) Ambiguities, Anomalies, and Conflicts
When appellants’ arguments and their relation to the Code are viewed, as
we must view them, in their entirety, In re Boodrow, 126 F.3d 43, 49 (2d Cir. 1997)
(“The Supreme Court has thus explained . . . ‘we must not be guided by a single
sentence or [part] of a sentence [of the Code], but look to the provisions of the
whole law, and to its object and policy.’”) (quoting Kelly v. Robinson, 479 U.S. 36,
43 (1986)), they reveal material ambiguities, anomalies, and outright conflicts
with the purposes of Code Sections 544, 362, and 548, not to mention the outright
conflict with Section 546(e) discussed infra.
43
A critical step in the logic of appellants’ theory finds no support in the
language of the Code. In particular, the inference that fraudulent conveyance
actions revert to creditors if either the two-year statute of limitations passes
without an exercise of the trustees’ et al. powers under Section 544 or the Section
362(a) stay is lifted by the bankruptcy court has no basis in the Code’s language.
To begin, the language of the automatic stay provision applies only to actions
against “the debtor.” 11 U.S.C. § 362. To be sure, there are cases barring
fraudulent conveyance actions brought by creditors before the passing of the
limitations period or lifting of the stay. See, e.g., In re Crysen/Montenay Energy
Co., 902 F.2d 1098, 1101 (2d Cir. 1990). The rationales of these cases vary. Some
rely on Section 362(a) on the theory that the fraudulent conveyance claims are the
property of the debtors’ estate. See In re MortgageAmerica Corp., 714 F.2d 1266,
1275-76 (5th Cir. 1983); Matter of Fletcher, 176 B.R. 445, 452 (Bankr. W.D. Mich.
1995), rev’d and remanded on other grounds sub nom. In re Van Orden, No. 1:95-
CV-79, 1995 WL 17903731 (W.D. Mich. Sept. 5, 1995). Some do not mention
Section 362(a) and rely on the need to protect trustees’ et al. powers to bring
Section 544 avoidance actions. See In re Van Diepen, P.A., 236 F. App’x. 498,
502-03 (11th Cir. 2007); In re Clark, 374 B.R. 874, 876 (Bankr. M.D. Ala. 2007); In re
44
Tessmer, 329 B.R. 776, 780 (Bankr. M.D. Ga. 2005). All the caselaw agrees that the
trustee et al.’s powers under Section 544 are exclusive, at least until the stay is
lifted or the two-year period expires.
Equally important is the fact that the inference of a reversion of fraudulent
conveyance claims to creditors drawn from Section 544's statute of limitations is
not based on the language of the Code, which says nothing about the reversion of
claims vested in the trustee et al. by Section 544. Statutes of limitation usually are
intended to limit the assertion of stale claims and to provide peace to possible
defendants, Converse v. Gen. Motors Corp., 893 F.2d 513, 516 (2d Cir. 1990), and
not to change the identity of the authorized plaintiffs without some express
language to that effect. A decisive part of appellants’ legal theory thus has no
support in the language of the Code.
Even if this gap is assumed not to exist, or can be otherwise traversed,
appellants’ theory encounters other serious problems. Section 544, vesting
avoidance powers in the trustee et al., is intended to simplify proceedings, reduce
the costs of marshalling the debtor’s assets, and assure an equitable distribution
among the creditors. See In re MortgageAmerica Corp., 714 F.2d 1266, 1275-76
(5th Cir. 1983) (noting that “[t]he ‘strong arm’ provision of the [Bankruptcy]
45
Code, 11 U.S.C. § 544, allows the bankruptcy trustee to step into the shoes of a
creditor for the purpose of asserting causes of action under state fraudulent
conveyance acts for the benefit of all creditors, not just those who win a race to
judgment” and Section 362 helps prevent “[a]ctions for the recovery of the
debtor’s property by individual creditors under state fraudulent conveyance laws
[that] would interfere with [the bankruptcy] estate and with the equitable
distribution scheme dependent upon it”). However, these purposes are hardly
consistent with the process hypothesized by appellants.
Accepting for purposes of argument appellants’ view of the applicable
process, Section 362, at the very least, prevented appellants (for a time) from
bringing their state law, fraudulent conveyance claims, while Section 546(e)
barred the Committee from seeking to enforce or, necessarily, to settle them.
Appellants’ argument thus seems to posit that their claims are on hold until the
trustees et al. decide whether to bring an action they are powerless to bring or to
pass on to creditors a power they do not have. In short, it assumes that, when
creditors’ avoidance claims are lodged in the trustee et al. and are diminished in
that hand by the Code, they reemerge in undiminished form in the hands of
46
creditors after the statute of limitations governing actions by the trustee et al. has
run or the bankruptcy court lifts the automatic stay.
In the context of the Code, however, any such process is a glaring anomaly.
