First Impressions: Seventh Circuit Rules that the Bankruptcy Code's "Safe Harbor" for Securities Contracts Transfers Applies to Non-Public Securities
Section 546(e) of the Bankruptcy Code's "safe harbor" preventing avoidance in bankruptcy of certain securities, commodity, or forward-contract payments has long been a magnet for controversy. Several noteworthy court rulings have been issued in bankruptcy cases addressing the scope of the provision, including its limitation to transactions involving "financial institutions" as transferors or transferees, its preemption of avoidance litigation that could have been commenced by or on behalf of creditors under applicable non-bankruptcy law, and its application to non-public transactions.
One of the latest chapters in the ongoing debate was written by the U.S. Court of Appeals for the Seventh Circuit in Petr v. BMO Harris Bank N.A., 95 F.4th 1090 (7th Cir. 2024) ("BMO Harris 2"). The Seventh Circuit affirmed a district court ruling broadly construing the section 546(e) safe harbor to bar a chapter 7 trustee from suing under state law and section 544 of the Bankruptcy Code to avoid an alleged constructively fraudulent transfer made by the debtor shortly after it had been acquired in a leveraged buy-out ("LBO"). Among other things, the Seventh Circuit agreed with the district court's conclusions that: (i) the safe harbor is not limited to transfers involving publicly traded securities; and (ii) section 546(e) preempted the trustee's claim to recover the value of the transfer under section 544 and state law.
The Section 546(e) Safe Harbor
Section 546 of the Bankruptcy Code imposes a number of limitations on a bankruptcy trustee's avoidance powers, which include the power to avoid certain preferential and fraudulent transfers. Section 546(e) provides that the trustee may not avoid, among other things, a pre-bankruptcy transfer that is a settlement payment "made by or to (or for the benefit of) a … financial institution [or a] financial participant…, or that is a transfer made by or to (or for the benefit of)" any such entity "in connection with a securities contract," except under section 548(a)(1)(A) of the Bankruptcy Code. Thus, the section 546(e) "safe harbor" bars avoidance claims challenging a qualifying transfer unless the transfer was made with actual intent to hinder, delay, or defraud creditors under section 548(a)(1)(A), as distinguished from constructively fraudulent transfers under section 548(A)(1)(B) where the debtor is insolvent at the time of the transfer (or becomes insolvent as a consequence) and receives less than reasonably equivalent value in exchange.
Section 101(22) of the Bankruptcy Code defines the term "financial institution" to include, in relevant part:
[A] Federal reserve bank, or an entity that is a commercial or savings bank, industrial savings bank, savings and loan association, trust company, federally-insured credit union, or receiver, liquidating agent, or conservator for such entity and, when any such Federal reserve bank, receiver, liquidating agent, conservator or entity is acting as agent or custodian for a customer (whether or not a "customer", as defined in section 741) in connection with a securities contract (as defined in section 741) such customer….
11 U.S.C. § 101(22). "Customer" and "securities contract" are defined broadly in sections 741(2) and 741(7) of the Bankruptcy Code, respectively. Sections 101(51A) and 741(8) define the term "settlement payment."
According to the legislative history of section 546(e), the purpose of the safe harbor is to prevent "the insolvency of one commodity or security firm from spreading to other firms and possibly threatening the collapse of the affected market." H.R. Rep. No. 97-420, at 1 (1982). The provision was "intended to minimize the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries." Id.
Notable Court Rulings
Many notable court rulings have addressed: (i) whether section 546(e) preempts fraudulent transfer claims that can be asserted by or on behalf of creditors by a bankruptcy trustee under state law; (ii) whether the section 546(e) safe harbor insulates from avoidance only transactions involving publicly traded securities; and (iii) whether a "financial institution" must be the transferor or ultimate transferee, as distinguished from an intermediary or conduit, for a transaction to be insulated from avoidance under the safe harbor.
