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Is Safe Harbor of 11 U.S.C. § 546(e) Bigger Than You Thought?

The Bankruptcy Court in the Eastern District of Michigan recently issued an opinion and granted summary judgment for the defendants in Buchwald Capital Advisors vs. Papas, et. al., Adversary Proceeding No. 10-05712 (In re Greektown Holdings, LLC, et. al., Bankruptcy Case No. 08-53104) that could help provide defendants in certain avoidable transfer actions a powerful and perhaps often-overlooked defense.

In 2000, the defendant and another individual entered into a stock purchase and redemption agreement to sell their interests in Greektown Casino. In 2005 the defendant agreed to an accelerated, discounted payment in the amount of $95 million. To fund the payment, Greektown Casino's parent issued $182 million of senior notes, purchased by Merrill Lynch, the net proceeds of which were earmarked and went primarily to fund the payment to the defendant and the other former owner. In 2008, Greektown Casino, its parent and certain affiliates filed Chapter 11, confirmed a plan in January 2010, and later that year the litigation trustee appointed under the plan filed a lawsuit to avoid the $95 million payment to the defendant pursuant to 11 U.S.C. § 548 as a constructively fraudulent transfer. 

The defendant's primary argument was that the transfer fell within the avoidable transfer safe harbor provision under 11 U.S.C. § 546(e) as a "settlement payment", because the $95 million was paid by a financial institution (Merrill Lynch) to complete the 2005 senior note transaction which was by definition a "securities transaction", and the senior notes by definition were "securities contracts". The plaintiff countered, unsuccessfully, that the 2005 transaction should be broken down into its discreet parts and that the elements of 546(e) are not met, and that only by a strained interpretation of the facts could the 2005 transaction be viewed as a transfer made by a financial institution related to a securities transaction. Rather, they argued, the payments were simply made by Greektown Casino to the defendant in payment of a debt obligation.

Section 546(e), very generally speaking, protects transfers made in securities transactions, and was originally enacted by Congress to preempt a ripple effect in the commodities and securities markets in the event of a major bankruptcy. But the Greektown court, and some courts before it, have interpreted 546(e) extremely broadly, to now include payments made on account of a redemption agreement funded from the issuance of promissory notes purchased by a financial institution. Practitioners should carefully consider whether 546(e) might provide a safe harbor whenever a financial institution is involved, directly or indirectly, in the payment of an allegedly avoidable transfer.

The decision is currently on appeal, and the District Court is currently considering a request by the defendants seeking a certification order of direct appeal to the United States Court of Appeals for the Sixth Circuit pursuant to 28 U.S.C. §158(d)(2)(B) and Federal Rule of Bankruptcy Procedure Rule 8006(f). Stay tuned for an update to this blog when the District Court rules.

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About this Author

Brendan G. Best, Varnum, Chapter 11 Bankruptcy Lawyer, Manufacturing Industry Attorney

Brendan focuses his practice on restructuring, workouts and bankruptcies, representing creditors, debtors and other parties in Chapter 11 bankruptcy cases, out-of-court workouts and restructurings, distressed transactions and general insolvencies. Brendan has a national insolvency practice, serving clients in diverse industries including manufacturing, automotive, building supply and service, energy, oil and gas, health care, food service, gaming, hospitality, construction and real estate.

Brendan serves as outside bankruptcy counsel for clients, advising them on commercial issues...