Section 548(a)(1)(A) vests trustees with a federal claim to avoid the very transfers
attacked by appellants’ state law claims –- but only on an intentional fraud
theory. There is little apparent reason to limit trustees et al. to intentional fraud
claims while not extinguishing constructive fraud claims but rather leaving them
to be brought later by individual creditors. In particular, enforcement of the
intentional fraud claim is undermined if creditors can later bring state law,
constructive fraudulent conveyance claims involving the same transfers. Any
trustee would have grave difficulty negotiating more than a nominal settlement
in the federal action if it cannot preclude state claims attacking the same transfers
but not requiring a showing of actual fraudulent intent. Unable to settle, a
trustee et al. will be reluctant to expend the estate’s resources on vigorously
pursuing the federal claim while awaiting the stayed state claims to revert and to
be litigated by creditors. As happened in the present matter, the result is that the
trustee et al.’s action awaits the pursuit of piecemeal actions by creditors. This is
precisely opposite of the intent of the Code’s procedures. While a bankruptcy
47
court can reduce the delay by an early lifting of the automatic stay with regard to
constructive fraudulent conveyance actions, that action would underline the
anomaly of applying the stay to the bringing of claims that are barred to trustees
et al.
Staying ordinary state law, constructive fraudulent conveyance claims by
individual creditors while the trustee deliberates is a rational method of avoiding
piecemeal litigation and ensuring an equitable distribution of assets among
creditors. See MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 108 (2d Cir. 2006)
(“The objectives of the Bankruptcy Code . . . include . . . ‘the need to protect
creditors and reorganiz[e] debtors from piecemeal litigation . . . .’”) (quoting Ins.
Co. of N. Am. v. NGC Settlement Trust & Asbestos Claims Mgmt. Corp., 118 F.3d
1056, 1069 (5th Cir. 1997)). However, the scheme described by appellants does
not resemble this method either in simplicity or in the equitable treatment of
creditors.
To rationalize these anomalies, appellants speculate as to -- more
accurately, imagine -- a deliberate balancing of interests by Congress. They argue
that Congress wanted to balance the need for certainty and finality in securities
markets, recognized in Section 546(e), against the need to maximize creditors’
48
recoveries, recognized in various other provisions. Congress did so, they argue,
by limiting only the avoidance powers of trustees et al., not those of individual
creditors (save for the stay), in Section 546(e) because actions by trustees et al. are
a greater threat to securities markets than are actions by individual creditors.
Resp. & Reply Br. of Pls.-Appellants-Cross-Appellees 71. That greater threat
results from the fact that a trustee’s power of avoidance is funded by the debtor’s
estate, see 11 U.S.C. §§ 327, 330, supported by national long-arm jurisdiction, see
Fed. R. Bankr. P. 7004(d),(f), and can be used to avoid the entirety of a transfer,
Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox Inc.), 464 B.R. 606, 615-17
(Bankr. S.D.N.Y. 2012) (citing Moore v. Bay, 284 U.S. 4 (1931)). Creditors, in turn,
have no such funding, are limited by state jurisdictional rules, and can sue only
for their individual losses. See In re Integrated Agri, Inc., 313 B.R. 419, 428
(Bankr. C.D. Ill. 2004). Therefore, appellants argue that a deliberate “balance”
was struck by protecting securities markets from trustees’ et al. actions while
subjecting them to the lesser disruption individual creditors’ actions might cause
after a two-year stay. Resp. & Reply Br. of Pls.-Appellants-Cross-Appellees 83-
85. For a court to upset this delicate balance would constitute judicial intrusion
on policy decisions rightfully left to the Congress.
49
However, the balance described above is an ex post explanation of a legal
scheme that appellants must first construct, and then justify as rational, because it
is essential to their claims. Although they argue that the scheme was deliberately
constructed by Congress, that argument lacks any support whatsoever in the
legislative deliberations that led to Section 546(e)’s enactment.
Moreover, appellants’ arguments understate the number of creditors who
would sue, if allowed, and the corresponding extent of the danger to securities
markets. Creditors may assign their claims and various methods of aggregation
can lead to billions of dollars of claims, as here.
(iii) No Plain Meaning
These issues reflect ambiguities as to exactly what is transferred to trustees
et al. by Section 544(b)(1). It is clear that trustees et al. own the debtors’ estates,
which include the debtors’ property and legal claims. See 11 U.S.C. § 541(a)(1)
(Among other things, the “estate is comprised of . . . all legal or equitable
interests of the debtor in property as of the commencement of the case”); U.S. ex
rel. Spicer v. Westbrook, 751 F.3d 354, 361-62 (5th Cir. 2014) (“The phrase ‘all
legal or equitable interests’ includes legal claims -- whether based on state or
federal law.”). Avoidance claims belong to creditors, however, and whether they
50
become the property of the debtors’ estates is a debated, and somewhat
metaphysical, issue. The issue does have a limited practical bearing on the
present matter, however. If the claims asserted by appellants became the
property of the debtor’s estate upon Tribune’s bankruptcy and were thereby
limited in the hands of the Committee, their reversion in an unaltered form,
whether occurring automatically or by act of the Committee or bankruptcy court,
might seem counterintuitive.
