482 F.Supp.3d 187
S.D.N.Y.2020Background
- In 2014 private equity firm Sycamore completed an LBO of The Jones Group, merging it into Jasper Parent/Nine West and leaving Nine West with >$1.5 billion of debt. The transaction paid public shareholders $1.105 billion and paid directors/officers roughly $149 million (restricted-share cashouts, unpaid dividends, and change-in-control payments).
- Payments to public shareholders were governed by a Paying Agent Agreement (PAA) among Nine West (and/or Jasper Parent) and Wells Fargo; payments to insiders were allegedly processed through payroll/other means.
- Nine West filed Chapter 11 in April 2018; a Litigation Trustee (avoider under 11 U.S.C. §544) and an Indenture Trustee (state-law creditor) sued shareholders, directors, and officers for constructive and intentional fraudulent conveyance, unjust enrichment, and related claims.
- Defendants moved to dismiss, asserting the §546(e) securities safe harbor bars avoidance of the merger payments; shareholders and D&O defendants relied heavily on In re Tribune Co. Fraudulent Conveyance Litigation.
- The Court considered whether the PAA was integral to the complaints, analyzed whether the transfers were "settlement payments" or "in connection with a securities contract," whether a qualifying ‘‘financial institution’’ participated (including whether Nine West counted as such via Wells Fargo acting as paying agent), and whether §546(e) preempted state-law claims and unjust enrichment remedies.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Consideration of Paying Agent Agreement at 12(b)(6) | PAA is not incorporated or integral; plaintiffs need not plead documents relevant only to defendants' affirmative defense | PAA is integral because the complaint references Wells Fargo's role and asks judicial construction of payment mechanics | Court treated the PAA as integral and considered it on the motion to dismiss |
| Do public-shareholder payments qualify under §546(e) ("settlement payment" / "in connection with a securities contract") | Payments were cancellations/conversions, not redemptions or securities transactions; thus §546(e) is inapplicable | Payments completed the share-redemption/conversion and fall within the broad statutory definitions of "securities contract" and "settlement payment" | Court held payments were qualifying transactions under §546(e) (both "in connection with a securities contract" and/or "settlement payments") |
| Is there a qualifying participant (is Nine West or shareholders a "financial institution") | Wells Fargo was only a non-agent service provider or Jasper Parent's agent, so Nine West is not a "financial institution" for these transfers | Where a bank serves as paying agent for a customer in connection with the securities contract, the customer (here Nine West) qualifies as a "financial institution"; many defendants independently qualify (1940 Act funds, banks) | Court held Wells Fargo acted as agent for Nine West (as in Tribune), so Nine West is a qualifying financial institution; additionally many public shareholders independently qualify |
| Do payments to D&O (restricted shares, share-equivalent units, accumulated dividends) fall within §546(e); are unjust-enrichment claims preempted | Accumulated dividends and some insider payments were not securities transactions or processed by the paying agent, so outside §546(e); unjust-enrichment claims are distinct remedies tied to fiduciary breach | The restricted-share payouts and accumulated dividends were part of the integrated securities transaction; §101(22)(A) should be read contract-by-contract so a customer-bank agent relationship protects all payments made in connection with that securities contract; unjust-enrichment claims that seek the same recovery are preempted | Court held those insider payments were qualifying transactions and protected because Nine West was a financial institution for the Merger Agreement; unjust-enrichment claims seeking disgorgement of the same payments were dismissed (change-in-control payments not decided) |
Key Cases Cited
- In re Tribune Co. Fraudulent Conveyance Litig., 946 F.3d 66 (2d Cir. 2019) (holding paying-agent relationship can render the issuer a "financial institution" under §101(22)(A), bringing LBO shareholder payments within §546(e) safe harbor)
- Merit Mgmt. Grp., L.P. v. FTI Consulting, Inc., 138 S. Ct. 883 (2018) (the relevant transfer is the overarching transfer the trustee seeks to avoid, not component parts)
- Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011) ("settlement payment" includes a cash transfer made to complete a securities transaction)
- Chambers v. Time Warner, Inc., 282 F.3d 147 (2d Cir. 2002) (when complaint relies heavily on a document's terms and effects, the document is integral and may be considered on a motion to dismiss)
- In re Bernard L. Madoff Inv. Sec. LLC, 773 F.3d 411 (2d Cir. 2014) (broad construction of "securities contract" under §741 informs §546(e) analysis)
- Broder v. Cablevision Sys. Corp., 418 F.3d 187 (2d Cir. 2005) (court need not accept plaintiffs' characterization of transactional documents and may examine the documents themselves)
- Contemporary Indus. Corp. v. Frost, 564 F.3d 981 (8th Cir. 2009) (remedy-focused approach: state-law claims seeking recovery equivalent to amounts protected by §546(e) are preempted)