Preemption. For example, in Deutsche Bank Trust Co. Ams. v. Large Private Beneficial Owners (In re Tribune Co. Fraudulent Conveyance Litig.), 818 F.3d 98 (2d Cir. 2016) ("Tribune 1"), the U.S. Court of Appeals for the Second Circuit affirmed lower court decisions dismissing creditors' state law constructive fraudulent transfer claims arising from the 2007 LBO of Tribune Company ("Tribune"). According to the Second Circuit, even though section 546(e) expressly provides that "the trustee" may not avoid certain payments under securities contracts unless such payments were made with the actual intent to defraud, section 546(e)'s language, its history, its purposes, and the policies embedded in the securities laws and elsewhere lead to the conclusion that the safe harbor was intended to preempt constructive fraudulent transfer claims asserted by creditors under state law.
The Second Circuit recently reaffirmed this approach in In re Nine W. LBO Sec. Litig., 87 F.4th 130 (2d Cir. 2023), reh'g denied, Nos. 20-3257-cv (L) et al. (2d Cir. Jan. 3, 2024), where the court adopted a "transfer-by-transfer" rather than a "contract-by-contract" approach to the safe harbor in affirming in part and reversing in part a district court ruling that section 546(e) preempted a litigation trustee's fraudulent transfer and unjust enrichment claims seeking avoidance of payments made to public and non-public shareholders as part of an LBO because only the public shareholder payments involved a "financial institution."
Previously, in Holliday, Liquidating Trustee of the BosGen Liq. Trust v. Credit Suisse Secs. (USA) LLC, 2021 WL 4150523 (S.D.N.Y. Sept. 13, 2021) ("Boston Generating"), appeal filed, No. 21-2543 (2d Cir. Oct. 8, 2021), appeal stayed, No. 21-2543 (2d Cir. Oct. 3, 2022), the U.S. District Court for the Southern District of New York held that section 546(e) preempts intentional fraudulent transfer claims under state law because the intentional fraud exception expressly included in the provision applies only to intentional fraudulent transfer claims under federal law.
Public v. Private Transactions. Because section 546(e) is silent as to whether it applies to both public and private transactions, some courts, finding the language of the provision to be ambiguous and looking to its legislative history for guidance, have concluded that the safe harbor is limited to transactions involving publicly traded securities. See, e.g., Kipperman v. Circle Trust F.B.O. (In re Grafton Partners, L.P.), 321 B.R. 527, 539 (B.A.P. 9th Cir. 2005) (finding that section 546(e) places a "line between public transactions that involve the clearance and settlement process and nonpublic transactions that do not involve that process"); Kapila v. Espirito Santo Bank (In re Bankest Capital Corp.), 374 B.R. 333, 346 (Bankr. S.D. Fla. 2007) (section 546(e) is inapplicable where the "case did not involve the utilization of public markets or publicly traded securities").
Other courts have disagreed, concluding that section 546(e) is not on its face limited to transactions involving publicly traded securities, and that resort to the provision's legislative history is therefore unwarranted. See, e.g., In re Quebecor World (USA) Inc., 719 F.3d 94 (2d Cir. 2013) (ruling that the safe harbor applied to insulate from avoidance a repurchase transaction for private-placement notes that involved payments to a noteholder trustee that was a "financial institution"); overruled in part on other grounds by Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 583 U.S. 366 (2018) ("Merit"); Brandt v. B.A. Capital Co. L.P. (In re Plassein Int'l Corp.), 590 F.3d 252 (3d Cir. 2009) (finding that the plain meaning of section 546(e) is clear, and holding that the provision is not limited to publicly traded securities but also extends to transactions involving privately held securities), cert. denied, 559 U.S. 1093 (2010); In re QSI Holdings, Inc., 571 F.3d 545, 550 (6th Cir. 2009) ("[W]e hold that nothing in the text of § 546(e) precludes its application to settlement payments involving privately held securities"), overruled in part on other grounds by Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 583 U.S. 366 (2018); Contemporary Indus. Corp. v. Frost, 564 F.3d 981 (8th Cir. 2009) (section 546(e) is not limited to public securities transactions and protects from avoidance a debtor's payments deposited in national bank in exchange for its shareholders' privately held stock during an LBO); In re Olympic Nat. Gas Co., 294 F.3d 737, 742 n.5 (5th Cir. 2002) (by including references to both the commodities and securities markets, lawmakers meant to exclude from the automatic stay and avoidance as a constructively fraudulent transfer "both on-market, and the corresponding off-market, transactions"); In re Taylor, Bean & Whitaker Mortgage Corp., 2017 WL 4736682, *9 (M.D. Fla. Mar. 14, 2017) ("[I]f Congress wanted § 546(e) to apply to only non-private transactions, it has the constitutional authority to rewrite the statute. The judiciary, however, does not."); In re Lancelot Investors Fund, L.P., 467 B.R. 643, 655 (N.D. Ill. 2012) (section 546(e) "does not limit its protection to transactions made on public exchanges.").
