450 B.R. 414
Bankr. S.D.N.Y.2011Background
- Shareholders owned 31% each of Debtor's stock and entered Stock Purchase Agreement on July 6, 2007 to sell to Debtor in an LBO.
- Lender funded the stock sale via an SBA-guaranteed loan of $1,150,000 and paid proceeds directly to Shareholders for stock purchases, secured by a lien on Debtor's assets.
- Debtor was insolvent or became insolvent by incurring the loan and funding stock purchases; Debtor filed Chapter 11 on November 18, 2008.
- Trustee seeks to avoid transfers as constructively fraudulent under 11 U.S.C. § 548(a)(1)(B) and 11 U.S.C. § 544/NY law 273, 275, 278, and to recover under § 550; challenges the stock sale and the loan/ security interest.
- Shareholders and TD Bank move for summary judgment arguing § 546(e) safe harbor bars avoidance; court denies both motions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does § 546(e) shield the LBO stock sale from avoidance? | Trustee argues § 546(e) may not apply to privately negotiated LBOs. | Shareholders/Bank contend the safe harbor applies to settlement/payments in securities transactions. | No; § 546(e) does not apply to this private LBO transaction. |
| Does § 546(e) protect the Debtor's incurrence of the LBO loan? | Trustee argues safe harbor may cover the loan incurrence as a related transfer. | Lenders contend safe harbor should shield the loan, as part of a securities settlement. | § 546(e) does not extend to the incurrence of an obligation, so the loan is not protected. |
| Does the SBA Regulation preempt or bar avoidance under § 544(a)? | Trustee may rely on § 544(a) standing to avoid the transfer notwithstanding SBA Regulation 101.106(d). | Lender argues Regulation precludes avoidance of the SBA loan/ lien. | Regulation does not preempt § 544(a); avoidance standing remains available. |
| Do NYBCL §§ 513/514 render the stock sale void ab initio or outside § 546(e) protection? | Trustee relies on NY BCL to argue invalid transfer should be actionable despite § 546(e). | Defendants contend legality under NYBCL should negate avoidance window. | Trustee's NYBCL argument fails; § 546(e) safe harbor not triggered to shelter the transfer. |
Key Cases Cited
- In re QSI Holdings, Inc., 571 F.3d 545 (6th Cir. 2009) (debate over scope of § 546(e)'s settlement payment exemption in private stock deals)
- Alfa, S.A.B. de C.V. v. Enron Creditors Recovery Corp., 422 B.R. 423 (S.D.N.Y. 2009) (court applied Jackson factors to assess 546(e) applicability)
- Norstan Apparel Shops, Inc. v. ASEA Brown Boveri, Inc., 367 B.R. 68 (Bankr.E.D.N.Y. 2007) (early interpretive analysis of 546(e) exemptions)
- Contemporary Indus. Corp. v. Frost, 564 F.3d 981 (8th Cir. 2009) (role of 741/761 cross-references and catchall in 546(e))
- Brandt v. B.A. Capital Co., LP (In re Plassein Int'l Corp.), 590 F.3d 252 (3d Cir. 2009) (broadened view of 546(e) exemption scope in certain private transactions)
- In re Enron Corp. (Enron/Bear Stearns), 323 B.R. 857 (S.D.N.Y. 2005) (statutory interpretation of 546(e) in pre-amendment context)