Appellants’ reliance on the applicability of the automatic stay to their
claims would arguably support the “property” view. The stay is intended in part
to protect the property rights of the trustee et al. in the debtor’s estate. Subjecting
avoidance actions by creditors to the stay has been supported by various courts
on the ground that such claims are either the property of the debtor’s estate or
have an equivalent legal status. See In re MortgageAmerica Corp., 714 F.2d 1266,
1275-76 (5th Cir. 1983); In re Swallen’s, Inc., 205 B.R. 879, 882 (Bankr. S.D. Ohio
1997); Matter of Fletcher, 176 B.R. 445, 452 (Bankr. W.D. Mich. 1995).
Whether, and to what degree, fraudulent conveyance claims become the
property of a bankrupt estate was, at the time of Section 546(e)’s enactment, and
now, anything but clear. The principal Supreme Court precedent held that such
51
claims are the property of the debtor’s estate. Trimble v. Woodhead, 102 U.S.
647, 649 (1880). It is a very old decision but has not been expressly overruled.
Subsequent court of appeals decisions are bountiful in contradictory statements
regarding the property issue. Compare In re Cybergenics Corp., 226 F.3d 237,
241, 246 (3d Cir. 2000) (stating that “fraudulent transfer claims have long
belonged to a transferor’s creditors, whose efforts to collect their debts have
essentially been thwarted as a consequence of the transferor’s actions” but also
noting that the debtor’s “‘assets’ and ‘property of the estate’ have different
meanings, evidenced in part by the numerous provisions in the Bankruptcy Code
that distinguish between property of the estate and property of the debtor, or
refer to one but not the other”), and Picard v. Fairfield Greenwich Ltd., 762 F.3d
199, 212 (2d Cir. 2014) (“Our case law is clear that assets targeted by a fraudulent
conveyance action do not become property of the debtor’s estate under the
Bankruptcy Code until the Trustee obtains a favorable judgment.”), with
Cumberland Oil Corp. v. Thropp, 791 F.2d 1037, 1042 (2d Cir. 1986) (noting that
causes of action alleging violation of fraudulent conveyance laws would be
property of the estate), and Nat’l Tax Credit Partners v. Havlik, 20 F.3d 705, 708-
09 (7th Cir. 1994) (“[T]he right to recoup a fraudulent conveyance, which outside
52
of bankruptcy may be invoked by a creditor, is property of the estate that only a
trustee or debtor in possession may pursue once a bankruptcy is underway.”).
Use of the term “property” as a short-hand way of suggesting exclusivity
has merit, Henry E. Smith, Property and Property Rules, 79 N.Y.U. L. Rev. 1719,
1770-74 (2004), but Section 544(b)(1) does not expressly state whether the bundle
of rights transferred can revert. However, we need not resolve either the
“property” or the reversion issues. Whether the statutory language has a plain
meaning turns on whether a consensus would have existed among reasonable,
contemporaneous readers as to meaning of that language in the particular
statutory context. See Pettus v. Morgenthau, 554 F.3d 293, 297 (2d Cir. 2009)
(“[W]e attempt to ascertain how a reasonable reader would understand the
statutory text, considered as a whole.”); Engine Mfrs. Ass’n v. S. Coast Air
Quality Mgmt. Dist., 541 U.S. 246, 252-53 (2004) (noting that “[s]tatutory
construction must begin with the language employed by Congress and the
assumption that the ordinary meaning of that language accurately expresses the
legislative purpose”) (quoting Park ‘N Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S.
189, 194 (1985)). If differing views as to meaning were reasonable at the time of
53
Section 546(e)’s enactment, its meaning is less than plain. See, e.g., Rodriguez v.
Cuomo, 953 F.2d 33, 39-40 (2d Cir. 1992).
Appellants’ arguments on meaning rely not only on the reference to a
trustee’s et al. powers but equally, or more so, on a claim of settled law at the
time of Section 546(e)’s enactment that creditors’ avoidance rights not only revert
to creditors but also revert in their original breadth. However, whether
fraudulent conveyance claims revert as a matter of law upon a trustee’s failure to
act was, both at the time Section 546(e) was passed as well as now, unclear, as
discussed supra. A contemporaneous reader would not, therefore, necessarily
have believed it plain that Section 546(e)’s reference only to a trustee’s et al.
avoidance claim meant that creditors could bring their own claims.14
A contemporaneous reader would also notice that the language of the
automatic stay provision does not literally apply to appellants’ actions and that
no provision for the reversion of claims vested in the trustee et al. by Section 544
exists. As explained supra, having to draw an inference of reversion of rights
from that provision’s statute of limitations might well have appeared as a leap
several bridges too far to such a reader. Indeed, the vesting of avoidance claims
14
Our task of determining how a contemporaneous reader would have read Section
546(e) does not depend on the caselaw of one particular circuit.
