Leveraged Buyout Transactions Challenged in Bankruptcy

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Leveraged Buyout Transactions Challenged in Bankruptcy Litigating Fraudulent Transfer Claims Against Lenders, Equity Purchasers and Shareholders WEDNESDAY, MARCH 28, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Lisa S. Bonsall, Partner, McCarter & English, Newark, N.J. Henry P. Baer, Partner, Finn Dixon & Herling, Stamford, Conn. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 BOSTON // HARTFORD // NEW YORK // NEWARK // STAMFORD // PHILADELPHIA // WILMINGTON Leveraged Buyout Transactions Challenged in Bankruptcy Background and Selected Case Law Lisa S. Bonsall, Esq March 23, 2012

6 Fraudulent Transfers in LBOs A. Bankruptcy allows debtors to unwind certain transfers or obligations that qualify as fraudulent transfer 1. LBO Transaction Substituting debt for equity Loan proceeds obtained by acquirer generally disbursed to target shareholders Assets of target corporation secure loan 6

7 Fraudulent Transfers in LBOs 2. LBO Transfers Targeted in Bankruptcy. Debt incurred by the target company to fund LBO, and liens securing it Payments made to target s former equity holders in exchange for their equity interest or assets sold in LBO Fees and costs associated with or arising from the transaction 3. LBO Defendants Lenders Former shareholders Professionals 7

8 Fraudulent Transfers in LBOs Cont d B. Bankruptcy Code 548 allows avoidance of transfers made or obligations incurred within 2 years of the filing of bankruptcy petition. 11 U.S.C allows debtor/trustee to recover the property fraudulently transferred 11 U.S.C allows debtor/trustee to avoid transfers under applicable nonbankruptcy law 8

9 Fraudulent Transfers in LBOs Cont d C. State Law Most states have state law equivalents to 548. The Uniform Fraudulent Transfer Act allows creditors to void transfers that are intentionally or constructively fraudulent under criteria that is generally the same as 548. NY, NJ, DE UFTA Longer claw back period 9

10 Fraudulent Transfers in LBOs Cont d D. There are two types of fraudulent transfers : actual or intentional fraudulent transfers, and constructive fraudulent transfers. 1. Actual fraud requires establishing transfer made with actual intent to hinder, delay, or defraud creditors. 2. Courts often rely on circumstantial evidence and badges of fraud to infer fraudulent intent. (Liquidation Trust of Hechinger Inv. Co. v. Fleet Retail Fin. Group, 327 B.R. 537, 550 (D.De. 2005)). Relationship between the debtor and the transferee; The consideration for the transfer; Insolvency or indebtedness of debtors; How much of the debtor s estate was transferred; Reservation of benefits, control or dominion by the debtor; Secrecy or concealment of the transaction. 10

11 Fraudulent Transfers in LBOs Cont d 2. Constructive fraud involves transfers made for less than reasonably equivalent value, which are presumed not to be in interests of creditors Elements: Debtor/transferor received less than reasonably equivalent value in exchange for the transfer or the obligation, AND was either Insolvent at the time of or rendered insolvent as a result of the transfer or obligation; or Left with unreasonably small capital, or Intended to incur, or believed it would incur, debt beyond its ability to pay; or Made such transfers or incurred such obligation to or for the benefit of an insider, under an employment contract, or not in the ordinary course of business 11

12 Fraudulent Transfers in LBOs Cont d E. Reasonably Equivalent Value Issue arises in LBO context because the party that incurs the debt and secures the obligation (the target) generally did not receive the proceeds of the loan financing the transaction. Typically the shareholders, not the company, receive the funds. Intangible benefits Operational synergies New credit opportunities Good will 12

13 Fraudulent Transfers in LBOs Cont d F. Insolvency Balance sheet test; whether liabilities exceed assets as of a specific date (before or immediately after the transaction). Generally valued on going concern basis unless bankruptcy is clearly imminent 13

14 Fraudulent Transfers in LBOs Cont d G. Unreasonably Small Capital Expands range of transactions because insolvency need not exist on date of transfer Test for unreasonably small capital is reasonable foreseeability. (Moody v. Security Pacific Business Credit, Inc., 971 F.2d 1056 (3d. Cir. 1992)). At the time of the transaction, was it reasonably foreseeable that the company would have unreasonably small capital after entering into the transaction? Courts look at: Whether projections were reasonable when made based on past performance, but accounting for potential future difficulties 14

