Commercial Litigation and Arbitration

“Settlement Payment” Doctrine — Exemption from Bankruptcy Avoidance — Extends to Privately-Traded Securities Acquired in Leveraged Buyout; Caselaw Split

From QSI Holdings, Inc. v. Alford, 2009 U.S. App. LEXIS 14744 (6th Cir. July 6, 2009):

In this appeal, we must determine whether § 546(e) of the Bankruptcy Code applies to privately traded securities. If that is indeed the case, then the settlement payments made to defendant shareholders are exempt from avoidance. This is an issue of first impression in this circuit and we now hold, as did the bankruptcy and district courts below, that § 546(e) is not limited to publicly traded securities but also extends to transactions, such as the leveraged buyout at issue here, involving privately held securities.


Numerous courts, including the courts below, have acknowledged that the definition of "settlement payment" set out in § 741(8) is somewhat "circular." See Kaiser Steel Corp. v. Charles Schwab & Co., Inc., 913 F.2d 846, 848 (10th Cir. 1990)***. Nonetheless, courts have recognized that the definition is "extremely broad." See Contemporary Indus. Corp. v. Frost, 564 F.3d 981, 985 (8th Cir. 2009) (citing Kaiser Steel, 913 F.2d at 848 (quoting In re Bevill, Bresler & Schulman Asset Mgmt. Corp., 878 F.2d 742, 751 (3d Cir. 1989)); In re Resorts Int'l, Inc., 181 F.3d 505, 514-15 (3d Cir. 1999); In re Comark, 971 F.2d 322, 326 (9th Cir. 1992)).

With this in mind, we turn to the definition of "settlement payment." For the purposes of this appeal, the critical phrase in the definition is the final one: the payment must be one "commonly used in the securities trade." 11 U.S.C. § 741(8). Plaintiffs take issue with the lower courts' failure to consider whether the LBO contained the hallmarks of a payment made in the securities trade. Specifically, they fault the district court for basing its broad reading of "settlement payment" upon decisions that involve public, not private, securities transactions. They would have us look to the legislative history of § 546(e). That history is recounted briefly in Kaiser Steel***. In Kaiser Steel, the court went on to conclude that "the transfer of consideration in an LBO is consistent with the way 'settlement' is defined in the securities industry." Id.

However, Kaiser Steelinvolved publicly traded securities. The question posed here is whether its logic extends to privately traded securities. In a case involving facts similar to ours, the Eighth Circuit recently held that it does. Contemporary Indus. Corp., 564 F.3d at 986 ("Nothing in the relevant statutory language suggests Congress intended to exclude these payments from the statutory definition of 'settlement payment' simply because the stock at issue was privately held"). The court construed the phrase "commonly used in the securities trade" as "a catchall phrase intended to underscore the breadth of the § 546(e) exemption." .... We agree. While, like the Eighth Circuit, we recognize that other courts have reached a different conclusion, those courts stressed that Congress intended to protect publicly traded securities from market volatility caused by bankruptcy by means of § 546(e). See, e.g., In re Norstan Apparel Shops, Inc., 367 B.R. 68, 76 (Bankr. E.D.N.Y. 2007). But unlike the instant case, the Norstan transaction involved the two sole shareholders of a closely held Subchapter S corporation, did not implicate public securities markets, and lacked many of the indicia of transactions "commonly used in the securities trade." See Norstan, 367 B.R. at 73. This case, on the other hand, considers a transaction with the characteristics of a common leveraged buyout involving the merger of nearly equal companies, and nothing in the statutory language indicates that Congress sought to limit that protection to publicly traded securities. The value of the privately held securities at issue is substantial and there is no reason to think that unwinding that settlement would have any less of an impact on financial markets than publicly traded securities. Accord Contemporary Indus., 564 F.3d at 987.

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