54
in the trustee et al., the lack of applicable language in the automatic stay
provision, and the lack of a statutory basis for reversion might well have
suggested to such a reader that Section 544’s vesting of avoidance proceedings in
the trustee et al. cut off creditors from any avoidance rights other than a share of
the proceeds in bankruptcy.
Even passing these obstacles, the structure of the Code and the relationship
of its pertinent sections might have suggested to a contemporaneous reader that
altered rights do not revert to creditors unaltered, or to put it another way, a
trustee et al. cannot pass on, or “allow” to revert through passivity, a right the
trustee et al. does not have. To be sure, contemporaneous readers might have
taken other views, including those of appellants, but that is the very definition of
ambiguity.
(iv) Conclusion
We need not resolve these issues or even hold that the lack of statutory
support, ambiguities, anomalies, or conflicts with purposes of the Code are
sufficient to support a preemption holding. They are sufficient, however, to
dispel the suggestions found in some discussions of these issues of a clear textual
basis for appellants’ theory in the Code and an overall consistency with
55
congressional purpose. See In re Lyondell Chem. Co., 503 B.R. 348, 358-59
(Bankr. S.D.N.Y. 2014) as corrected (Jan. 16, 2014); In re: Tribune Co. Fraudulent
Conveyance Litig., 499 B.R. at 315. We also need not issue a decision that affects
fraudulent conveyance actions brought by creditors whose claims are not subject
to Section 546(e). Our ensuing discussion concludes that the purposes and
history of that Section necessarily reflect an intent to preempt the claims before
us. We turn now to the conflict between those claims and Section 546(e).
5. Conflict with Section 546(e)
As discussed supra, the meaning of Section 546(e) with regard to
appellants’ rights to bring the actions before us is ambiguous. We must,
therefore, look to its language, legislative history, and purposes to determine its
effect. Marvel Characters, Inc. v. Simon, 310 F.3d 280, 290 (2d Cir. 2002). Every
congressional purpose reflected in Section 546(e), however narrow or broad, is in
conflict with appellants’ legal theory. Their claims are, therefore, preempted.
Section 546(e) was intended to protect from avoidance proceedings
payments by and to commodities and securities firms in the settlement of
securities transactions or the execution of securities contracts. The method of
settlement through such entities is essential to securities markets. Payments by
56
and to such entities provide certainty as to each transaction’s consummation,
speed to allow parties to adjust the transaction to market conditions, finality with
regard to investors’ stakes in firms, and thus stability to financial markets. See
H.R. Rep. No. 97-420 (1982); H.R. Rep. No. 95-595 (1977). Unwinding settled
securities transactions by claims such as appellants’ would seriously undermine -
- a substantial understatement -- markets in which certainty, speed, finality, and
stability are necessary to attract capital. To allow appellants’ claims to proceed,
we would have to construe Section 546(e) as achieving the opposite of what it
was intended to achieve.
Allowing creditors to bring claims barred by Section 546(e) to the trustee et
al. only after the trustee et al. fails to exercise powers it does not have would
increase the disruptive effect of an unwinding by lengthening the period of
uncertainty for covered entities and investors. Indeed, the idea of preventing a
trustee from unwinding specified transactions while allowing creditors to do so,
but only later, is a policy in a fruitless search of a logical rationale.
The narrowest purpose of Section 546(e) was to protect other commodities
and securities firms from avoidance claims seeking to unwind a bankrupt
commodities or securities firm’s transactions that consummated transfers
57
between customers. See H.R. Rep. No. 97-420, at 1 (1982) (“The commodities and
securities markets operate through a complex system of accounts and guarantees.
Because of the structure of the clearing systems in these industries and the
sometimes volatile nature [of] the markets, certain protections are necessary to
prevent the insolvency of one commodity or security firm from spreading to
other firms and possibl[y] threatening the collapse of the affected market.”). It
must be emphasized that appellants’ legal theory would clearly allow such
claims to be brought (later) by creditors of the bankrupt firm. Even the
narrowest purpose of Section 546(e) is thus at risk.
Some judicial and other discussions of these issues avoid addressing the
full effects of adopting appellants’ arguments. See In re Lyondell Chem. Co., 503
B.R. 348, 359-78 (Bankr. S.D.N.Y. 2014) as corrected (Jan. 16, 2014). Such analysis
always begins by reliance on the “trustee” language, id. at 358, but then narrows
the scope of the transfers covered by Section 546(e)’s language. For example,
appellants argue that the concerns of the amicus curiae Securities and Exchange
Commission regarding the effect of the district court’s decision on the securities
markets are misplaced, because appellants are not seeking money from the
58
intermediaries.15 Resp. & Reply Br. of Pls.-Appellants Cross-Appellees 78-82. In
doing so, they rely upon the Lyondell opinion, which, after relying on the
“trustee” language, held that Section 546(e) is not preemptive of state law,
fraudulent conveyance actions involving LBOs because such actions do not
implicate the purposes of Section 546(e). 503 B.R. at 372-73.
