A “Meritorious” Defense: In re Tribune Co. Fraudulent Conveyance Litigation
As reported in a previous Stroock Special Bulletin, the United States Supreme Court, in its 2018 decision in Merit Management Group, LP v. FTI Consulting, Inc., limited the avoidance defense contained in Section 546(e) of the Bankruptcy Code in certain situations involving a traditional financial institution acting merely as a conduit, rather than a principal, in a transaction. As we reported, the Court’s ruling was guided by the appellant’s failure to argue that it (or the debtor) was a “financial institution” as that term is used in the Bankruptcy Code, by virtue of being a “customer” of a traditional financial institution. That issue has now been raised in litigation arising out of the Tribune Company bankruptcy, leading the Southern District of New York to rule that transfers to shareholders in a leveraged buyout transaction were protected under section 546(e) by virtue of Tribune’s status as a customer of the financial institution it hired to repurchase shares in connection with the LBO.
Section 546(e) exempts margin payments, settlement payments and other transfers from avoidance as a preference or constructive fraudulent conveyance when they were made “in connection with a securities contract” and by or to (or for the benefit of) certain protected parties, including a “financial institution,” defined in the Bankruptcy Code as:
a Federal reserve bank, or an entity that is a commercial or savings bank, industrial savings bank, savings and loan association, trust company, federally-insured credit union, or receiver, liquidating agent, or conservator for such entity and, when any such Federal reserve bank, receiver, liquidating agent, conservator or 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.
In Merit, the Supreme Court held that the mere presence of a traditional financial institution acting as a conduit in a transaction did not insulate the transaction from avoidance where the principals in the transaction were not themselves parties protected under section 546(e). The Supreme Court noted that neither party had raised the issue of whether the debtor or the petitioner was itself a financial institution, and accordingly, the Court would “not address what impact, if any, §101(22)(A) would have in the application of the §546(e) safe harbor.”
In connection with the Tribune LBO, Tribune repurchased its outstanding shares, using Computershare Trust Company (“CTC”) to implement a tender offer, hold the tendered shares, and pay the tendering shareholders $34 per share, acting as “Depositary” and “Exchange Agent” in connection with these repurchases. The Tribune bankruptcy estate subsequently sought to avoid and recover these payments, and in the wake of the Merit decision, the Tribune Litigation Trustee (“Trustee”) renewed a request to amend the complaint to add constructive fraudulent transfer claims against the shareholder defendants. The district court concluded that section 546(e) immunized the transfers from avoidance as constructively fraudulent, and the Trustee’s motion to amend was denied.
Applying a plain meaning analysis of Section 101(22)(A), the court concluded that Tribune qualified as a “financial institution,” because it was a customer of CTC, and CTC was acting for its customer as agent or custodian in connection with a securities contract.  While the term “customer” was not defined, its plain meaning referred to a purchaser of services, and here Tribune had retained CTC to act as depositary in connection with the tender offer. CTC clearly was acting as Tribune’s agent in the transaction, the court describing it as “a paradigmatic principal-agent relationship.” CTC’s services were provided in connection with a contract for purchase of securities, falling well within the Bankruptcy Code’s definition of a “securities contract.” Lastly, the court rejected the Trustee’s suggestion that so holding would run counter to the spirit of the Merit decision; rather, there was no tension between the two outcomes because the Supreme Court had specifically declined to consider the scope of the financial institution definition as the issue had not been raised before it.
Prior to the Merit decision, a number of courts, including the Second Circuit Court of Appeals, had extended section 546(e) to include situations where a bank acted merely as a conduit in a securities transaction. The Tribune decision demonstrates that after Merit, it is possible to reach the same result, but on a more solid footing based on the plain language of the statute.
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|Mark A. Speiser||Harold A. Olsen|
 Stroock Special Bulletin, “Why it Pays to Read the Definitions Carefully: Merit Management Group, LP v. FTI Consulting, Inc.” March 5, 2018.
 Merit Management Group, LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018).
 In re Tribune Co. Fraudulent Conveyance Litigation, No. 11md2296 (DLC), 2019 WL 1771786 (April 23, 2019).
 11 U.S.C. § 101(22)(A) (emphasis added).
 Merit, 138 S. Ct. at 890, n.2 (internal citations omitted).
 It was undisputed that CTC was itself a “bank” and a “trust company” and that the challenged transfers were settlement payments made by Tribune in connection with a securities contract.
 The Trustee argued that “customer” should be interpreted in light of the narrow uses of that term in sections 741 and 761 of the Bankruptcy Code, but the court noted that the use of the term in section 101(22)(A) is expressly broader than those more limited definitions.
 Tribune, 2019 WL 1771786 at *11.
 See, e.g., In re Quebecor World (USA) Inc., 719 F.3d 94, 100 (2d Cir. 2013).