Merit Management’s Footnote 2 and Justice Breyer’s Point Prevail in Second Circuit (In re Tribune)

Safe harbor (photo by Marilyn Swanson)

By Donald L. Swanson

The parties here do not contend that either the debtor or petitioner in this case qualified as a “financial institution” by virtue of its status as a “customer” under §101(22)(A). . . . We therefore do not address what impact, if any, §101(22)(A) would have in the application of the §546(e) safe harbor.”

–From Footnote 2 in Merit Management v. FTI Consulting, 138 S.Ct. 883 (2018).

New Second Circuit Opinion

The new opinion (issued December 19, 2019) is by the Second Circuit Court of Appeals in a case out of the Southern District of New York, titled In re Tribune Company Fraudulent Conveyance Litigation.

Opposite Results

This new opinion applies the U.S. Supreme Court’s Merit Management ruling on the 11 U.S.C. § 546(e) “safe harbor” defense to fraudulent transfer claims, but it reaches an opposite result:

  • In Merit Management, the § 546(e) defense DID NOT protect the transferees; but
  • In Tribune Company, § 546(e) DOES protect them.

Here’s why there are opposite results: the Merit Management defendants failed to properly present the § 546(e) defense, while the Tribune Company defendants presented it properly.

I’ll try to explain.

–Failure to Properly Present the § 546(e) Defense in Merit Management

The parties in Merit Management fail to argue that the transferor or transferee qualifies as a a “financial institution” under §546(e). See the Footnote 2 quotation above.

In fact, Justice Breyer, during oral arguments in Merit Management, expresses frustration over the parties’ failure to raise that defense. Here’s how:

JUSTICE BREYER: . . . nobody refers us to that provision [the “financial institution” and “such customer” defense], and I can’t understand why they didn’t — what’s going on?

PETITIONER’S COUNSEL: Your Honor, we did — we did refer to that provision in — in both of our briefs, if I remember correctly.

JUSTICE BREYER: You may have put it in your briefs, but, I mean, why in the lower courts wasn’t this just said . . . Judge, this involves a customer of a financial institution, namely VVD, and, therefore, it’s in the exempt area? . . . And I want to know why that didn’t happen.


JUSTICE BREYER: It’s your case. You can do it. . . . I would like to know the answer.

PETITIONER’S COUNSEL: I’m afraid I don’t have a good answer for why that did not come up earlier.

The point of Justice Breyer’s frustration is embodied in Merit Management’s Footnote 2.  And the Merit Management defendants lose.

–Properly Presenting the § 546(e) Defense in Tribune Company

So, the Tribune Company defendants get Judge Breyer’s point and raise it as a defense in their own case. And they win!

The Tribune Company Case

What follows is a summary of the Tribune Company case.


Here’s an In re Tribune Company chronology:

  • It all begins with owners of the Tribune Company selling their shares for $8 billion in a leveraged buyout;
  • Shortly thereafter, the Tribune Company files bankruptcy;
  • Creditors obtain Bankruptcy Court permission to sue the Tribune Company’s former shareholders to claw back the purchase payments as fraudulent transfers, and they file the authorized lawsuits in Federal District Court;
  • The Federal District Court issues rulings, and both sides appeal to the Second Circuit;
  • The Second Circuit denies creditors’ fraudulent transfer claims, under the § 546(e) defense, and creditors file their Petition for a writ of certiorari to the U.S. Supreme Court;
  • While the Petition is pending, the U.S. Supreme Court issues its ruling on the § 546(e) defense in Merit Management;
  • Justices Kennedy and Thomas issue a “Statement” that the Petition in Tribune Company “will be deferred” so the Second Circuit can “consider whether to recall” its mandate “in light of this Court’s decision in Merit Management” and because “there might not be a quorum in this Court” to decide the case;
  • So, the Second Circuit recalls its Tribune Company mandate; and
  • Finally, the Second Circuit issues its new opinion, on December 19, 2019, under the Supreme Court’s Merit Management ruling.

–Threshold Q&A

Threshold Question: Are the $8 billion of purchase price payments to former Tribune Company shareholders entitled to a § 546(e) defense, under Merit Management?

Threshold Answer: Yes.

Here’s Why: Under Merit Management’s Footnote 2, payments to the Tribune Company’s shareholders are entitled to § 546(e) protection because the Tribune Company qualified as a “financial institution” in the LBO. That’s because the Tribune Company was a “customer” of Computershare Trust Company, N.A., which acted as the Tribune Company’s agent in the LBO securities contract.

–The § 546(e) Defense

The Bankruptcy Code provides:

  • § 546(e): a bankruptcy trustee “may not avoid . . . a transfer made by or to (or for the benefit of) a . . . financial institution, . . . in connection with a securities contract, as defined in section 741(7),” except through an intentional fraudulent conveyance claim (emphasis added); and
  • § 101(22): the term “financial institution” includes the “customer” of a bank or trust company that is “acting as agent” for such customer “in connection with a securities contract.”

–§ 546(e) Applied

Such provisions apply to the Tribune Company’s LBO like this:

  1. The Tribune Company retained Computershare to act as its “Depositary” for the LBO tender offer;
  2. Computershare is a “financial institution” under § 101(22) because it is a trust company and bank;
  3. The Tribune Company, therefore, qualifies as a “financial institution” under § 101(22) because it was Computershare’s “customer” and because Computershare acted as its “agent” in the LBO: Computershare (i) received and held the Tribune Company’s deposit of the purchase price for the shares, (ii) received and held the tendered shares, and (iii) payed the purchase price to the tendering shareholders; and
    4. The LBO qualifies as a “securities contract” because all payments were for the purchase of stock shares.

The Tribune Company’s former shareholders are, therefore, entitled to a § 546(e) defense against the creditors’ claw back claims.


Merit Management’s Footnote 2 prevails in the new Tribune Company opinion from the Second Circuit Court of Appeals. And Justice Breyer’s frustration, during Merit Management’s oral arguments, appears to be well founded and authoritative.

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