Holders v. Large Private Beneficial Owners (In re Tribune Co. Fraudulent Conveyance Litig.)

818 F.3d 98

In re TRIBUNE COMPANY FRAUDULENT CONVEYANCE LITIGATION.

Note Holders, Deutsche Bank Trust Company Americas, Law Debenture Trust Company of New York, Wilmington Trust Company, Individual Retirees, William A. Niese, on behalf of a putative class of Tribune Company retirees, Plaintiffs–Appellants–Cross–Appellees,

Mark S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust, Plaintiff,

Tendering Phones Holders, Citadel Equity Fund Ltd., Camden Asset Management LLP and certain of their affiliates, Plaintiffs–Intervenors,

v.Large Private Beneficial Owners, Financial Institution Holders, Financial Institution Conduits, Merrill Lynch, Pierce, Fenner & Smith, Inc., on behalf of a putative class of former Tribune Company shareholders, Pension Funds, including public, private, and Taft Hartley Funds, Individual Beneficial Owners, Mario J. Gabelli, on behalf of a putative class of former Tribune Company shareholders, Mutual Funds, At–Large, Estate of Karen Babcock, Phillip S. Babcock, Douglas Babcock, Defendants Listed on Exhibit B, Defendants–Appellees–Cross–Appellants,Current and Former Directors and Officers, Betsy D. Holden, Christopher Reyes, Dudley S. Taft, Enrique Hernandez, Jr., Miles D. White, Robert S. Morrison, William A. Osborn, Harry Amsden, Stephen D. Carver, Dennis J. FitzSimons, Robert Gremillion, Donald C. Grenesko, David Dean Hiller, Timothy J. Landon, Thomas D. Leach, Luis E. Le, Mark Hianik, Irving Quimby, Crane Kenney, Chandler Bigelow, Daniel Kazan, Timothy Knight, Thomas Finke, Sam Zell and Affiliated Entities, EGI–TRB, LLC, Equity Group Investments, LLC, Sam Investment Trust, Samuel Zell, Tower CH, LLC, Tower DC, LLC, Tower DL, LLC, Tower EH, LLC, Tower Gr, Large Shareholders, Chandler Trusts and their representatives, Financial Advisors, Valuation Research Corporation, Duff & Phelps, LLC, Morgan Stanley & Co. Inc. and Morgan Stanley Capital Services, Inc., GreatBanc Trust Company, Citigroup Global Markets, Inc., CA Public Employee Retirement System, Calpers, University Of CA Regents, T. Rowe Price Associates, Inc., Morgan Keegan & Company, Inc., NTCA, Diocese of Trenton–Pension Fund, First Energy Service Company, Maryland State Retirement and Pension System, T Bank LCV QP, T Bank–LCV–PT, Japan Post Insurance, Co., Ltd., Servants of Relief for Incurable Cancer (aka Dominican Sisters of Hawthorne), New Life International, New Life International Trust, Salvation Army, Southern Territorial Headquarters, City of Philadelphia Employees, Ohio Carpenters' Midcap (aka Ohio Carpenters' Pension Fund), Tilden H. Edwards, Jr., Malloy and Evans, Inc., Bedford Oak Partners, LP, Duff and Phelps LLC, Durham J. Monsma, Certain Tag–Along Defendants, Michael S. Meadows, Wirtz Corporation, Defendants.

Docket Nos. 13–3992–cv

13–3875–cv

13–4178–cv

13–4196–cv.

United States Court of Appeals, Second Circuit.

Argued: Nov. 5, 2014.

Decided: March 29, 2016.

Roy T. Englert, Jr. (Lawrence S. Robbins, Ariel N. Lavinbuk, Daniel N. Lerman, Shai D. Bronshtein, Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, DC, Pratik A. Shah, James E. Tysse, Z.W. Julius Chen, Akin Gump Strauss Hauer & Feld LLP, Washington, DC, David M. Zensky, Mitchell Hurley, Deborah J. Newman, Akin Gump Strauss Hauer & Feld LLP, New York, NY, Robert J. Lack & Hal Neier, Friedman Kaplan Seiler & Adelman LLP, New York, NY, Daniel M. Scott & Kevin M. Magnuson, Kelley, Wolter & Scott, P.A., Minneapolis, MN, David S. Rosner & Sheron Korpus, Kasowitz Benson Torres & Friedman LLP, New York, NY, Joseph Aronauer, Aronauer Re & Yudell, LLP, New York, NY, on the brief), Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, DC, for Plaintiffs–Appellants–Cross–Appellees Note Holders.

Jay Teitelbaum, Teitelbaum & Baskin LLP, White Plains, NY, for Plaintiffs–Appellants–Cross–Appellees Individual Retirees.

Joel A. Feuer & Oscar Garza, Gibson, Dunn & Crutcher LLP, Los Angeles, CA, David C. Bohan & John P. Sieger, Katten Muchin Rosenman LLP, Chicago, IL, for Defendants–Appellees–Cross–Appellants Large Private Beneficial Owners.