15 Fraudulent Transfers in LBOs Cont d Availability of credit Other industry factors (competition, market pricing) that may have caused the debtor s problems, and whether those factors were foreseeable Other financial measures Debt to capital ratio in the industry Public equity / debt, price of securities 15

16 Fraudulent Transfers in LBOs Cont d H. Collapsing loan transactions. LBOs often involve several steps or a series of transactions. When a series of transactions is part of one integrated transaction, a court may look behind the exchange of funds and collapse the individual transactions to determine the overall economic impact of the transaction. 1. Standard: Three factors courts consider in determining whether the transactions should be collapsed : Whether all of the parties involved had knowledge of the multiple transactions. Whether each transaction would have occurred on its own Whether each transaction was dependent or conditioned upon other transactions. U.S. v. Tabor Realty Corp., et al., 803 F.2d 1288 (3d Cir. 1986) 16

17 CASES: Mervyn s Mervyn s, LLC v. Lubert Adler Group IV LLC, et al, 426 B.R. 488 (Bankr. D.De. 2010). Facts: Target Corp. sold Mervyn s department stores to Mervyn s Holdings, LLC, ( MH ) owned by 3 private equity funds, in 2004 purchase price of $1.175B financed by leveraged borrowing using the real estate as collateral. no loan proceeds went to Mervyn s. post-closing, MH transferred real estate to sister company for little or no consideration, which then leased it back at significantly higher rent 17

18 CASES: Mervyn s Cont d Mervyn s filed chapter 11, and Committee sued Target and the MH owners, claiming the loss of the real estate and leases, and the over-leveraged financial condition caused the bankruptcy alleged the transfers were actually and constructively fraudulent, and breaches of fiduciary duty on motion to dismiss, court found collapsing appropriate. Execution of sale agreement, transfer of real estate, transfer of leases, and loans collapsed into a single transaction to view the overall economic consequences. Target had constructive knowledge of the transactions. Transactions would not have taken place on their own. Transactions were mutually dependent upon each other. 18

19 CASES: Mervyn s Cont d Overall economic consequences were devastating to creditors, including stripping of real estate, increasing rents, and creation of an economic conflict of interest at the parent level. LBO left debtor with as little as $22M working capital and additional debt of over $800M 546(e) settlement payment exemption does not apply to collapsed transactions. Once collapsed, there was no settlement payment within meaning of 741 because the real estate transfers were not sales of securities 19

20 CASES: Mervyn s (Compare) Compare, Mervyn s, 426 B.R. 104 (Bankr. D.De. 2010) whereby the action was brought against the successor to the secured lender. PE Sponsors required Mervyn s to deposit rent payments into bank accounts initially controlled by secured lenders. Bank of America was the Trustee for the holders of the secured lenders certificates and accepted an assignment of the loans and liens. Committee sued Bank of America. Court granted a motion to dismiss on the failure to plead control or knowledge. Court refused to collapse transactions in absence of any allegations of either actual or constructive fraud as to Bank of America. 20

21 CASES: Boyer Boyer v. Crown Stock Distributing, 587 F.3d 787 (7 th Cir. 2009) Facts: Sale of assets, not stock Cash retained by seller/target (i.e., not transferred with sale of assets), but upstreamed as shareholder distribution shortly before the sale of assets Corporate name included in assets purchased, so creditors were not aware of transaction; analogous to stock sale 21

22 CASES: Boyer Cont d Target became highly leveraged, but stayed in business for over 3 years after the sale Filed for bankruptcy; and Trustee sued to avoid transaction, recover payments to seller Trustee also sought to recover the pre-sale dividend to equity Transaction collapsed to reflect economic reality. Held entire transaction as a fraudulent transfer and allowed recovery of all consideration, plus the pre-closing dividend even though the total amount exceeded creditor claims, since excess funds would be returned to defendants (shareholders). 22

23 In re TOUSA, INC., 444 B.R. 613 (S.D. Flo. 2011). In re TOUSA, Inc., 444 B.R. 613 (S.D. Fl. 2011) In 2005, home builder and developer TOUSA, Inc. and one of its subsidiaries issued unsecured guaranties in connection with a leverage joint venture. When the joint venture failed, the JV lenders sued TOUSA as a guarantor. To settle the litigation, TOUSA agreed to pay more than $420MM to the JV lenders on the guaranties. TOUSA borrowed $500MM from its own lenders to fund the settlement and pledged all of its and its subsidiaries assets as collateral for the loan. The subsidiary pledgers were not defendants in the JV lender litigation, but the companies financing was such that a judgment in the litigation would trigger defaults and guarantor liability of those same subsidiaries. Less than six months after the loan to fund the settlement, TOUSA and its subs filed for Chapter