There is no little irony in putting lynchpin reliance on the word “trustee”
while ignoring the language that follows. In any event, for the reasons stated
above, Section 546(e)’s language is broad enough under certain circumstances to
cover a bankrupt firm’s LBO payments even where, as here, that firm’s business
was primarily commercial in nature. 11 U.S.C. § 546(e) (limitations on avoidance
of transfers made by a “customer” of a financial institution “in connection with a
securities contract”). A search for legislative purpose is heavily informed by
language, and analyzing all the language of a provision and its relationship to the
Code as a whole is preferable to using literalness here and perceived legislative
purpose (without regard to language) where as needed to reach particular
15
Under the “Collapsing Doctrine,” “[c]ourts analyzing the effect of LBOs have
routinely analyzed them by reference to their economic substance, ‘collapsing’ them, in many
cases, to consider the overall effect of multi-step transactions.” In re Lyondell Chem. Co., 503
B.R. 348, 354, 379 (Bankr. S.D.N.Y. 2014) as corrected (Jan. 16, 2014). Monies passed through
intermediaries are deemed to be the property only of the ultimate recipients, here the cashed
out shareholders.
59
results. See King v. Burwell, 135 S. Ct. 2480, 2489 (2015) (“[O]ftentimes the
meaning -- or ambiguity -- of certain words or phrases may only become evident
when placed in context. So when deciding whether the language is plain, we
must read the words in their context and with a view to their place in the overall
statutory scheme. Our duty, after all, is to construe statutes, not isolated
provisions.”) (internal quotation marks and citations omitted).
We do not dwell on this because we perceive no conflict between Section
546(e)’s language and its purpose. Section 546(e) is simply a case of Congress
perceiving a need to address a particular problem within an important process or
market and using statutory language broader than necessary to resolve the
immediate problem. Such broad language is intended to protect the process or
market from the entire genre of harms of which the particular problem was only
one symptom. The legislative history of Section 546(e) clearly reveals such a
purpose. That history (confirmed by the broad language adopted) reflects a
concern over the use of avoidance powers not only after the bankruptcy of a
commodities or securities firm, but also after a “customer” or “other participant”
in the securities markets enters bankruptcy. See H.R. Rep. No. 97-420 (1982). To
be sure, the examples used by the Section’s proponents focused on the immediate
60
concern of creditors of bankrupt brokers seeking to unwind payments by the
bankrupt firm to other brokers. Id. Such actions were perceived as creating a
danger of “a ripple effect,” id., a chain of bankruptcies among brokers disrupting
the securities market generally. From these examples, appellants, and others,
have argued that when monetary damages are sought only from shareholders, or
an LBO is involved, the purposes of Section 546(e) are not implicated. See Resp.
& Reply Br. of Pls.-Appellants-Cross-Appellees 79; In re Lyondell, 503 B.R. at 358-
59. Even apart from using the oil and water mixture of applying a narrow
literalness to the word “trustee” and disregarding the rest of the Section’s
language, we disagree.
As courts have recognized, Congress’s intent to “minimiz[e] the
displacement caused in the commodities and securities markets in the event of a
major bankruptcy affecting those industries,” Quebecor, 719 F.3d at 100 (quoting
Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329, 333 (2d Cir.
2011)), reflected a larger purpose memorialized in the legislative history’s
mention of bankrupt “customers” or “other participant[s]” and in the broad
statutory language defining the transactions covered. That larger purpose was to
“promot[e] finality . . . and certainty” for investors, by limiting the circumstances,
61
e.g., to cases of intentional fraud, under which securities transactions could be
unwound. In re Kaiser Steel Corp., 952 F.2d 1230, 1240 n.10 (10th Cir. 1991)
(quoting H. Rep. No. 484, 101st Cong. 2d Sess. 2 (1990), reprinted in 1990
U.S.C.C.A.N. 223, 224).
The broad language used in Section 546(e) 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. See Bankruptcy of
Commodity and Securities Brokers: Hearings Before the Subcomm. on
Monopolies and Commercial Law of the Comm. on the Judiciary, 47th Cong. 239
(1981) (statement of Bevis Longstreth, Commissioner, SEC) (explaining that,
without 546(e), the Bankruptcy Code’s “preference, fraudulent transfer and stay
provisions can be interpreted to apply in harmful and costly ways to customary
methods of operation essential to the securities industry”). As noted, central to a
highly efficient securities market are methods of trading securities through
commodities and securities firms. Section 546(e)’s protection of the transactions
consummated through these entities was not intended as protection of politically
favored special interests. Rather, it was sought by the SEC –- and corresponding
provisions by the CFTC, see Bankruptcy Act Revision: Hearings on H.R. 31 and
62
H.R. 32 Before the Subcomm. on Civil & Constitutional Rights of the H. Comm.
on the Judiciary, 94th Cong., Supp. App. Pt. 4, 2406 (1976) -- in order to protect
investors from the disruptive effect of after-the-fact unwinding of securities
transactions.
