Note Holders, Deutsche Bank Trust Co. Americas v. Large Private Beneficial Owners
818 F.3d 98
2d Cir.2016Background
- Tribune completed a leveraged buyout (LBO) that paid shareholders over $8 billion through financial intermediaries; Tribune later filed Chapter 11 in December 2008.
- The Official Committee of Unsecured Creditors (the Committee) sued under 11 U.S.C. § 548(a)(1)(A) alleging intentional fraudulent conveyances; that federal action remained pending and was transferred to the Litigation Trust under the confirmed plan.
- Two groups of unsecured creditors (Retirees and Noteholder trustees) brought state-law constructive fraudulent-conveyance claims against the cashed‑out shareholders seeking to recover amounts to satisfy their claims; those suits were consolidated and moved to federal court.
- The bankruptcy court twice lifted the automatic stay (and the confirmed plan expressly preserved creditors’ rights to pursue certain state-law LBO claims), permitting the creditors to file state-law actions; the district court nonetheless dismissed the creditors’ complaints on standing grounds.
- The Second Circuit held that (1) the creditors were not barred by the automatic stay given the bankruptcy orders and confirmed plan, but (2) their state‑law constructive fraudulent‑conveyance claims were preempted by 11 U.S.C. § 546(e) and affirmed dismissal on preemption grounds.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 362(a) automatic stay/statutory standing bars creditors from pursuing state‑law constructive fraudulent‑conveyance claims while a trustee‑type actor pursues avoidance of the same transfers | Appellants: the Committee’s failure to bring § 544 claims within the two‑year § 546(a) period (or bankruptcy court lift of stay) restored creditors’ rights to pursue state claims; bankruptcy orders lifted the stay anyway | Shareholders: stay (and exclusivity of trustee’s § 544 powers) deprives creditors of statutory standing while trustee‑type avoidance proceedings are pending | Court: Not barred — bankruptcy court orders and confirmed plan lifted the stay as to these state claims, so the creditors had standing to sue |
| Whether state‑law constructive fraudulent‑conveyance claims are preempted by 11 U.S.C. § 546(e) (i.e., conflict preemption because § 546(e) bars avoidance of transfers through financial intermediaries) | Appellants: § 546(e) speaks only to a “trustee,” so creditors retained the ability to bring state claims once stayed or time elapsed; Congress did not expressly preempt such creditor actions | Shareholders/Litigation Trust: § 546(e)’s purpose — protecting securities settlement finality through intermediaries — conflicts with permitting creditor suits to unwind the same transfers; allowing creditor suits would undermine § 546(e) and securities markets | Court: Held preempted — § 546(e)’s text, purpose, and legislative history demonstrate Congress intended to bar avoidance of transfers involving financial intermediaries (except for intentional‑fraud § 548(a)(1)(A) claims), so creditors’ state‑law constructive claims are preempted |
Key Cases Cited
- Mary Jo C. v. N.Y. State & Local Ret. Sys., 707 F.3d 144 (2d Cir. 2013) (standard of appellate review for dismissal)
- St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989) (effect of bankruptcy court relief from the automatic stay on creditors’ ability to sue)
- In re Colonial Realty Co., 980 F.2d 125 (2d Cir. 1992) (application of automatic stay to fraudulent‑conveyance actions)
- Hillman v. Maretta, 133 S. Ct. 1943 (2013) (conflict‑preemption principles and presumption against preemption analysis)
- King v. Burwell, 135 S. Ct. 2480 (2015) (statutory interpretation principle: read provisions in context of whole statutory scheme)