District court considers “bulk transfer” when applying for bankruptcy safe harbor

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The District Court for the Southern District of New York recently released an important decision that provides additional support for a holistic analysis when applying the Bankruptcy Code’s “safety rules”. In Mark Holliday, the Liquidating Trustee of the BosGen Liquidating Trust v. Credit Suisse Securities (USA) LLC, et al., 20 Civ. 5404 (September 13, 2021), the district court upheld the bankruptcy court’s dismissal of the plaintiff’s fraudulent transfer claims against the defendants as being protected from nullification by the “safe harbor” of Section 546 ( e) of the Bankruptcy Code. In doing so, the appellate court considered the nature of the “bulk transfer” rather than a separate element of the transaction as claimed in the plaintiff’s complaint.

The claims arise from a leveraged recapitalization in 2006 whereby a holding company (“Holdings”) and its operating subsidiary, Boston Generating, LLC (“BosGen”), obtained loans to finance a public offering purchase and a dividend to holders of Holdings interests. The loans took the form of two credit facilities granted to BosGen which required it to finance the purchase of certain equity interests and to make a distribution to the members of Holdings. A national bank (“Bank A”) served as the “custodian” for BosGen and, under the direction of BosGen, received the proceeds of the loans and then transferred them in accordance with the cash flow instructions. A portion of these proceeds for use in member interest purchase and distribution was deposited into a Holdings account at a second bank (“Bank B”). Holdings then ordered Bank B to transfer the funds to its account at another bank (“Bank C”) in order to make payments to members.

Holdings, BosGen and certain affiliates subsequently filed for bankruptcy and upheld a Chapter 11 liquidation plan in August 2012. The plan created a liquidation trust and the liquidation trustee subsequently initiated adversarial proceedings against the defendants. Among other causes of action, the plaintiff sought a ruling that the transfer from Bank A (BosGen account) to Bank B (Holdings account) should be avoided as a fraudulent transfer. After extensive legal maneuvering, including the filing of a number of amended complaints, the bankruptcy court finally dismissed the opponent’s complaint in June 2020, including the fraudulent transfer requests. He did so on the grounds that these claims were protected by Section 546 (e) of the Bankruptcy Code (“Section 546 (e)”). Very generally, Section 546 (e) protects certain pre-petition transfers from annulment in the event of the transferor’s bankruptcy – including transfers that are (i) a margin payment, a settlement payment or a transfer, (ii) made by or to (or for the benefit of) a commodity broker, futures dealer, securities dealer, financial institution, financial participant or a securities clearing agency, and (iii) effected under a securities contract, commodity contract or futures contract. See 11 USC § 546 (e).

On appeal, the district court considered the decision in the leading case concerning a transfer carried out in stages, Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883. The district court explained that Merit required it to “determine which transfer is relevant to the Safe Harbor investigation…” and that it should not “analyze a transfer separated from its context”. See Holliday at 6. While the district court recognized that Merit considers the relevant transfer to be one the plaintiff seeks to avoid, it need not rely on the plaintiff’s interpretation of that transfer – in case of dispute. Identifier. Here, the transfer at issue has been defined by reference to New York law which guided the district court to consider an allegedly fraudulent transfer in the context of the larger plan “viewed as a whole with all of its composite implications”. Identifier. to 7 (citation omitted). The district court noted that many parties to the recapitalization understood that the loans had been made to BosGen, in part to fund payments to members of Holdings. As a result, the district court refused to limit its analysis to just the transfer from bank A to bank B – and determined that the “heart” of the case was the leveraged recapitalization and that the actual transfer that the plaintiff sought to avoid was that of bank A. to bank C. Identifier. This was an important point of distinction, tying the entire (collapsed) transaction to a securities contract (i.e. the takeover bid) with the aim of satisfying the safe harbor contained in section 564 (e). With that critical point resolved, the district court agreed with the bankruptcy court ruling that the transfer was protected from reversal as a “settlement payment”, made on behalf of a “financial institution” (which included BosGen as a client of bank A, its agent), and concluded in conjunction with a “securities contract”.

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