A lack of protection against the unwinding of securities transactions would
create substantial deterrents, limited only by the copious imaginations of able
lawyers, to investing in the securities market. The effect of appellants’ legal
theory would be akin to the effect of eliminating the limited liability of investors
for the debts of a corporation: a reduction of capital available to American
securities markets.
For example, all investors in public companies would face new and
substantial risks, if appellants’ theory is adopted. At the very least, each would
have to confront a higher degree of uncertainty even as to the consummation of
securities transfers. The risks are not confined to the consummation of securities
transactions. Pension plans, mutual funds, and similar institutional investors
would find securities markets far more risky if exposed to substantial liabilities
derived from investments in securities sold long ago. If appellants were to
prevail, a pension plan whose position in a firm was cashed out in a merger
63
might have to set aside reserves in case the surviving firm went bankrupt and
triggered avoidance actions based on a claim that the cash out price exceeded the
value of the shares. Every economic downturn could expose such institutional
investors not only to a decline in the value of their current portfolios but also to
claims for substantial monies received from mergers during good times.
Given the occasional volatility of economic events, any transaction buying
out shareholders would risk being attacked as a fraudulent conveyance avoidable
by creditors if the firm faltered. Appellants’ legal theory could even reach
investors who, after voting against a merger approved by other shareholders,
were involuntarily cashed out. Tender offers, which almost always involve a
premium above trading price, Lynn A. Stout, Are Takeover Premiums Really
Premiums? Market Price, Fair Value, and Corporate Law, 99 Yale L.J. 1235, 1235
(1990), would imperil cashed out shareholders if the surviving entity
encountered financial difficulties.
If appellants’ theory was adopted, individual investors following a
conservative buy-and-hold strategy with a diversified portfolio designed to
reduce risk might well decide that such a strategy would actually increase the
risk of crushing liabilities. Such a strategy is adopted because it involves low
64
costs of monitoring the prospects of individual companies and emphasizes the
offsetting of unsystematic risks by investing in multiple firms. See Leigh v.
Engle, 858 F.2d 361, 368 (7th Cir. 1988). Appellants’ legal theory might well
require costly and constant monitoring by investors to rid their portfolios of
investments in firms that might, under then-current circumstances, be subject to
mergers, stock buy-backs, or tender offers (and would otherwise be good
investments). Investing in multiple companies, the essence of diversification,
would increase the danger of avoidance liability.
The threat to investors is not simply losing a lawsuit. Given the costliness
of defending such legal actions and the long delay in learning their outcome,
exposing investors to even very weak lawsuits involving millions of dollars
would be a substantial deterrent to investing in securities. The need to set aside
reserves to meet the costs of litigation -- not to mention costs of losing -- would
suck money from capital markets.
As noted, concern has been expressed that LBOs are different from other
transactions in ways pertinent to the Bankruptcy Code. In re Lyondell Chem.
Co., 503 B.R. 348, 354, 358-59 (Bankr. S.D.N.Y. 2014), as corrected (Jan. 16, 2014).
65
However, the language of Section 546(e) clearly covers the LBO payments at
issue here for the reasons stated above.
Moreover, securities markets are heavily regulated by state and federal
governments. The statutory supplements used in law school securities regulation
courses are thick enough to rival Kevlar in stopping bullets. Mergers and tender
offers are among the most regulated transactions. See, e.g., Williams Act, 15
U.S.C.A. §§ 78m(d)-(e), 78n(d). Much of the content of state and federal
regulation is designed to protect investors in such transactions. Much of that
content is also designed to maximize the payout to shareholders cashed out in a
merger, see, e.g., Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d
173, 182 (Del. 1986); Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955-56
(Del. 1985), or accepting a tender offer, see Williams Act, 15 U.S.C.A. §§ 78m(d)-
(e), 78n(d). Appellants’ legal theory would allow creditors to seek to portray that
maximization as evidence supporting a crushing liability. A legal rule
substantially undermining those goals of state and federal regulation –- again,
one akin to eliminating limited liability –- is a systemic risk.
It is also argued that the Bankruptcy Code has many different purposes
and that Section 546(e) does not clearly “trump[] all [the] other[s].” In re Tribune
66
Co. Fraudulent Conveyance Litig., 499 B.R. 310, 317 (S.D.N.Y. 2013). The
pertinent -- and “trumping” -- “other” purpose of the Code is said to be the
maximization of assets available to creditors. Id. Courts customarily
accommodate statutory provisions in tension with one another where the
principal purpose of each is attainable by limiting each in achieving secondary
goals. See, e.g., In re Colonial Realty Co., 980 F.2d 125, 132 (2d Cir. 1992).
However, Section 546(e) is in full conflict with the goal of maximizing the assets
available to creditors. Its purpose is to protect a national, heavily regulated
market by limiting creditors’ rights. Conflicting goals are not accommodated by
giving value with the right hand and taking it away with the left. Section 546(e)
cannot be trumped by the Code’s goal of maximizing the return to creditors
without thwarting the Section’s purposes.