Financial Institution as Transferor or Transferee. Prior to the Supreme Court's 2018 ruling in Merit, there was a split among the circuit courts concerning whether the section 546(e) safe harbor barred state law constructive fraud claims to avoid transactions in which the "financial institution" involved was merely a "conduit" for the transfer of funds from the debtor to the ultimate transferee. See generally Collier on Bankruptcy ¶ 546.06[2] n.16 (listing cases) (16th ed. 2023). The Supreme Court resolved the circuit split in Merit.
In Merit, a unanimous Supreme Court held that section 546(e) did not protect a transfer made as part of a non-public stock sale transaction through a "financial institution," regardless of whether the financial institution had a beneficial interest in the transferred property. Instead, the relevant inquiry is whether the transferor or the transferee in the transaction sought to be avoided overall is itself a financial institution. Because the selling shareholder in the LBO transaction that was challenged in Merit was not a financial institution (even though the conduit banks through which the payments were made met that definition), the Court ruled that the payments fell outside of the safe harbor.
In a footnote, the Court acknowledged that the Bankruptcy Code defines "financial institution" broadly to include not only entities traditionally viewed as financial institutions, but also the "customers" of those entities, when financial institutions act as agents or custodians in connection with a securities contract. Merit, 583 U.S. at 373 n.2. The selling shareholder in Merit was a customer of one of the conduit banks yet never raised the argument that it therefore also qualified as a financial institution for purposes of section 546(e). For this reason, the Court did not address the possible impact of the selling shareholder's status on the scope of the safe harbor.
The Second Circuit quickly filled that void. In In re Tribune Co. Fraudulent Conveyance Litig., 946 F.3d 66 (2d Cir. 2019), dismissing cert. in part, 141 S. Ct. 728 (2020), cert. denied, 141 S. Ct. 2552 (2021) ("Tribune 2"), the Second Circuit explained that, under Merit, the payments to Tribune's shareholders were shielded from avoidance under section 546(e) only if either Tribune, which made the payments, or the shareholders who received them, were "covered entities." It then concluded that Tribune was a "financial institution," as defined by section 101(22) of the Bankruptcy Code, and "therefore a covered entity."
According to the Second Circuit, the entity Tribune retained to act as depository in connection with the LBO was a "financial institution" for purposes of section 546(e) because it was a trust company and a bank. Therefore, the court reasoned, Tribune was likewise a financial institution because, under the ordinary meaning of the term as defined by section 101(22), Tribune was the bank's "customer" with respect to the LBO payments, and the bank was Tribune's agent according to the common law definition of "agency." Tribune 2, 946 F.3d at 91; see also Kelley as Tr. of PCI Liquidating Tr. v. Safe Harbor Managed Acct. 101, Ltd., 31 F.4th 1058, 1065 (8th Cir. 2022) (noting that "we do not disagree" with Tribune 2's "basic assumption" that the customer of a financial institution may itself qualify as a financial institution for purposes of the section 546(e) safe harbor if it meets the definition of "financial institution" set forth in section 101(22)(A) of the Bankruptcy Code).
