Second Circuit Limits Creditors’ Ability to Claw Back LBO Payments

May 05, 2016

A recent decision by the U.S. Court of Appeals for the Second Circuit, In re Tribune Company Fraudulent Conveyance Litigation,1 represents a significant victory for shareholders who may get cashed out in connection with a leveraged transaction that precedes a company bankruptcy.

As background, in connection with a leveraged buyout (LBO), the shareholders of a public company are often required to sell their shares in return for a cash payment. In the event that the company ultimately goes bankrupt, the shareholders could be subject to constructive fraudulent conveyance claims by the bankrupt company’s trustee, who will seek to “claw back” the money that the shareholders received. Recognizing that these sorts of claims could lead to significant disruption in the securities markets, Congress passed Section 546(e) of the Bankruptcy Code.2 That section precludes trustees from bringing federal constructive fraudulent conveyance claims based upon shareholders’ receipt of cash in return for their shares. \

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