Valuing Tendered Shares in Fraudulent Transfer Cases

Companies that enter into leveraged buyouts (LBO) that fail typically end up in bankruptcy. Section 546(e) of the Bankruptcy Code¹ acts as a “safe harbor” to protect recipients of certain settlement payments from law suits by the bankruptcy estate representative (e.g., the debtor). Case law² has interpreted this “safe harbor” provision to protect public shareholders from being sued by the bankruptcy estate representative for constructive fraudulent transfers³ in respect of payments made for their tendered shares.⁴

Recently, courts have considered whether the §546(e) “safe harbor” applies to protect public shareholders in constructive fraudulent transfer litigation if the plaintiffs are creditors suing under state fraudulent transfer laws after the bankruptcy estate representative has declined to do so because of the §546(e) “safe harbor” provision. In In re Tribune Fraudulent Conveyance Litig.⁵ and In re Lyondell Chem.,⁶ shareholder motions to dismiss, based primarily on federal preemption grounds, were denied on the basis that §546(e) does not apply to creditors (as contrasted to the bankruptcy estate representative) suing shareholders to recover a state law constructive fraudulent transfer. These cases, if upheld on appeal, will require the court to consider the proper result for the passive, tendering shareholder, who happened to be an investor in a company that did the LBO that ultimately failed. Without the benefit of the §546(e) “safe harbor” defense, tendering shareholders will try and find another bright line defense to extricate themselves at the early stages of a complex and expensive fraudulent transfer litigation. The reliance on market data for value determinations in a fraudulent transfer case arguably may provide that bright line alternative defense.

Fraudulent Transfer Law