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Section 546(e) of the Bankruptcy Code provides a safe harbor from constructive fraudulent transfer claims for transfers that are settlement payments or payments related to a securities contract, when those transfers are “made by or to (or for the benefit of) … financial institutions.”  Most commonly, the safe harbor is asserted to provide protection against such claims to public shareholders who receive merger consideration payments through a financial institution that serves as the buyer’s paying agent, but the 7th Circuit’s recent decision in PETR v. BMO Harris Bank N.A., (7th Cir. 3/24), affirmed a district court’s ruling that the safe harbor extended to transactions involving private companies as well.

The case arose out of a target company’s repayment of bridge financing provided by BMO Harris in connection with the target’s acquisition by Sun Capital Partners VI, L.P.  That repayment also relieved Sun Capital of certain guarantees that it made to the bridge lender.  After the target filed bankruptcy, the trustee filed claims against BMO Harris and Sun Capital alleging that the repayment and elimination of the guarantees involved a constructive fraudulent conveyance not protected by the safe harbor.

A federal bankruptcy court ruled that the Section 546(e) safe harbor did not extend to securities transactions involving private companies. An Indiana federal district court overruled that decision, and the 7th Circuit affirmed the district court’s decision. This excerpt from King & Spalding’s memo on the case explains the Court’s reasoning:

The Seventh Circuit next determined that the plain text and definition of “securities contract” is broad and unambiguous as used in section 546(e), and the 546(e) safe harbor therefore applies to transfers made in connection with securities contracts for both publicly and privately held securities. The Courts of Appeals for the Third, Fifth, Sixth and Eighth Circuits have reached similar conclusions.

The Seventh Circuit agreed that the stock purchase agreement, which involved privately held securities, clearly fit within the definition of a securities contract. The bridge loan authorization agreement also fit within the definition as an extension of credit “for the clearance or settlement of securities transactions.” The court also found that because the guaranty was a credit enhancement for the bridge loan authorization agreement, it fit within the definition of a securities contract as a “credit enhancement related to any agreement or transaction referred to in [the definition.]” The court also noted that the three agreements were additionally covered by the catch-all language of the definition, which includes “any other agreement or transaction that is similar to an agreement or transaction referred to in [the definition].

The 7th Circuit also held that the 546(e) safe harbor preempts state law claims that seek to recover value transfers that the safe harbor is intended to protect, because a holding to the contrary would essentially render the safe harbor meaningless.

– John Jenkins