A group of creditors from the Tribune Media Co.'s 2008 bankruptcy cannot recover money paid to the defunct firm's investors in leveraged buyout before the company filed for Chapter 11 protection in Delaware, the U.S. Court of Appeals for the Second Circuit ruled Thursday.

A three-judge panel of the Manhattan-based appeals court said that the creditors' state law claims for constructive fraudulent conveyance were preempted by a provision of U.S. bankruptcy law, which protects certain transactions involving securities contracts.

The U.S. Supreme Court last year narrowed the scope of the Section 546(e) safe harbor to exclude certain fraudulent transfers made through the "conduit" of a financial institution to a third party, giving new hope to creditors claiming that billionaire Samuel Zell's 2007 leveraged buyout had overpaid investors in exchange for returning their shares to Tribune.

U.S. District Judge Denise Cote of the Southern District of New York, however, denied their motion to amend the complaint in light of the high court's ruling, finding that Tribune was itself a "financial institution" that qualified for protection under the bankruptcy code. On appeal, the creditors argued that they regained the ability to pursue their state law claims after the bankruptcy trustee declined to pursue them within the two-year statute of limitations provided by federal law.

But Second Circuit Judges Ralph K. Winter and Christopher F. Droney said Thursday that the theory created a number of "ambiguities, anomalies and outright conflicts" with the federal bankruptcy statute. Among them, the judges said, was the possibility that bankruptcy proceedings could be held up while creditors pursue "piecemeal actions" brought by creditors.

"This is precisely opposite of the intent of the code's procedures," the judges wrote in a 75-page opinion.

"Any trustee would have grave difficulty negotiating more than a nominal settlement in the federal action if it cannot preclude state claims attacking the same transfers but not requiring a showing of actual fraudulent intent," Winter and Droney wrote. "Unable to settle, a trustee will be reluctant to expend the estate's resources on vigorously pursuing the federal claim while awaiting the stayed state claims to revert and to be litigated by creditors."

The judges were joined by U.S. District Judge Alvin K. Hellerstein of the Southern District of New York, who sat by designation.

In addition to the "disruptive effect" of the creditors' position, there were bigger policy concerns regarding the efficiency of securities market, which are subject to extensive federal regulations.

The appeals court noted that the broad language of 546(e) was meant to protect the market from "after-the-fact unwinding of securities transactions," which could expose investors in public companies to "substantial" risks.

For instance, the judges said, players in the market would face increased uncertainty surrounding their transactions, and institutional investors would find securities markets far more risky if they were exposed to liabilities from securities investments they made long ago.

"A lack of protection against the unwinding of securities transactions would create substantial deterrents, limited only by the copious imaginations of able lawyers, to investing in the securities market," they said.

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