Seventh Circuit Applies Safe Harbor to Private Securities Transaction

"… [T]he term 'securities contract' as used in [Bankruptcy Code] §546(e) unambiguously includes contracts involving privately held securities." Petr v. BMO Harris Bank, N.A., (In re BWGS, LLC), 2024 WL 113217, *6 (7^th Cir. Mar. 15, 2024). Affirming the district court's reversal of the bankruptcy court, the court also held that "§546(e) preempts" the bankruptcy trustee's "proffered" state law fraudulent transfer claims. Id. at *10.

Facts

The Chapter 7 trustee here sued the acquiror and the lending bank, but not the selling shareholders, in connection with the failed leveraged buyout (LBO) of the target debtor. The defendant bank here had initially financed the acquiror's purchase of the target debtor's stock under a stock purchase agreement with a "bridge loan." The acquiror guaranteed payment of the bridge loan. "[L]ess than one month after acquisition," the defendant bank's bridge loan was repaid with funds from two new lenders who now had claims against the debtor, presumably secured by the debtor's assets. The court called this bridge loan repayment to the defendant bank the "Transfer" which also "relieved the acquiror of any obligations under the Bridge Loan." Id. at *1-*2. The debtor, of course, "received no value from the Transfer," but was indebted to the new lenders – the classic LBO. "The essence of a leveraged buyout is that investors "buy out" existing stockholders of a target company with mostly borrowed money (the "leverage"), and use the target's own assets to "secure the debt [guaranteeing or assuming] the debt to the lenders." Chas. J. Tabb, Law of Bankruptcy §6.37, at 439 (Foundation Press, 1997). The trustee sought in the bankruptcy court avoidance of the Transfer plus recovery of "its value from either" the defendant bank or the acquiror. Id. at *2.

Relevance

Section 546(a) of the Bankruptcy Code (Code) limits a trustee's avoiding powers (e.g., fraudulent transfers and preferences). In relevant part, it insulates from a trustee's fraudulent transfer or preference claim a "settlement payment" to a "financial institution … in connection with a securities contract," unless the debtor makes the payment with "actual intent to hinder, delay or defraud creditors" under §548(a)(1). See, In re Manhattan Inv. Fund Ltd., 397 B.R. 1, 13 n.8 (S.D.N.Y. 2007) ("§546(e) does not preclude avoidance if there is actual fraud under § 548(a)(1)(a),…"), aff'd, 328 F.App'x 709, 710 (2d Cir. 2009). This safe harbor provision was meant, among other things, to protect commodities and securities markets from major disturbances resulting from bankruptcy cases. See, In re Sentinel Mgmt. Grp., Inc., 746 F.3d 244, 252 (7^th Cir. 2014) ("By preventing one large bankruptcy from rippling through the security industry in this way, the §546(e) safe harbor protects the market from systemic risk and allows parties in the security industry to enter into transactions with greater confidence.").