Choppy Waters in the Safe Harbor for Shareholders of Failed LBOs?

The Safe Harbor

When Congress enacted Section 546(e) of the Bankruptcy Code in 1982, it most likely did not envision the confusion and disagreement that would result. Motivated by a desire to “minimize the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries” (H.R. Rep. No. 420, 97th Cong., 2d Sess. (1982)) and to “promote customer confidence in commodity markets generally via the protection of commodity market stability,” [see Kaiser Steel Corp. v. Charles Schwab & Co., 913 F.2d 846, 849 (10th Cir.1990) (quoting Sen. R. No. 989, 95th Cong., 2d Sess. 8 (1978) (inner quotation marks omitted)], Section 546(e), a safe harbor statute, states, in pertinent part, as follows:

' the trustee may not avoid a transfer that is a ' settlement payment, as defined in section 101 or 741 of this title, made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency ' in connection with a securities contract ' that is made before the commencement of the [bankruptcy] case, except under section 548(a)(1)(A) of this title.

The safe harbor provision, therefore, protects relevant transfers, unless the transfer was made with actual intent to hinder, delay or defraud creditors. Thus, protected transfers cannot be avoided as preferential transfers or constructively fraudulent transfers. Intentional fraudulent transfer claims are not protected but are difficult to prove. To be successful on such a claim, a plaintiff must demonstrate there is a knowing intent on the part of the debtor to harm its creditors. Even the badges of fraud, which typically are used when direct evidence of fraudulent intent cannot be proven, are difficult to demonstrate in most cases.