24 In re TOUSA, INC., 444 B.R. 613 (S.D. Flo. 2011). Cont d The Committee commenced an adversary proceeding alleging that the $500MM in debt and settlement payments made with the funds were fraudulent transfers. After a trial, the bankruptcy court agreed, finding that the transfers were constructively fraudulent because no reasonably equivalent value was exchanged and the entities were insolvent before and after the transfers. 422 B.R. 783 (Bankr. S.D. Fla. 2009). Court ordered avoidance of the liens, disallowance of their secured claims, disgorgement of principal, interest, costs and expenses from the lenders, plus prejudgment interest for total disgorgement in excess of $480MM. 24

25 In re TOUSA, INC., 444 B.R. 613 (S.D. Flo. 2011). Cont d District Court reversed. In re TOUSA, INC., et al., 444 B.R. 613 (S.D. Fl. 2011). Held: Debtor subsidiaries lacked property interest required for avoidance of fraudulent transfer in proceeds of new loans used by debtor parent company to pay joint venture lenders in settlement of antecedent debt (i.e., the guaranty); Debtor-subsidiaries received value in exchange for granting liens on their assets to new lenders that provided financing for settlement payment made to joint venture lenders; Debtor-subsidiaries received reasonably equivalent value in exchange for liens given to new lenders Joint venture lenders were not entities for whose benefit transfers of liens by debtor-subsidiaries to new lenders were made; and Joint venture lenders could not be found to have acted in bad faith or with knowledge of avoidability of lien transfers, and would preclude them from qualifying for exceptions to avoidance recovery. 25

26 CASES: Tribune-Collapsing In re: Tribune Co., 464 B.R. 126 (Bankr. D.De. 2011) In 2007, Tribune Company board of directors approved an LBO to Sam Zell to take the company private To finance the transaction, the purchaser caused Tribune to increase its debt load from approximately $5 billion to approximately $14 billion. The LBO financing was unsecured. The proceeds were used to repurchase stock. Tribune s subsidiaries provided unsecured guarantees of the debt but did not get the use of most of the funds. The transaction occurred in two steps: 26

27 CASES: Tribune-Collapsing Step One (June 2007): an ESOP controlled by the purchaser was formed to purchase Tribune common stock. Zell entity invested $250M in Tribune in exchange for 1.4M shares of common stock at $34/sh, and a $200M unsecured subordinated exchangeable note of Tribune. Tribune commenced a cash tender offer to repurchase 50% outstanding common stock at $34/sh, which it then retired. Tender offer financed with $8B loan guaranteed by several Tribune subsidiaries on an unsecured basis. Loan proceeds were used to pay shareholders ($4.284B), refinance existing loans ($2.5B), and pay transaction fees and costs. 27

28 CASES: Tribune-Collapsing Step Two (December 2007): Tribune merged with a Delaware corporation wholly owned by the ESOP. Tribune survived the merger and became wholly owned by the ESOP. The merger was financed through additional borrowings of $2.1B and $1.6B, which were unsecured but guaranteed by the guaranteeing subsidiaries. Proceeds of the loans were used to consummate the merger, repurchase outstanding Tribune shares, and pay Step Two financing fees, costs and expenses. 28

29 CASES: Tribune-Collapsing Tribune filed for bankruptcy on December 8, The Court appointed an examiner to review the alleged LBO-related claims. On July 26, 2010, the examiner issued his report, analyzing the obligations and payments subject to potential avoidance. Court held contested confirmation hearing on two competing plans: the Debtor/Committee/Lender ( DCL ) plan and the Subordinated Noteholders Plan. DCL Plan proposed a settlement of many of the fraudulent transfer claims, while the Noteholders Plan proposed to litigate those claims. The Court therefore focused on the proposed settlement and the likelihood of success on the merits under FRBP Collapsing considered in analyzing reasonably equivalent value, insolvency, and post-transaction capitalization. 29

30 CASES: Tribune-Collapsing 1. Reasonably equivalent value. Transactions in which the Tribune parent received monies from the senior lenders (first transaction) with the transaction in which the Tribune parent purchased stock from the stockholders (the second transaction) would likely be collapsed in both Steps One and Two. Highly likely that the LBO Lenders did not confer reasonably equivalent value on the Tribune Parent or the Guarantor Subsidiaries in the Step One or Step Two transactions for those portions of advances used to redeem stock. Highly likely that the lenders conferred reasonably equivalent value to the Tribune Parent, but not to the Guarantor Subsidiaries, in Step One for amounts borrowed to repay the old bank debt. 30

