Tendering Phones Holders, et al. v. Large Private Benefecial Owners, et al. (In re Tribune Company Fraudulent Conveyance Litigation)

2016 U.S. App. LEXIS 5787 (2d Cir. N.Y. Mar. 29, 2016)
The Second Circuit addressed 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 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). The Second Circuit held that appellants were 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 but nevertheless affirmed holding that appellants' claims were preempted by Section 546(e), which shields from avoidance proceedings brought by a bankruptcy trustee transfers by or to financial intermediaries effectuating settlement payments in securities transactions or made in connection with a securities contract, except through an intentional fraudulent conveyance claim
Procedural context:
Representatives of certain unsecured creditors of the Chapter 11 debtor Tribune Company ("Appellants") appealed from the granting of a motion to dismiss their state law, constructive fraudulent conveyance claims brought against Tribune's former shareholders. Appellants appealed the district court's dismissal for lack of statutory standing, and appellees cross-appealed from the district court's rejection of their argument that Appellants' claims were preempted.
Representatives of certain unsecured creditors of the Chapter 11 debtor Tribune Company brought an action seeking to recover an amount sufficient to satisfy Tribune's debts to them by avoiding and recovering payments by Tribune to shareholders that purchased all of its stock under a leveraged buyout (LBO). The payments the unsecured creditors sought to recover occurred in connection with the LBO and were processed through securities intermediaries. Shortly after the LBO, Tribune filed for bankruptcy under Chapter 11. The Court concluded 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. The Court noted that 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. The Court went on to note that Section 546(e)'s protection of the transactions consummated through intermediaries was not intended as protection of politically favored special interests. Rather, it was sought by the SEC -- and corresponding provisions by the CFTC - in order to protect investors from the disruptive effect of after-the-fact unwinding of securities transactions. The Court found in favor of preemption concluding that 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.
WINTER, DRONEY, Circuit Judges, and HELLERSTEIN, District Judge

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