Several bankruptcy and district courts in the Second Circuit picked up where the Second Circuit left off in Tribune 2, ruling that pre-bankruptcy recapitalization or LBO transactions were safe-harbored from avoidance as fraudulent transfers because they were effected through a bank or other qualifying financial institution. See, e.g., Boston Generating, 2021 WL 4150523, at *6 (payments made to the members of LLC debtors as part of a pre-bankruptcy recapitalization transaction were protected from avoidance under section 546(e) because the debtors were "financial institutions," as customers of banks that acted as their depositories and agents in connection with the transaction); In re Nine W. LBO Sec. Litig., 482 F. Supp. 3d 187 (S.D.N.Y. 2020) (dismissing fraudulent transfer and unjust enrichment claims brought by a chapter 11 plan litigation trustee and an indenture trustee seeking to avoid payments made as part of an LBO, and ruling that the payments were protected by the safe harbor because they were made by a bank acting as the debtor's agent), aff'd in part, rev'd in part and remanded, 87 F.4th 130 (2d Cir. 2023); SunEdison Litigation Trust v. Seller Note, LLC (In re SunEdison, Inc.), 620 B.R. 505, 515 (Bankr. S.D.N.Y. 2020) (noting that, under Merit, the "relevant transfer" was "the overarching transfer," and ruling that, because one step of an "integrated transaction" was effected through a qualified financial institution, section 546(e) shielded the "component steps" from avoidance as a constructive fraudulent transfer); see also In re Tops Holding II Corp., 646 B.R. 617 (Bankr. S.D.N.Y. 2022) (the safe harbor did not insulate a transaction whereby, after encumbering the assets of a privately held chapter 11 debtor with privately issued debt, certain private equity investors took massive dividends, because, although the proceeds of the private notes were intended to be deposited into the bank accounts of the debtors and the private equity investors, the parties' banks were not agents or custodians (as was the case in Tribune 2), and therefore were not qualifying recipients for purposes of section 546(e)), leave to appeal denied, 2023 WL 119445 (S.D.N.Y. Jan. 6, 2023).
BMO Harris
In March 2019, creditors filed an involuntary chapter 7 petition against BWGS, LLC (the "debtor"), a distributor of agricultural equipment and supplies, in the Southern District of Indiana. After the bankruptcy court entered an order for relief, the chapter 7 trustee filed an adversary proceeding against BMO Harris Bank, N.A. ("BMO") and Sun Capital Partners, VI, L.P. ("Sun Capital" and, collectively, the "defendants"). In his complaint, the trustee sought to avoid as constructively fraudulent under Indiana law and section 544(b) of the Bankruptcy Code approximately $25 million transferred by the debtor in January 2017 to BMO to repay a bridge loan made to a Sun Capital affiliate created in 2016 to acquire the debtor's stock from a non-publicly traded employee stock ownership plan trust (the "ESOP Trust") for $37.75 million.
Although the debtor was not liable on the bridge loan, which was guaranteed by Sun Capital, the debtor borrowed funds from another bank one month after the acquisition was completed to pay off the bridge loan. The debtor pledged its assets as security for repayment of the second loan.
Because the transfer occurred more than two years before the bankruptcy filing, the chapter 7 trustee could not seek avoidance under section 548 of the Bankruptcy Code. Instead, the trustee invoked section 544(b) to step into the shoes of an actual creditor for the purpose of suing BMO and Sun Capital to avoid the constructively fraudulent transfer under Indiana's version of the Uniform Voidable Transactions Act (the "UVTA"). The trustee alleged that the $25 million transfer to pay off the bridge loan was made "to or for the benefit" of Sun Capital and BMO and that the debtor received no consideration for encumbering its property. The trustee also sought to recover the value of the transfer from either BMO—the original transferee—of the beneficiary of the transfer—Sun Capital—under section 550(a) of the Bankruptcy Code and the UVTA.
The defendants moved to dismiss the trustee's complaint. They argued that the litigation was barred by the section 546(e) safe harbor because the bridge loan repayment was made in connection with several securities contracts, including the stock purchase agreement between the Sun Capital affiliate and the ESOP Trust, the bridge loan from BMO (a "financial institution"), and the Sun Capital guarantee. The trustee countered that section 546(e) applies only to transactions "that implicate systemic risks in the national clearance and settlement system for trades of publicly-held securities," not private LBO transactions.