Philip D. Anker (Alan E. Schoenfeld, Adriel I. Cepeda Derieux, Pablo G. Kapusta, Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY, Sabin Willett & Michael C. D'Agnostino, Bingham McCutchen LLP, Boston, MA, Joel W. Millar, Washington, DC, on the brief), Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY, for Defendants–Appellees–Cross–Appellants Financial Institution Holders.

Elliot Moskowitz, Davis Polk & Wardwell LLP, New York, NY, Daniel L. Cantor, O'Melveny & Myers LLP, New York, NY, Gregg M. Mashberg & Stephen L. Ratner, Proskauer Rose LLP, New York, NY, for Defendants–Appellees–Cross–Appellants Financial Institution Conduits.

Douglas Hallward–Driemeier, Ropes & Gray LLP, Washington, DC, D. Ross Martin, Ropes & Gray LLP, New York, NY, Matthew L. Fornshell, Ice Miller LLP, Columbus, OH, for Defendants–Appellees–Cross–Appellants Pension Funds.

Andrew J. Entwistle, Entwistle & Cappucci, LLP, New York, NY, David N. Dunn, Potter Stewart, Jr. Law Offices, Brattleboro, VT, Mark A. Neubauer, Steptoe & Johnson LLP, Los Angeles, CA, for Defendants–Appellees–Cross–Appellants Individual Beneficial Owners.

Michael S. Doluisio & Alexander Bilus, Dechert LLP, Philadelphia, PA, Steven R. Schoenfeld, Robinson & Cole LLP, New York, NY, for Defendants–Appellees–Cross–Appellants Mutual Funds.

Alan J. Stone & Andrew M. LeBlanc, Milbank, Tweed, Hadley & McCloy LLP, New York, NY, for Defendant–Appellee–Cross–Appellant At–Large.

Gary Stein, David K. Momborquette, William H. Gussman, Jr., Schulte Roth & Zabel LLP, New York, NY, for Defendants–Appellees–Cross–Appellants Defendants Listed on Exhibit B.

Kevin Carroll, Securities Industry and Financial Markets Association, Washington, DC, Holly K. Kulka, NYSE Euronext, New York, NY, Marshall H. Fishman, Timothy P. Harkness, David Y. Livshiz, Freshfields Bruckhaus Deringer U.S. LLP, New York, NY, for Amici Curiae Securities Industry and Financial Markets Association, International Swaps and Derivatives Association, Inc., and the NYSE Euronext.

Michael A. Conley, John W. Avery, Tracey A. Hardin, Benjamin M. Vetter, Securities and Exchange Commission, Washington, DC, for Amicus Curiae Securities and Exchange Commission.

Before WINTER, DRONEY, Circuit Judges, and HELLERSTEIN, District Judge.^**

WINTER, Circuit Judge:

Representatives of certain unsecured creditors of the Chapter 11 debtor Tribune Company appeal from Judge Sullivan's grant of a motion to dismiss their state law, constructive fraudulent conveyance claims brought against Tribune's former shareholders. Appellants seek to recover an amount sufficient to satisfy Tribune's debts to them by avoiding (recovering) payments by Tribune to shareholders that purchased all of its stock. The payments occurred in a transaction commonly called a leveraged buyout ("LBO"),¹ soon after which Tribune went into Chapter 11 bankruptcy. Appellants appeal the district court's dismissal for lack of statutory standing, and appellees cross-appeal from the district court's rejection of their argument that appellants' claims are preempted.²

We address 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).

On issue (i), we hold that appellants are 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. On issue (ii), the subject of appellees' cross-appeal, we hold that appellants' claims are preempted by Section 546(e). That Section 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.

We therefore affirm.

BACKGROUND

a) The LBO

Tribune Media Company (formerly known as "Tribune Company") is a multimedia corporation that, in 2007, faced deteriorating financial prospects. Appellee Samuel Zell, a billionaire investor, 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 some of Tribune's pre-existing bank debt and to cash out Tribune's shareholders for over $8 billion at a premium price—above its trading range—per share. It is undisputed that Tribune transferred the over $8 billion to a "securities clearing agency" or other "financial institution," as those terms are used in Section 546(e), acting as intermediaries in the LBO transaction. Those intermediaries in turn paid the funds to the shareholders in exchange for their shares that were then returned to Tribune. Appellants seek to satisfy Tribune's debts to them by avoiding Tribune's payments to the shareholders. Appellants do not seek money from the intermediaries. See Note 8, infra.

b) Bankruptcy Proceedings

On December 8, 2008, with debt and contingent liabilities exceeding its assets by more than $3 billion, Tribune and nearly all of its subsidiaries filed for bankruptcy under Chapter 11 in the District of Delaware. A trustee was not appointed, and Tribune and its affiliates continued to operate the businesses as debtors in possession. See 11 U.S.C. § 1107(a) ("Subject to any limitations on a trustee ... a debtor in possession shall have all the rights ..., and powers, and shall perform all the functions and duties ... of a trustee...."). In discussing the powers of a bankruptcy tr...