Pending litigation arising out of the corporate bankruptcies of Lyondell Basell and the Tribune Company has the potential to upend years of expansion of the Bankruptcy Code §546(e) safe harbor for securities transactions and settlement payments. This in turn could destabilize securities markets and make it more costly for companies to engage in capital markets transactions of all types, be they leveraged buyouts or ordinary course securities transactions necessary to the ongoing operation of the business. Market participants that rely on the §546(e) safe harbor in assessing risk should pay attention to the Tribune and Lyondell Basell cases and consider the impact that the eventual rulings in these cases may have on their transactions in the future.
Background
The U.S. Constitution grants to the federal government the authority to make uniform laws on bankruptcy. The U.S. Congress enacted the first federal bankruptcy law in 1800, while the most recent iteration, the U.S. Bankruptcy Code, was enacted in 1978. A prominent feature of our federal bankruptcy laws are the various causes of action set out in Chapter 5 of the Bankruptcy Code, by which the Bankruptcy Code empowers the trustee (or debtor-in-possession) to avoid and recover preferential or fraudulent transfers made by the debtor to third parties before the petition date. These avoidance actions are powerful tools, because they provide alternative, most likely solvent, sources—the transferees—from which the estate can recover funds to pay creditors.
