Creditors of Tribune Co. acted on the suggestion made last week by two justices on the Supreme Court by filing a motion this week asking the Second Circuit to recall the mandate that the appeals court issued in Note Holders v. Large Private Beneficial Owners (In re Tribune Co. Fraudulent Conveyance Litigation), 818 F.3d 98 (2d Cir. 2016).
Tribune included two rulings by the Second Circuit that preclude creditors of a bankrupt company from bringing suit on their own behalf based on state fraudulent transfer law. First, the circuit court ruled that the safe harbor in Section 546(e) applies even if a bank only serves as a conduit for money paid to selling shareholders in a leveraged buyout that turns out to be a fraudulent transfer. The appeals court said that the safe harbor protects transactions, not just financial institutions.
Second, the appeals court held that the Section 546(e) safe harbor impliedly preempts state law on fraudulent transfer anytime there is a bankruptcy of a company that was the subject of a leveraged buyout. As a consequence of preemption, the Second Circuit said that individual creditors cannot mount a fraudulent transfer suit on their own behalf. In the opinion of the Second Circuit, the safe harbor blocks lawsuits not only by trustees and debtors but also by creditors asserting claims of their own in a non-bankruptcy court.
Under the caption Deutsche Bank Trust Co. Americas v. Robert R. McCormick, 16-317 (Sup. Ct.), the Tribune creditors filed a petition for certiorari in the Supreme Court. The high court deferred passing on the Deutsche Bank certiorari petition, while the justices decided a different case raising the “mere conduit” issue under Section 546(e).
On February 27, the Supreme Court decided Merit Management Group LP v. FTI Consulting Inc., 138 S. Ct. 883, 200 L. Ed. 2d 183, 86 U.S.L.W. 4088 (Sup. Ct. Feb. 27, 2018), effectively holding that the use of a bank as a mere conduit will not invoke the safe harbor. More precisely, the justices unanimously ruled that the safe harbor only applies to “the transfer that the trustee seeks to avoid.”
In short, Merit Management obliterated one of the grounds on which the Second Circuit had dismissed the creditors’ lawsuit in Tribune. Where the Second Circuit said that the safe harbor protects transactions, the Supreme Court held that the protection is for financial institutions. Observers therefore presumed that the Supreme Court would dispose of Deutsche Bank by granting the certiorari petition, reversing, and remanding for the Second Circuit to reconsider in light of Merit Management.
Instead, there was silence from the Supreme Court, even though the Deutsche Bank petition was scheduled for conference among the justices on four occasions subsequent to the decision in Merit Management.
Out of the blue, Justices Anthony M. Kennedy and Clarence Thomas issued a “Statement” on the Deutsche Bank docket on April 4. They implied that at least four justices are recused at this time, leaving the Supreme Court without a quorum to rule on the certiorari petition.
In view of the delay or possible inability of the Supreme Court to act, the two justices said the Second Circuit could recall the Tribune mandate and “decide whether relief from judgment is appropriate given the possibility that there might not be a quorum in this Court. See 28 U.S.C. § 2109.”
In the motion on April 10 to recall the mandate, the Tribune creditors naturally argue that the Second Circuit’s “mere conduit” rationale has been overruled by the Supreme Court. The creditors also contend that Merit Management ripped away the foundation for the Second Circuit’s notion that Section 546(e) impliedly preempts state fraudulent transfer law.
The Tribune creditors want the Second Circuit to recall the mandate and remand the case to the district court. They told the Second Circuit that the selling shareholders oppose recalling the mandate. However, the Tribune creditors are not asking for oral argument in the Second Circuit.
Whether the Second Circuit reconsiders its own Tribune decision or remands to the district court, the question of preemption is squarely raised.
If the Second Circuit does not recall the mandate, and if the Supreme Court cannot raise a quorum, the appeals court’s Tribune opinion will be upheld under Section 2109 “with the same effect as upon affirmance by an equally divided court.” In other words, the Tribune creditors would lose, but technical affirmance by the Supreme Court would have no precedential effect.
To tackle the question of implied preemption, the Supreme Court would need a certiorari petition in another case if the Second Circuit does not recall the mandate.
For ABI’s report on the April 4 statement by the two justices, click here. To read ABI’s discussion of the Second Circuit’s decision in Tribune, a/k/a Deutsche Bank, click here. For ABI’s report on the Merit Management decision, click here.