Law.com Subscribers SAVE 30%

Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.

The Bankruptcy StrategistFeaturesBankruptcyContractsLitigation

Second Circuit Reinforces Bankruptcy Code Settlement Payment Safe Harbor

By Michael L. Cook
November 01, 2024

The Second Circuit affirmed the lower courts' judgment that a "transfer made … in connection with a securities contract … by a qualifying financial institution" was entitled "to the protection of [Bankruptcy] Code §546 (e)'s safe harbor, which pre-empts the trustee's state-law fraudulent [transfer] claims." In re Boston Generating, LLC, 2024 WL 4234886 (2d Cir. Sept. 19, 2024). The lower courts had dismissed the liquidating trustee's claims because Code §546 (e)'s safe harbor provision had preempted the state law fraudulent transfer claims, relying on binding precedent. In re Tribune Co. Fraudulent Conv. Litig., 946 F.3d. 66 (2d Cir. 2019) (Tribune II), cert. denied, 141 S. Ct. 2552 (2021) (Creditors could not circumvent §546(e) safe harbor by suing under state law). More significant, though, was the court's explanation of why: a) the payment here was part of a securities contract; and why b) the debtor parent and its debtor subsidiary were "each a 'financial institution' under Bankruptcy Code (Code) §101(22)(A)."

Facts

The debtor corporate parent, a holding company, had used its debtor subsidiary to finance its so-called "Leveraged Recap Transaction." In effect, the parent purchased equity from its members using the cash borrowed by its subsidiary. The debtor subsidiary received loan proceeds from its lenders and promptly sent the proceeds from its bank account (approximately $708 million) to its parent's bank account for transfer to the selling members. The trustee sought to recover the $708 million from the member defendants "who received payments for their equity securities pursuant to the Leveraged Recap Transaction." Id. at*1. He alleged an "initial transfer" with $708 million from the subsidiary and a "subsequent transfer" of those funds to the defendant members. The trustee admittedly split the transaction to get around Code §546(e), arguing that the initial subsidiary-to-parent transfer was not a settlement payment and not made as part of a "securities contract."

This premium content is locked for Entertainment Law & Finance subscribers only

  • Stay current on the latest information, rulings, regulations, and trends
  • Includes practical, must-have information on copyrights, royalties, AI, and more
  • Tap into expert guidance from top entertainment lawyers and experts

For enterprise-wide or corporate acess, please contact Customer Service at [email protected] or 877-256-2473

Read These Next
The DOJ's Corporate Enforcement Policy: One Year Later Image

The DOJ's Criminal Division issued three declinations since the issuance of the revised CEP a year ago. Review of these cases gives insight into DOJ's implementation of the new policy in practice.

The Bankruptcy Hotline Image

Recent cases of importance to your practice.

Use of Deferred Prosecution Agreements In White Collar Investigations Image

This article discusses the practical and policy reasons for the use of DPAs and NPAs in white-collar criminal investigations, and considers the NDAA's new reporting provision and its relationship with other efforts to enhance transparency in DOJ decision-making.

How AI Has Affected PR Image

When we consider how the use of AI affects legal PR and communications, we have to look at it as an industrywide global phenomenon. A recent online conference provided an overview of the latest AI trends in public relations, and specifically, the impact of AI on communications. Here are some of the key points and takeaways from several of the speakers, who provided current best practices, tips, concerns and case studies.

New York's Latest Cybersecurity Commitment Image

On Aug. 9, 2023, Gov. Kathy Hochul introduced New York's inaugural comprehensive cybersecurity strategy. In sum, the plan aims to update government networks, bolster county-level digital defenses, and regulate critical infrastructure.