503 B.R. 348, 372-73 (Bankr. S.D.N.Y. 2014), as corrected (Jan.

16, 2014). In Lyondell, the bankruptcy court recognized the presumption that “the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress” and that, because “the States have traditionally occupied the field of fraudulent transfer law,” “applying the presumption against preemption is therefore appropriate.” In Lyondell, the court found section 546(e) inapplicable as to “LBO payments to stockholders at the very end of the asset transfer chain, where the stockholders are the ultimate beneficiaries of the constructively fraudulent transfers, and can give the money back to injured creditors with no damage to anyone but themselves.” Id. The Delaware bankruptcy court similarly found that policy reasons supported its finding that preemption was inappropriate. As was the case in Lyondell, the Physiotherapy court found that permitting the trustee to pursue the state law fraudulent transfer claims (which do not involve, for example, any swap transactions or commodities trading, but which, here, involved transactions with non-publicly traded securities) would not implicate the concerns that the safe harbor provisions are to meant to protect, i.e., transactions that have a destabilizing “ripple effect” on the financial markets.

The court also seemed to be swayed (at least in part) by the alleged bad faith of the shareholders, who purportedly controlled the debtor and its board of directors and, therefore, may have been involved with or authorized the wrongdoing alleged in the complaint. The court clarified that section 546(e) would not prevent the trustee from asserting state law fraudulent transfer claims in the capacity of a creditor-assignee when “(1) the transaction sought to be avoided poses no threat of ‘ripple effects’ in the relevant securities markets; (2) the transferees received payment for non-public securities, and (3) the transferees were corporate insiders that allegedly acted in bad faith.” The court also allowed the trustee’s federal and state intentional fraudulent transfer claims to proceed (such claims are expressly not subject to the Bankruptcy Code’s safe harbor provisions) and dismissed the Trustee’s remaining constructive fraudulent transfer claims brought under sections 544 and 548 of the Bankruptcy Code (as these claims were shielded by section 546(e)). The implications of the Delaware bankruptcy court’s noteworthy departure from the Second Circuit’s Tribune decision is an interesting development and one that is likely to spark further debate and litigation, including, perhaps, an appeal to the Third Circuit Court of Appeals. Berwyn | Boston | Detroit | Harrisburg | Los Angeles | New York | Orange County | Philadelphia | Pittsburgh | Princeton Silicon Valley | Washington | Wilmington pepperlaw.com .