The bankruptcy court denied the defendants' motion to dismiss. See Petr v. BMO Harris Bank N.A. (In re BWGS LLC), 643 B.R. 576 (Bankr. S.D. Ind. 2022), rev'd and remanded, 2023 WL 3203113 (S.D. Ind. May 2, 2023) ("BMO Harris 1"), aff'd, 95 F.4th 1090 (7th Cir. 2024). According to the bankruptcy court, the section 546(e) safe harbor did not apply because the trustee's complaint sought avoidance of the constructively fraudulent transfer under section 544(b), rather than section 548. The court also found that the safe harbor did not apply because the stock sold by the ESOP Trust was not publicly traded, hence avoiding the transfer would not pose any systemic risk to the financial markets.
In addition, because there was a one-month gap between the closing of the LBO and the bridge loan repayment, the bankruptcy court concluded that the two transactions were separate for purposes of section 546(e). Finally, the court held (sua sponte) that the trustee's claim to avoid the value of the transfer from Sun Capital under the UVTA via the "strong arm" powers in section 544(b) did not implicate the section 546(e) safe harbor because the UVTA provides that a creditor may recover the value of a transfer to the extent that the is avoidable rather than avoided.
The bankruptcy court authorized the defendants' interlocutory appeal to the district court.
The district court reversed and remanded the case to the bankruptcy court.
According to the district court, the bankruptcy court erred by: (i) limiting its analysis to whether the stock purchase agreement, as distinguished from all of the related agreements, was a "securities contract" for purposes of the safe harbor; and (ii) concluding that the safe harbor was not implicated because the debtor's stock was not publicly traded. Instead, the district court explained, the bankruptcy court should have examined whether all of the related agreements were securities contracts, as defined in section 741(7), in determining whether the relevant transactions were within the scope of section 546(e).
"Based on the plain and unambiguous language in Section 546(e)," the district court concluded that the stock purchase agreement, the bridge loan, and the Sun Capital guarantee were all covered by the safe harbor because they were entered into "in connection with a securities contract." BMO Harris 1, 2023 WL 3203113, at *5.
It explained that all three agreements fell within the definition of a "securities contract" because: (i) the stock purchase agreement was the transaction by which the Sun Capital affiliate acquired the debtor's stock from the ESOP Trust, and the agreement constituted "a contract for the purchase … of a security," as specified in section 741(7); (ii) the bridge loan was made by BMO to the Sun Capital affiliate to provide part of the $37.75 million stock purchase price, and the loan was an "extension of credit for the clearance or settlement of [a] securities transaction[ ]," or an "agreement … that is similar to an agreement or transaction" referred to in section 741(7); and (iii) by the Sun Capital guarantee, Sun Capital provided a credit enhancement to BMO with respect to the bridge loan, and the guarantee was accordingly an "arrangement or other credit enhancement related to any agreement or transaction referred to in [§ 741(7)], including any guarantee … to a … financial institution … in connection with any agreement or transaction referred to in [§ 741(7)]." Id.
The district court also faulted the bankruptcy court's determination that the safe harbor was inapplicable because the bridge loan was repaid one month after the LBO. According to the court, although the Seventh Circuit had not then addressed the issue, the phrase "in connection with a securities contract" in section 546(e) should be read broadly to mean "related to" a securities contract. It wrote that "the Transfer was made in connection with the Stock Purchase Agreement because it was made to pay off the Bridge Loan that was used to close the Stock Purchase Agreement." Id. at *7.
The district court then ruled that the bankruptcy court erroneously concluded, based on the legislative history of section 546(e), that the safe harbor applies only to transactions involving publicly traded securities. According to the district court:
Nowhere in § 546(e) is a distinction drawn between a transaction that implicates publicly traded securities versus one that implicates privately held securities. Instead, as discussed above, § 546(e) refers to the definition of "securities contract" in § 741(7), which similarly does not distinguish between publicly or privately held securities. The fact that the definition of "securities contract" appears in another section of the Bankruptcy Code is of no moment—indeed statutes frequently refer to other statutes in order to define included terms.
