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The Intent of Section 546(e)
On Dec. 1, 2016, Bankruptcy Judge Michael J. Kaplan, in Christophersen v. Pahel (In re TVGA Engineering, Surveying, P.C.), 14-1104 (K) (Bankr. W.D.N.Y. Dec. 1, 2016), held that when a private company repurchases stock from a shareholder, and the payments were made “by” the company “to” the shareholder, through a bank, those payments are not protected by Bankruptcy Code § 546(e)'s safe harbor defense because its application “cannot be permitted to turn upon the use of a bank.” In re TVGA Engineering, Surveying, P.C., 14-1104 (K) p.5 (Bankr. W.D.N.Y. Dec. 1, 2016).
Judge Kaplan relied on legislative intent to find that a transaction which potentially falls within the safe harbor protections of 546(e) should not be afforded the benefits of the safe harbor defense because it is between private parties, is truly “by” the debtor and “to” the transferor, merely uses a financial institution like cash and, perhaps most important, if reversed, would not likely “seriously upset the securities market's ability to function.”
The Judge recognized that he was bound by precedent in the U.S. Court of Appeals for the Second Circuit that “a financial institution (such as a bank) need not have taken a 'beneficial interest' in a security (such as a share of stock or a note or a bond) in order to trigger the §546(e) 'safe harbor.'” In re TVGA Engineering, Surveying, P.C., 14-1104 (K) p.5 (Bankr. W.D.N.Y. Dec. 1, 2016) (citing In re Quebecor World (USA) Inc., 719 F.3d 94 (2d Cir. 2013)). Accordingly, Judge Kaplan could not rely solely upon the fact that the bank in In re TVGA Engineering Surveying, P.C. did not receive a financial benefit from the transaction. Instead, he distinguished prior precedent, and aligned with decisions looking to the legislative intent of Bankruptcy Code § 546(e).
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