Second Circuit Paves a Way to Protect LBO Payments from Avoidance Actions

January 21, 2020

The Second Circuit Court of Appeals recently held in In re Tribune Company Fraudulent Conveyance Litigation, No. 13-3992-cv (L) (2d Cir., Dec. 19, 2019) that Bankruptcy Code Section 546(e) barred claims seeking to avoid payments made by Tribune to its shareholders as part of a leveraged buyout (LBO). The Section 546(e) safe harbor bars avoidance of certain types of transfers that are made by, to or for the benefit of certain entities, including a “financial institution.” The Bankruptcy Code defines “financial institution” to include certain banks, and when such banks act as an agent or custodian for a customer in connection with a securities contract, the customer is deemed to be a financial institution as well. The Second Circuit held that Tribune qualified as a “financial institution” because a bank and trust company acted as Tribune’s agent in making payments to the shareholders who tendered their shares in the LBO.


In 2007, billionaire investor Samuel Zell 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 Tribune’s pre-existing bank debt and cash out its shareholders for over $8 billion. Tribune transferred the funds to Computershare Trust Company, which acted as Tribune’s agent and paid the funds to the tendering shareholders in exchange for their shares that were then returned to Tribune.  

In 2008, Tribune and nearly all of its subsidiaries filed for bankruptcy under Chapter 11. Certain unsecured creditors sought to avoid the payments made to Tribune’s former shareholders in connection with the LBO and filed state law, constructive fraudulent conveyance claims in various federal and state courts. The creditors argued that the payments were for more than the reasonable value of the shares and made when Tribune was in distressed financial condition. The district court dismissed the creditors’ claims on standing grounds.  

Tribune I 

In a prior opinion, the Second Circuit affirmed the lower court’s dismissal, but on the ground that Section 546(e) preempts fraudulent conveyance actions brought to recover payments protected from avoidance by Section 546(e). At that time, it was the law in the Second Circuit that the payments to Tribune’s former shareholders fell within Section 546(e) because entities covered by Section 546(e), i.e. banks, had served as intermediaries.  

The creditors petitioned for certiorari. While that petition was pending, the Supreme Court in Merit Management rejected the Second Circuit’s (and the majority of the other Circuits) interpretation of Section 546(e)’s scope and held that Section 546(e) does not protect transfers where the financial institutions served as “mere conduits.”  

In Merit Management, however, the parties did not argue, and the Supreme Court specifically noted that it did not address, the possibility that the transferor or the transferee qualified as a financial institution because it was the customer of a financial institution acting for it as an agent or custodian. This is the issue that the Second Circuit addressed in Tribune

Tribune II

The issue for the Second Circuit in reviewing its prior opinion was whether, in the aftermath of Merit Management, Tribune’s payments to former shareholders remained subject to Section 546(e). Under Merit Management, the payments at issue would be subject to Section 546(e) only if Tribune (who made the payments) or the shareholders (who received the payments) qualified as a financial institution or other covered entity under the statute.  

The Court found that Tribune, as transferor, qualified as a financial institution since it was a customer of Computershare, a bank and trust company, which acted for Tribune as a depository and paying agent in connection with the LBO’s tender offer. The Court explained that since the Bankruptcy Code does not define the term “customer” for Section 741 purposes, it must give the term its ordinary meaning. The Court looked to Black’s Law Dictionary and other precedents holding that the ordinary definition of customer is “someone who buys goods or services,” or “a person … for whom a bank has agreed to collect items.” Under this plain meaning, the Second Circuit found that Computershare was clearly Tribune’s agent since it agreed to collect the tendered shares and Tribune bought Computershare’s services by retaining it to act as its depository. 

The Second Circuit also found Computershare to be Tribune’s agent applying the common law meaning of the term. At common law, agency requires the principal’s manifestation of intent to grant authority to the agent, the agent’s acceptance and the principal’s maintenance of control over key aspects of the undertaking. These elements were satisfied as Tribune granted Computershare authority by depositing the aggregate purchase price and entrusted it with paying the tendering shareholders. Computershare obviously accepted the assignment by taking the funds and performing its obligations.  Lastly, Tribune maintained control over key aspects as it maintained the discretion to accept shares that were properly tendered and was required to direct Computershare to pay properly tendering shareholders. Since Computershare, an undisputed financial institution, acted as Tribune’s agent, Tribune itself qualified as a financial institution.  


Commentators and practitioners alike were of the view that Merit Management’s limitation of the scope of the Section 546(e) safe harbor may prove fleeting in light of the parties’ failure to argue, and the resulting Supreme Court’s refusal to consider, the implication of the “customer” element to the “financial institution” definition. The Second Circuit’s Tribune opinion appears to support that view.  

Read the opinion >> 

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