Recently, in In re Tribune Co. Fraudulent Conveyance Litig., 2016 WL 1226871 (March 29, 2016), the Second Circuit held that 11 U.S.C. § 546(e) preempts state law constructive fraudulent conveyance claims brought by creditors even though the text of § 546(e) mentions only trustees. The court thought it unwise to focus exclusively on § 546(e)’s limitation to trustees in ignorance of its context and legislative history. Using those indicia of meaning, the court concluded that the statute’s purpose is to insulate securities markets from avoidance proceedings, and that allowing creditors to assert state law constructive fraudulent conveyance claims would frustrate that purpose. Accordingly, it held such claims preempted.
Weil Gotshal, Shearman & Sterling and Mintz Levin believe the decision properly forecloses creditors from circumventing § 546(e) by either suing individually under state fraudulent conveyance laws or assigning their claims to the trustee. According to these firms, the decision thus reinforces equitable distributions because it prevents creditors from enhancing their individual recoveries.
Latham & Watkins, on the other hand, believes the decision’s “sweeping” language leaves creditors “stranded at sea” and doubts other circuits will join the Second Circuit’s expansive interpretation. Caplin & Drysdale agrees that the court went too far. “Any untoward consequences threatened by the simultaneous prosecution of claims by a trustee and creditors,” the firm explains, “could be prevented by a Section 105(a) injunction.”
Meanwhile, according to Freshfields, Schulte Roth, and Paul, Weiss, the decision merely reaffirms the Second Circuit’s commitment––announced in Enron and Quebecor––to expansive interpretations of the Bankruptcy Code’s safe harbors.