31 CASES: Tribune-Collapsing 2. Solvency. The main dispute on the constructive fraud claims was whether the transfers made, or obligations incurred, rendered the debtors insolvent, inadequately capitalized, or unable to pay their debts as they became due. Collapsing Steps One and Two made a significant (but not dispositive) difference. First two Tabor factors favored collapsing Step One and Step Two together. All parties were well aware of the proposed transactions and it is unlikely either transaction would have occurred alone. Third factor did not favor collapse because the two steps were not mutually dependent or conditioned upon one another. Factors considered: Documents allowed Step One to stand alone if necessary. Uncertainty as to whether Step Two would close. 31

32 CASES: Tribune-Collapsing The credit agreement did not obligate Tribune to obtain Step Two financing; failure to do so was not an event of default. Alternatives to selling stock were provided if the merger did not occur. Public filings disclosed that Step Two might not close. Solvency is a balance sheet test measured as of a particular date, and if the Step One transactions could stand on their own as of the closing on Step One, it was not appropriate to collapse the steps for determining solvency at the particular time. At the close of Step One, the debtors had no obligation to the senior lenders for the Step Two debt: focus should be on what is required to happen to debtor s estate, rather than what will probably happen. 32

33 CASES: Tribune-Collapsing Other factors considered in analyzing solvency: contemporaneous market evidence; rating agency actions and bond yields; credit default swaps spread. 33

34 CASES: Tribune-Collapsing 3. Unreasonably small capital. Forward-looking analysis, rather than a snapshot of a particular point in time. Because Step Two was highly likely to occur, it was reasonably foreseeable and should be included in the analysis of whether Step One transactions left the debtors with unreasonably small capital. Utilizing the projections and market data from the time, with some adjustments, Examiner concluded that both the parent and subs were likely to be considered to be adequately capitalized after the Step One transactions, even when factoring the Step Two transactions. The Court found the question to be open and therefore ripe for settlement. 34

35 Litigating Fraudulent Transfer Claims Against Lenders, Equity Purchasers and Shareholders Henry P. Baer, Jr

36 Isolated Issues Within the LBO Context 36

37 Safe Harbors The Bankruptcy Code includes certain safe harbors, within which transfers cannot be avoided as preferential or fraudulent The one most relevant to the LBO context is the Section 546(e) safe harbor Notably, this safe harbor explicitly does not apply to claims for actual fraudulent conveyance 37

38 Statutory Language Notwithstanding sections 544, 545, 547, 548(a)(1)(B) and 548(b) of this title, the trustee may not avoid a transfer that is a margin payment,... Or a settlement payment, as defined in section 101 or 741 of this title, made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, or that is a transfer made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, in connection with a securities contract, as defined in section 741(7), commodity contract, as defined section 761(4), or forward contract, that is made before the commencement of the case, except under section 548(a)(1)(A) of this title. 38

39 Section 546(e) Section 546(e) is a safe harbor intended to protect the integrity of the market; to reduce systemic risk to the markets that could result from undoing historic transactions upon which counter-parties had relied, had hedged, and had re-allocated proceeds. 39

40 Settlement Payments 40

41 Settlement Payment Bankruptcy Code Section 101: The term settlement payment means, for purposes of the forward contract provisions of this title, a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, a net settlement payment, or any other similar payment commonly used in the forward contract trade. (Bankruptcy Code Section 741: any other similar payment commonly used in the securities trade. ) 41

42 LBOs of Privately Held Companies There is substantial precedent on both sides of the issue for privately held companies, but the three Circuit Courts that have considered the issue have agreed that the safe harbor applies, even for private transactions and private companies: In re QSI Holdings, Inc. v. Alford (In re QSI Holdings, Inc.), 571 F.3d 545 (6 th Cir. 2009) Brandt v. B.A. Capital Co., LP (In re Plassein Int l Corp.), 590 F.3d 252 (3d Cir. 2009) Contemporary Indus. Corp. v. Frost, 564 F.3d 981 (8 th Cir. 2009) Recent well publicized decisions however come out differently 42