6. Additional Considerations Regarding Congressional Intent
We therefore conclude that Congress intended to protect from constructive
fraudulent conveyance avoidance proceedings transfers by a debtor in
bankruptcy that fall within Section 546(e)’s terms. As discussed supra,
appellants’ theory hangs on the ambiguous use of the word “trustee,” has no
basis in the language of the Code, leads to substantial anomalies, ambiguities and
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conflicts with the Code’s procedures, and, most importantly, is in irreconcilable
conflict with the purposes of Section 546(e). In this regard, we do not ignore
Section 544(b)(2), which prohibits avoidance of a transfer to a charitable
contribution by a trustee but also expressly preempts state law claims by
creditors. It states: “Any claim by any person to recover a transferred
contribution described in the preceding sentence under Federal or State law in a
Federal or State court shall be preempted by the commencement of the case.” 11
U.S.C. § 544(b)(2). Appellants rely heavily upon this provision to argue that,
while Congress knew how to explicitly preempt state law in the Bankruptcy
Code, it chose not to do so in the context of Section 546(e).
Appellants’ argument suffers from a fatal flaw, however. In Arizona v.
United States, the Supreme Court made clear that “the existence of an express
pre-emption provisio[n] does not bar the ordinary working of conflict pre-
emption principles or impose a special burden that would make it more difficult
to establish the preemption of laws falling outside the clause.” 132 S. Ct. 2492,
2504-05 (2012) (quotation marks and citations omitted); see also Hillman, 133 S.
Ct. at 1954 (“[W]e have made clear that the existence of a separate pre-emption
provision does not bar the ordinary working of conflict pre-emption principles.”)
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(internal quotation marks and citations omitted). Section 544(b)(2) does not,
therefore, undermine our conclusion as to Congress’s intent.
Next, appellants argue that Congress’s failure to amend Section 546(e) over
the years that it has existed in pertinent form reflects a congressional intent to
allow their actions to proceed. In support, they point only to requests for an
amendment by the Chair of the CFTC and by Comex, see Bankruptcy Act
Revision: Hearings on H.R. 31 and H.R. 32 Before the Subcomm. on Civil &
Constitutional Rights of the H. Comm. on the Judiciary, 94th Cong., Supp. App.
Pt. 4, 2406 (1976); Bankruptcy Reform Act: Hearings on S. 2266 and H.R. 8000
Before the Subcomm. on Improvements in Judicial Machinery of the S. Comm. on
the Judiciary, 95th Cong. 1297 (1978), the enactment of Section 544(b)(2) with an
express preemption provision, and a decision in the District of Delaware, PHP
Liquidating, LLC v. Robbins, 291 B.R. 603, 607 (D. Del. 2003), aff’d sub nom. In re
PHP Healthcare Corp., 128 F. App’x 839 (3d Cir. 2005).
To be sure, a history of relevant practice may support an inference of
congressional acquiescence. See, e.g., Fiero v. Fin. Indus. Regulatory Auth., 660
F.3d 569, 577 (2d Cir. 2011) (noting that FINRA’s “longstanding reliance” on
enforcement mechanisms other than fines -- and Congress’s failure to alter
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FINRA’s enforcement powers -- “indicates that FINRA is not authorized to
enforce the collection of its fines through the courts”); Am. Tel. & Tel. Co. v. M/V
Cape Fear, 967 F.2d 864, 872 (3d Cir. 1992) (“The Supreme Court in the past has
implied private causes of action where Congress, after a ‘consensus of opinion
concerning the existence of a private cause of action’ had developed in the
federal courts, has amended a statute without mentioning a private remedy.”)
(quoting Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 380
(1982)). However, the effect or meaning of legislation is not to be gleaned from
isolated requests for more protective, but possibly redundant, legislation. The
impact of Section 544(b)(2) is discussed immediately above and need not be
repeated here.
Finally, the failure of Congress to respond to court decisions is of
interpretive significance only when the decisions are large in number and
universally, or almost so, followed. See Merrill Lynch, 456 U.S. at 379 (holding
that congressional amendment of the Commodity Exchange Act that was silent
on the subject of private judicial remedies did not overturn federal court
decisions routinely and consistently [] recogniz[ing] an implied private cause of
action”) (emphasis added); see also Touche Ross & Co. v. Redington, 442 U.S.
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560, 577 n.19 (1979) (holding that the Supreme Court’s implication of a private
right of action under § 10(b) of the Securities and Exchange Act of 1934 was
simply acquiescence in “the 25-year-old acceptance by the lower federal courts of
an implied action”). The present decision is far from a departure from a
generally accepted understanding. The district court decision in this very case
and the bankruptcy court decision in Lyondell are in fact the sole extensive
judicial discussions of the issue. Indeed, our present decision does not even
constitute a split among the circuits. As or more telling with regard to the
existence of a general understanding or a need for action, we find no history of
the use of state law, constructive fraudulent conveyance actions to unwind
settled securities transactions, either after a bankruptcy or in its absence.