Id. at *9. The district court also noted that its conclusion is consistent with the rulings of "numerous" courts, including the Sixth and Eighth Circuits in QSI Holdings and Contemporary Industries, respectively. Id.
The district court rejected the trustee's argument that he could recover the value of the property transferred for the benefit of Sun Capital, which was not a transferee, under section 544(a) of the Bankruptcy Code, which allows a trustee to "avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by" certain creditors that extend credit to the debtor, and the UVTA. According to the district court, "[b]ecause the Trustee did not assert a claim under § 544(a) in the Amended Complaint in the adversary proceeding, nor did he rely upon that provision in opposing the Motions to Dismiss, the Court will not consider any arguments under § 544(a) in this appeal." Id. at *11.
Finally, citing Tribune 1, the district court ruled that the trustee's state constructive fraudulent transfer claims under section 544(b) and the UVTA were preempted by section 546(e).
The district court accordingly reversed the bankruptcy court's ruling and remanded the case below with instructions to dismiss the suit.
The trustee appealed the district court's ruling to the Seventh Circuit.
The Seventh Circuit's Ruling
A three-judge panel of the Seventh Circuit affirmed.
Writing for the panel, U.S. Circuit Court Judge Amy J. St. Eve explained that the appeal raised two issues of first impression in the Seventh Circuit: (i) whether the section 546(e) safe harbor "extends to transactions involving private securities that do not implicate the national securities market"; and (ii) if so, whether the safe harbor provision "also preempts state law claims seeking similar relief such that a bankruptcy trustee may not bring them under § 544(a) of the Bankruptcy Code." "We hold today," Judge St. Eve wrote, "that the answer to each of these questions is 'yes.'" BMO Harris 2, 95 F.4th at 1094.
The Seventh Circuit panel rejected the trustee's argument that reference to section 546(e)'s legislative history was warranted to determine whether lawmakers intended the provision to apply to private securities transactions because the court had previously found section 546(e) to be ambiguous in FTI Consulting, Inc. v. Merit Mgmt. Grp., 880 F.3d 690 (7th Cir. 2016), aff'd and remanded, 583 U.S. 366 (2018). According to Judge St. Eve, "we held no such thing" in FTI Consulting. BMO Harris 2, 95 F.4th at 1098. Rather, she explained, the discrete issue in that case was whether the safe harbor protects transfers conducted through financial institutions as mere conduits, as distinguished from the transferor or the ultimate transferee.
Judge St. Eve further noted that there was no question that the transfer involved in FTI Consulting was a "settlement payment" or a payment made "in connection with a securities contract" for purposes of section 546(e). Therefore, she emphasized, the court did not previously hold that the provision "as a whole is ambiguous," and its conclusion that certain parts of section 546(e) were ambiguous—thereby warranting reference to its legislative history—was limited to the meaning of the phrases "by or to" and "for the benefit of" a financial institution in connection with a securities contract. Id. Even after consulting the legislative history regarding the meaning of these terms, Judge St. Eve wrote, "we did not come close to holding that § 546(e), or any portion thereof, applies only to securities transactions implicating the national securities clearance system." Id.
Because the parties did not dispute that the transfer to BMO was made to a "financial institution," the Seventh Circuit panel considered whether the term "securities contract" in section 546(e) is ambiguous. It concluded that it was not, and that "nothing in the plain language of § 546(e) excludes private contracts not implicating the national securities clearance system from the definition of 'securities contract.'" Id. at 1099.
Judge St. Eve explained that section 741(7) defines the term "very broadly," and none of section 741(7)'s "eleven sub-definitions contains any indication that it is limited to contracts implicating only publicly held securities." Id. Moreover, she noted: (i) section 741(7)(a)(i) states that "securities contract" includes "a contract for the purchase, sale, or loan of a security"; (ii) "security" is defined in section 101(49)(A)(ii) of the Bankruptcy Code to include "stock"; and (iii) "stock" is commonly understood to include shares in private and public companies. Id.