43 LBOs of Privately Held Companies In re MacMenamin s Grill Ltd., 450 B.R. 414 (Bankr. SDNY 2011) The Debtor took a loan from TD Bank to fund stock repurchase from three shareholders who held aggregate of 93% of Debtor s stock 1) Payments to shareholders were by Lender, not Company 2) Payments were made to each shareholder s individual financial institution Debtor filed for Chapter 11 protection approximately 14 months later Committee sought to avoid payments to shareholders and loan from TD Bank as fraudulent conveyances Defendants sought to dismiss complaints as precluded by 546(e) the payments were made by and to financial institutions in settlement of a stock repurchase 43

44 LBOs of Privately Held Companies (cont d) The parties did not dispute that the Lender and the shareholders banks were financial institutions, or that the Debtor s stock was a security. The trustee also seemed to accept that payment to purchase stock was a settlement payment and that an agreement to purchase stock was a securities contract. 44

45 LBOs of Privately Held Companies (cont d) Judge Drain, however, was not convinced Notwithstanding that the parties, and apparently Judge Drain, agreed that the payments in question fell within the four corners of the statute they were payments for securities by and to a financial institution, or were otherwise a transfer by and to a financial institution, in connection with a securities contract Judge Drain found that the payments were not entitled to the safe harbor of 546(e). 45

46 LBOs of Privately Held Companies (cont d) Judge Drain came to this conclusion in two ways: 1) First, Judge Drain found that the definition of settlement payments in the Bankruptcy Code was circular, self-referential and unhelpful, and therefore the provision was ambiguous. 2) Because the statutory language was ambiguous, the Court referred to legislative history to determine Congressional intent, and found that application of the safe harbor to private transactions in these circumstances would be inapposite with that congressional intent. 3) Second, Judge Drain found that strict application of the statutory language was unnecessary because doing so in this case is so far removed from achieving Congress professed intent to protect the financial markets that it would be absurd. 46

47 LBO s of Privately Held Companies (cont d) In re Appleseed s Intermediate Holdings, LLC, 2012 WL (D.Del.) The Debtors entered into a $710 million credit facility to fund a $170 million acquisition, to retire some existing debt, and to make a $310 million dividend to private equity shareholders. Appleseed s filed for chapter 11 protection a few years later, and the committee sought to avoid the acquisition and the dividend as, among other things, fraudulent conveyances. In its complaint, the Committee made serious allegations about the integrity of the process, and alleged intentional and material fraud by various participants 47

48 LBOs of Privately Held Companies (cont d) The defendants moved to dismiss on the grounds that, among other things, the dividends to the defendants were protected by the safe harbor of section 546(e) The Court found that these dividends were not protected by 546(e) because there was no exchange of value. As such, the payments were not settlement payments. As the Court explained: Although the Third Circuit has held that a payment for shares during a leveraged buyout is a settlement payment, those transactions involved security exchanges. The necessary implication is that both parties exchanged some value. The court went on to say that the [acquisition] may fall within the meaning of settlement payment, [but] the [] acquisition cannot be conflated with the payment of the dividend. 48

49 LBOs of Privately Held Companies (cont d) These two decisions, however, appear driven by the unique facts of each case. In MacMenimans, Judge Drain focused repeatedly on the disconnect between the intent of the statute and the size of the case a $1.4 million buyout of three people from a small bar and grill. The Appleseed court, in turn, may have been driven by the egregious factual allegations in that case, which included substantial allegations of actual fraud. 49

50 LBOs for Stock or Debt Redemptions Enron Creditors Recovery Corp. v. Alfa, S.A.B., de C.V., 651 F.3d 329 (2d Cir. 2011) 1) Enron drew on its revolver to redeem its commercial paper prior to maturity. 2) Payments were made to DTC, and then to investors through J.P Morgan. Defendants moved to dismiss based on 546(e). 3) The Bankruptcy Court found that the payments at issue were not settlement payments because title to the commercial paper never changed hands. Because the debt was retired, not purchased, the Bankruptcy Court reasoned, the payments were not settlement payments. 50

51 LBOs for Stock or Debt Redemptions Enron, cont d The District Court reversed, and the 2d Circuit affirmed the District Court decision dismissing the complaint. In addressing arguments raised by the plaintiffs, the Second Circuit found that the Phrase commonly used in the securities trade modifies only the final term in the definition (other similar payment), not the entire list of terms The Court also found that title need not change hands for a payment to be considered a settlement payment Finally, the 2d Circuit joined the 3 rd, 6 th, and 8 th Circuits in declining to adopt a per se rule that financial intermediaries must obtain a beneficial interest in the underlying securities in order for the protections of 546(e) to apply. As a result, wiring funds through a financial institution continues to be a potentially valid defense to later avoidance actions. 51