The Constitution’s establishment of two legislative branches that must act
jointly and with the executive’s approval was designed to render hasty action
possible only in circumstances of widely perceived need. Congress’s failure to
act must be viewed in that context, and reliance upon an inference of satisfaction
with the status quo must at least be based on evidence of a long-standing and
recognized status quo. In the present matter, we cannot draw the suggested
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inference on the basis of the skimpy evidence submitted while the inference of a
preemptive intent is easily drawn.
7. The Relevance of Merit Mgmt. to this Preemption Holding
Appellants finally contend that this preemption holding “cannot be
reconciled” with the Supreme Court’s decision in Merit Mgmt. Appellants’
Motion to Recall the Mandate at 10. Again, we disagree. As an initial matter, the
Merit Mgmt. Court was not tasked with assessing Section 546(e)’s preemptive
force, and it did not address preemption. Instead, the sole issue in Merit Mgmt.
was whether, “in the context of a transfer that was executed via one or more
transactions,” the relevant transfer for the purposes of Section 546(e) was the
overarching transfer or any of its component transfers. Merit Mgmt., 138 S. Ct. at
888. Accordingly, Merit Mgmt. does not control our disposition of the
preemption issue.
Nor have we located anything in Merit Mgmt.’s reasoning that contradicts
our assessment of Congress’s preemptive intent. Appellants suggest that the
Supreme Court rejected a primary premise upon which we have relied here: that
Section 546(e) was intended to promote “‘finality’ in the securities markets.”
Appellants’ Motion to Recall the Mandate at 10-11. The Court did no such thing,
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however. Instead, it merely concluded that, to the extent the policies animating
Section 546(e) were relevant for determining the safe harbor’s scope, those
policies did not supply a basis for “deviat[ing] from the plain meaning of the
language used in § 546(e).” Merit Mgmt., 138 S. Ct. at 897; see also id. at 888
(“The Court concludes that the plain meaning of § 546(e) dictates that the only
relevant transfer for purposes of the safe harbor is the [overarching] transfer that
the trustee seeks to avoid.”).
Also, the failures of the “purposivist arguments” in Merit Mgmt., id. at 897,
are not particularly instructive here due to the distinctions between the inquiries
here and there. The Supreme Court has repeatedly held that where, as in Merit
Mgmt., courts are interpreting the meaning of a statutory provision, they should
not allow extrinsic evidence of Congressional purpose to alter the plain meaning
of the statute. See, e.g., Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718,
1725 (2017) (“[I]t is quite mistaken to assume . . . that whatever might appear to
further the statute’s primary objective must be the law.”) (internal quotation
marks and alterations omitted); Dodd v. United States, 545 U.S. 353, 357 (2005)
(“We must presume that the legislature says in a statute what it means and
means in a statute what it says there.”) (internal quotation marks and alterations
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omitted). But where, as here, we are assessing whether a statute preempts
certain claims, we have been directed to consult evidence of Congressional
purpose to ascertain whether the statute has a preemptive effect beyond that
provided by its plain terms. See, e.g., Altria Grp., Inc. v. Good, 555 U.S. 70, 76
(2008) (“Congress may indicate pre-emptive intent through a statute’s express
language or through its structure and purpose. [Even where] a federal law
contains an express pre-emption clause, it does not immediately end the inquiry
because the question of the substance and scope of Congress’ displacement of
state law still remains.”) (internal citations omitted) (emphasis added). Thus, in
light of these different directives, it is clear that a “purposivist” argument should
carry far more weight in this case than in Merit Mgmt.
Finally, it bears emphasizing that the other reasons underpinning our
preemption holding are not implicated by Merit Mgmt. in any way. Specifically,
Merit Mgmt. does not contradict our findings that appellants’ legal theory has no
support in the language of the Code; leads to substantial anomalies and conflicts
with the Code’s procedures; and requires reading Section 546(e)’s reference to a
trustee et al. avoidance claim to mean that creditors could bring their own claims
–- a reading that is less than plain.
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For these reasons, we find that our preemption holding is consistent with
Merit Mgmt.
CONCLUSION
For the reasons stated, we affirm the dismissal of appellants’ claims, on
preemption rather than standing grounds. We resolve no issues regarding the
rights of creditors to bring state law, fraudulent conveyance claims not limited in
the hands of a trustee et al. by Code Section 546(e) or by similar provisions such
as Section 546(g), which was at issue in an appeal heard in tandem with the
present matter, see Whyte v. Barclays Bank PLC, 644 F. App’x 60, 60 (2d Cir.
2016) (affirming the district court’s dismissal of state law, fraudulent conveyance
claims limited by Section 546(g) “for substantially the reasons stated in [Tribune
I]”), cert. denied, 137 S. Ct. 2114 (2017).
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