The Seventh Circuit panel rejected the argument that, because the definition of "securities contract" is located in the subchapter of the Bankruptcy Code governing stockbroker liquidations (subchapter III of chapter 7, §§ 741-753), Congress intended to "somehow graft[ ] a public-securities requirement onto the otherwise-clear meaning of the term." Id. Judge St. Eve noted that section 102(8) of the Bankruptcy Code instead states that "a definition, contained in a section of [the Bankruptcy Code] that refers to another section of [the Bankruptcy Code], does not for the purpose of such reference, affect the meaning of a term used in such other section." Id. Thus, she wrote, "Congress … made it clear that it did not intend cross-references between sections of the Code to impact the meaning of terms used in those other sections." Id.
The Seventh Circuit panel noted that its conclusion that the section 546(e) safe harbor is not restricted to public securities comports with the rulings of its sister circuits in Plassein, Frost, QSI Holdings, and Olympic. "Accordingly," the Seventh Circuit panel wrote, "we hold that the term 'securities contract' as used in § 546(e) unambiguously includes contracts involving privately held securities." Id. at 1100.
Applying the "unambiguous definition" in section 741(7), the Seventh Circuit panel agreed with the district court that the stock purchase agreement, the bridge loan, and the Sun Capital guarantee were all securities contracts for the reasons articulated by the district court. The Seventh Circuit panel also found no error in the district court's conclusion and reasoning that the challenged transfers were made "in connection with" those securities contracts, although it declined to define the "outer limits" of the "in connection with" requirement. Id. at 1101. Because the relevant agreements were securities contracts, the Seventh Circuit panel ruled that the challenged transfers could not be avoided by the trustee under section 544(b) of the Bankruptcy Code.
Finally, the Seventh Circuit panel denied the trustee's request to amend his complaint to add a claim for recovery of the value of the challenged transfer from Sun Capital under section 544(a) and the UVTA. According to the trustee, section 546(e)'s ban on avoidance of a constructively fraudulent transfer did not prohibit him from seeking a judgment for the value of the transfer because a transfer need only be avoidable under section 544(a) and the UVTA. The Seventh Circuit rejected this argument, ruling that amendment of the complaint would be futile. According to Judge St. Eve, the trustee's claim sought to invoke the UVTA under section 544(a) "to obtain the same relief that § 546(e) otherwise precludes," and that section 546(e) accordingly precluded the claim. The Seventh Circuit panel noted that this conclusion is consistent with decisions by two other circuits holding that section 546(e) preempts state law claims seeking recovery of the value of transfers protected from avoidance under the safe harbor. Id. at 1103 (citing Tribune 2, 946 F.3d at 90-92; Frost, 564 F.3d at 988). "To hold differently," Judge St. Eve wrote, "would render § 546(e) meaningless." Id. at 1104.
Outlook
The section 546(e) safe harbor has produced a wealth of notable court rulings in recent years, and BMO Harris 2 is no exception. Moreover, further developments on this issue are likely. Even though the U.S. Supreme Court declined to review Tribune 2 in 2021, an appeal of the decisions in Boston Generating has been pending for years before the Second Circuit.
On October 3, 2022, the Second Circuit issued an order staying the appeal of the district court's decision in Boston Generating pending the issuance of its ruling in Nine West, directing the parties to address the effect of the ruling on the appeal no later than 14 days after it handed down its decision. The remaining litigants submitted post-argument letter briefs on December 11, 2023.
Key takeaways from the Seventh Circuit's decision include: (i) five circuit courts of appeal have now concluded that the section 546(e) safe harbor is not limited to transactions involving transfers of publicly traded securities; and (ii) three circuits have now ruled that section 546(e) preempts state law claims seeking recovery of the value of transfers protected from avoidance under the safe harbor.
This article was prepared with the assistance of Nathaniel J. Parr.
