Some circuit courts had issued fairly hard to fathom opinions immunizing some corporate transactions from fraudulent conveyance claims if banks (and others) were involved in moving money as pass-through entities. The Seventh Circuit disagreed, and created a circuit split. SCOTUS has now blessed the Seventh Circuit’s reasoning. See Supreme Court Scales Back Safe Harbor Protection for Some Pre-Bankruptcy Fraudulent Transfers, a March 2, 2018 article at the National Law Review. The case is known as Merit; online here at SCOTUS.
According to legal commentators at Dechert, the holding creates more legal peril for entities involved in lbos. In a March 5, 2018 article, they explained as follows:
“This is probably most significant for selling stockholders in the leveraged buyout context, where there is risk that years after the LBO closed, a trustee, debtor-in-possession, or perhaps a creditors’ committee will argue that the consideration provided to the selling stockholders and other parties involved in the LBO rendered the company insolvent and thus the buyout effectuated a constructively fraudulent transfer. By overturning long-standing precedents from the Second and Third Circuits, which oversee the two districts that handle the lion share of the biggest Chapter 11 cases—the Southern District of New York and the District of Delaware (as well as reversing decisions of the Sixth, Eighth, and Tenth Circuits), the Supreme Court’s Merit decision has the potential to dramatically shift parties’ assessments of the risks associated with such transactions.
Significantly, the decision might impact ongoing fraudulent transfer litigation stemming from Tribune media’s massive 2007 leveraged buyout. There, the litigation trustee appointed as part of Tribune’s former bankruptcy proceedings has been attempting to “claw back” approximately US$8 billion in payments made to 5,500 former Tribune shareholders as part of the buyout. While the breadth of Merit’s impact on other cases is yet to be seen, one can expect that trustees and others wielding avoidance powers will undoubtedly be vigorous in bringing avoidance actions against transferees of the debtor’s assets, especially in large, failed LBOs.