NACM Oregon
Business Credit Journal 7931 NE Halsey, Suite 200
In This Issue
Portland, Oregon 97213
Tel 503.257.0802
Fax 503.257.0247
April 2012 www.nacmoregon.org
Recovery of LBO Fraudulent Transfers: Can § 546(e) Be Circumvented? by Deborah L. Thorne1, Barnes & Thornburg LLP
Recovery of LBO................ 1 Member Profile................... 3 Complimentary Registration ........................................ 5 Legislative Session............. 6 International Corner........... 8 ITSBM Scholarships............ 9 NOF Scholarship Funds....... 10 Scholarship Recipient and New Designee’s......................... 10 BCLC Webinars................... 11 Education Schedule............ 11 New Members.................... 12 Job Postings...................... 13 Contacts............................ 20
T
he economic optimism and greed of the last decade and the resulting leveraged buyouts (LBOs) placed a number of companies in dire financial situations. While management and shareholders reaped the benefits of LBOs, unsecured creditors were denied their share of the largess. Frequently, transfers to shareholders and management siphoned out so much cash that even if the company was not insolvent at the time of a stock redemption, it was left with insufficient capital to operate as a going-concern. As a result of certain LBOs, companies collapsed under the weight of their debt, leaving unsecured creditors to attempt to recover fraudulent conveyances made to shareholders and management. Among the most notable is that involving the failed LBO of the Tribune Co., the publisher of the Chicago Tribune and Los Angeles Times and former owner of the Chicago Cubs. The Tribune Co. was burdened with nearly $9 billion of new debt through a complicated LBO in 2007. Less than one year later, it filed for chapter 11 relief in an effort to reorganize the financial ruin in which it found itself due in large part to the LBO.2 The out-of-the money creditors determined that the payments to the former shareholders receiving transfers at the time of the LBO should be recovered for the benefit of the unsecured creditors and filed an action seeking recovery of the transfers.3 The unsecured creditors’ committee also filed adversary proceedings, one seeking to recover transfers made to the redeeming former shareholders and a second proceeding to recover transfers made to certain lenders.4 In other cases, unsecured creditors recovered or are attempting to recover transfers made to “old” equity as fraudulent transfers at the time of the LBO.5 Many of these attempts have been attacked, and some thwarted, by the assertion of § 546(e) claiming that the transfers were “settlement payments” that qualified for statutory “safe-harbor” treatment. Section 546(e) does not offer the broad protection claimed by former shareholders. ...continue on page 17 3 4 1
The author thanks Rebecca Workman and John T. Gregg of Barnes & Thornburg LLP for their comments and constructive criticism for this article.
2
In re Tribune Co., et al., Case No. 08-13141 (KJC), Jointly Administered (Bankr. D. Del.).
5
Wilmington Trust Co. v. JPMorgan Chase Bank NA, No. 10-50732 (Bankr. D. Del. March 4, 2010). Official Committee of Unsecured Creditors v. Fitzsimmons, Adversary Nos. 10-54010, and Official Committee of Unsecured Creditors v. JPMorgan Chase Bank NA, 10-55969 (Bankr. D. Del.). Official Committee of Unsecured Creditors of Quebecor World (USA) Inc. v. American United Life Insurance Co. (In re Quebecor World (USA) Inc.), 435 B.R. 201 (Bankr. S.D.N.Y. 2011) (payments involved transfer of cash to complete securities transaction and were “settlement payments” that qualified for statutory “safe harbor” treatment); QSI Holdings Inc., et al. v. Alford, et al. (In re QSI Holdings Inc.), 571 F.3d 545 (6th Cir. 2009) (shareholder payments qualified as “settlement payment” for purposes of § 546(e) barring trustee’s avoidance). See also Geltzer v. Mooney (In re MacMenamin’s Grill Ltd.), 450 B.R. 414 (Bankr. S.D.N.Y. 2011) (payments to former shareholders in closely held corporation received in connection with LBO were not “settlement payments” because such payments did not disrupt the securities’ market so § 546(e) did not apply).
Page 1