By Donald Bernstein, Elliot Moskowitz, Damian Schaible, Eli Vonnegut, Alicia Llosa Chang, and Tina Hwa Joe of Davis Polk & Wardwell LLP
On March 29, 2016, the United States Court of Appeals for the Second Circuit issued an important opinion that limits the ability of creditors to assert constructive fraudulent transfer claims in major bankruptcy cases. In a unanimous opinion, the Circuit held that in circumstances where Section 546 of the Bankruptcy Code bars estate representatives from asserting constructive fraudulent conveyance claims under state law, the statute likewise prevents individual creditors from bringing those claims after the estate’s time to do so expires. In several recent Chapter 11 cases, individual creditors argued that the statute should only preclude a “trustee” – the term used in the statutory text – from bringing such claims, not individual creditors. The Circuit’s ruling in In re: Tribune Company Fraudulent Conveyance Litigation, No. 13-3992, and summary order in related case Whyte v. Barclays Bank, 13-2653, were the first decisions from a circuit court on the issue and settled a conflict among its lower courts. In a 53-page decision, the Circuit rejected the argument that the text of the statute only bars constructive fraud claims brought by a trustee or other estate representative, instead holding that the doctrine of implied preemption protects settlement payments and swap transactions from constructive fraud claims brought by any party. The decision may put an end to recent attempts by creditors to circumvent Section 546(e) and related provisions in bringing such claims.
The full memo is available here.