52 Securities Contract Detailed definition, including: A contract for the sale or purchase or loan of a security Foreign currency options Guarantee by or to any securities clearing agency of a settlement of cash Margin loan Extension of credit for the clearance or settlement of a securities transaction Loan transaction coupled with a securities collar transaction, any prepaid forward securities transaction, or any total return swap transaction coupled with a securities sale transaction Certain options, master agreements, security agreements or other credit enhancements, or any combination of the above 52

53 Other Definitions Financial Institution: 101(22) Financial Participant: 101(22A) Stockbroker: a person (A) with respect to which there is a customer ; and (B) that is engaged in the business of effecting transactions in securities (i) for the account of others; or (ii) with members of the general public, from or for such persons own account. 53

54 Potentially Conflicting Decisions in Madoff Although not in a LBO context, these cases address the applicability of the 546(e) safe harbor to avoidance actions. In both cases, the Madoff Trustee, Irving Picard, brought suits seeking to avoid transfers to various defendants as preferences and fraudulent conveyances, among other grounds. In both cases, the defendants sought to dismiss the complaints at the pleading stage based on, among other things, the safe harbor of 546(e). The two cases came down on seemingly opposite sides of the same question -- Judge Lifland, affirmed by Judge Wood, found 546(e) did not apply at the pleading stage. Judge Rakoff found 546(e) did apply, and dismissed a large portion of the claims brought by the Trustee 54

55 546(e) Does Not Apply to Madoff Litigation Picard v. Merkin, et al., 440 B.R. 243 (Bank. SDNY 2010), affirmed,2011 WL (S.D.N.Y. 2011) Section 546(e) provides an affirmative defense that, unless clearly established on the face of the Complaint, does not tend to controvert the [trustee s] prima facie case. Whether Madoff, through BLMIS, was a stockbroker engaged in the business of effecting transactions in securities is dubious. even if BLMIS were a stockbroker, the Court questions whether the Account Agreements are securities contracts as that term is conceived by the statute. Courts have held that to extend safe harbor protection in the context of fraudulent securities scheme would be to undermine, not protect or promote investor confidence [by] endorsing a scheme to defraud SIPC, and therefore contradict the goals of the provision. As a result, the court refused to dismiss the complaint at the pleading stage. 55

56 546(e) Does Apply to Madoff Litigation Picard v. Katz, et al., 1:11-cv-03605, September 27, Because Madoff Securities was a registered stockbrokerage firm, the liabilities of customers like the defendants here are subject to the safe harbor set forth in section 546(e) of the Bankruptcy Code. all payments made by Madoff Securities to its customers were clearly settlement payments Further more, any payment by Madoff Securities to its customers that somehow does not qualify as a settlement payment qualifies as a transfer made in connection with a securities contract. As a result, the court dismissed all counts of the complaint, other than those predicated on actual fraud or equitable subordination. Initial motion for leave to appeal was denied, and case was settled on March 19,

57 Reversion/Preemption An additional issue is getting its moment in the spotlight. In both Lyondell and Tribune, the question has arisen whether the right to pursue fraudulent conveyance claims reverts to individual creditors following the expiration of the Bankruptcy statute of limitations. Moreover, if those rights do revert, are they also subject to the safe harbors of Section 546 in other words, has the safe harbor of the Bankruptcy Code (which is federal law) preempted state law, such that the safe harbor necessarily applies even in state law actions. 57

58 Reversion/Pre-Emption Tribune Company (Case No , Bankr. D. Del.) Prior to the expiration of the statute of limitations under Section 546 of the Bankruptcy Code, the Official Committee sought and received authority to file complaints seeking to avoid the payments made and obligations incurred during the LBO. To avoid the prohibitions of Section 546(e), the Committee s complaint did not bring constructive fraudulent conveyance claims, but instead only brought intentional fraudulent conveyance claims. Immediately after the expiration of the two year bankruptcy SOL, certain creditors sought authority from the bankruptcy court to bring state law constructive fraudulent conveyance actions (SLCFCA). 58

59 Reversion/Preemption Several parties objected. The objectors argued, among other things: 1) The debtors, or its representative, have exclusive jurisdiction to pursue these claims 2) The prohibition on pursuing avoidance of transfers subject to the safe harbor of 546(e) has pre-empted state law, and cannot be avoided by pursuing the claims in state court instead of bankruptcy court The Bankruptcy Court ultimately approved the motion, preserving those issues for the relevant state court to eventually consider. 59