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Court Split Occurs Involving Whether Section 546(e) “Financial Participant” Excludes Debtors
In December 2020, a Delaware bankruptcy court held that the term “financial participant” as used in the safe harbor provisions of Section 546(e) of the Bankruptcy Code does not unequivocally exclude debtors. The Delaware court’s ruling is notable because it marks a split from a 2019 Southern District of New York court ruling.
The Issue Introduced by the Case
The case concerns Section 546(e) of the Bankruptcy Code referred to as the “safe harbor” provision that guards certain types of payments from a bankruptcy trustee’s avoidance powers. One “safe “harbor” are transfers made by a “financial participant” in connection with a “securities contract.” The scope of Section 546(e) has been hotly debated. A “financial participant” is defined by the Bankruptcy Code, but as an entity who has one or more required agreements in the required amounts with the debtor or any other entity.
The Background of the Case
In 2011, Samson Investment Company and its related entities entered into a stock purchase agreement to sell a company through a leveraged buyout. Consequently, the Samson Resources Corporation was formed. Four years later, Samson as well as its related entitled filed petitions under Chapter 11 of the Bankruptcy Code. Then, in 2017, the Bankruptcy Court confirmed Samson’s Chapter 11 plan, which created a settlement trust. An appointee to the trust was then selected and tasked with maximizing recoveries for unsecured creditors asserting more than $3 billion of substantially unpaid claims. Then, in 2017, a trustee filed an adversary proceeding in an effort to avoid fraudulent transfers. The defendants filed an answer in 2018 which included the affirmative defense that some or all of the transfers sought to be avoided by the trustee were protected. Then, in March 2020, Samson filed a summary judgment. In response, the trustee filed a cross-motion arguing that the safe harbor defense does not apply to debtors. At the conclusion of 2020, a Bankruptcy Court for the District of Delaware issued its opinion.
The Court’s Decision
The judge in this case agreed with the Samson defendants and concluded that the definition of “financial participant” does not exclude debtors. The judge came to this conclusion after noting the term is defined as “an entity” that holds requisite contracts in requisite amounts with the debtor. The judge who authored the opinion further noted that if a debtor could be considered as a “financial participant” and that “with the debtor” language would be either redundant or superfluous because Congress only needed to state that the agreements could be with any other entity. The Samson defendants, however, had argued that reading bankruptcy code to exclude debtors constituted writing the definition of by adding language (like “an entity other than the debtor”) or ignoring the plain language the entity might have the required agreements “with the debtor or any other entity.”
A bankruptcy court in the Southern District of New York previously agreed with an argument similar to the trustee’s and noted that if the entity described in the first part of the definition includes the debtor then the inclusion of the debtor in the second part is not puzzling. The court also found that if the term “entity” is meant to include the debtor it would be redundant to refer to the “debtor.” The court also noted that a bankruptcy court in the Middle District of Florida had previously rejected an argument that the definition of “financial participant” in the context of Section 546(g) excludes debtors. This court had found that one express language indicates a definition including only entities other than the debtor.
Following its perspective that the plain language of the statute should control, the Delaware court sided with the later view. The court also explained that other defined terms in the bankruptcy code clearly excluded the debtor. As a result, the Delaware bankruptcy court found that the “plain text” and structure of the bankruptcy code does not exclude debtors.
The United States Supreme Court and Section 546(e)
It is likely that the scope of Section 546(e) will continue to remain a hotly debated and discussed subject. In 2018, the United States Supreme Court considered text found in another segment of Section (546). The language considered by the court holds that the safe harbor does not apply simply because the challenged transfer is completed through a financial institution. In the 2018 case of Merit Management, the United States Supreme Court issued a ruling. The court focused its language in its opinion on both the language of the statute and the statutory context. The Supreme Court held that Section 546(e) only applies to a contested transfer and not to intermediary transactions within the contested transfer. As a result, the Supreme Court found that Section 546(e) does not protect transfers that are routed through financial institutions if neither the debtor nor the ultimate beneficiary of the transfer constituted protected entities under bankruptcy.
What Makes This Case Influential?
Today, as a result of this decision, bankruptcy courts in both Delaware and the Southern District of New York disagree about how “financial participant” should be interpreted. Given that neither court’s ruling is precedential, it remains uncertain how this issue will be resolved. It is critical to remember some important details about what the bankruptcy code says about “financial participants,” which includes:
- A financial participant can either enter into an agreement or contract with the debtor or any other entity of a total gross dollar value of not less than $1,000,000,000, OR in a notional principal amount outstanding at any time during the 15-month period preceding the date of the filing of the bankruptcy petition, OR have gross mark-to-market positions of at least $100,000,000 in at least one agreement or transaction with the debtor.
- A financial participant can also be a clearing organization.
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