1

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

In re: )

NATIONAL FORGE COMPANY, et al., )

)

Debtor. )

 )

)

OFFICIAL COMMITTEE OF ) Civil Action No. 04-21 Erie

UNSECURED CREDITORS OF )

NATIONAL FORGE COMPANY, )

)

Plaintiff, )

and )

)

OFFICIAL COMMITTEE OF RETIREES )

OF NATIONAL FORGE COMPANY, )

)

Intervenors, )

v. )

)

E. ROGER CLARK, et al., )

)

Defendants. )

MEMORANDUM OPINION

McLAUGHLIN, SEAN J., District J.,

Currently pending before the Court in this adversary proceeding is a motion for

partial summary judgment filed and/or joined in by all of the Defendants. The adversary

proceeding was originally commenced in the Bankruptcy Court, but the reference was

withdrawn pursuant to our order dated March 1, 2004 upon the agreement of all parties. 

Consequently, this Court now has original jurisdiction over the matter pursuant to 28

U.S.C. § 157(d) and § 1334(b). 

For the reasons set forth below, the Defendants’ motion will be granted and

judgment will be entered in favor of all Defendants on Counts 1 through 7 of the

Amended Complaint. As to Count 8, judgment will be entered in favor of all

Defendants, except for E. Roger Clark, Maurice J. Cashman, Dana Beyeler, Robert A.

Kaemmerer, and Ashtok Khare.

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 1 of 69
2

I. STANDARD OF REVIEW

 Summary judgment is appropriate if the pleadings, depositions, answers to

interrogatories and admissions on file, together with any affidavits, show that there is no

genuine issues as to any material fact and that the moving party is entitled to judgment

as a matter of law. Fed. R. Civ. P. 56(c). In considering a motion for summary

judgment, the court must examine the facts in the light most favorable to the party

opposing the motion. International Raw Materials, Ltd. v. Stauffer Chemical Co., 898

F.2d 946, 949 (3d Cir.1990). The moving party has the initial burden of demonstrating

that, given the evidence of record, no reasonable jury could return a verdict for the

non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Once

the moving party satisfies its burden, the burden shifts to the non-moving party, who

must go beyond its pleadings and designate specific facts by the use of affidavits,

depositions, admissions, or answers to interrogatories showing that there is a genuine

issue for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986); Wilson v. Lemington

Home for the Aged, No. 99-1893, 2000 WL 33712287 at *1 (W.D. Pa. April 12, 2000). 

Entry of judgment is mandated against any party who fails to make a showing sufficient

to establish the existence of an element essential to that party's case and on which that

party will bear the burden of proof at trial. Celotex Corp., 477 U.S. at 322; Wilson,

supra, at *1.

II. BACKGROUND

The present dispute arises out of the redemption of certain shares of National

Forge Company Holding Inc.’s stock which occurred on April 13, 1999. The Official

Committee of Unsecured Creditors (the “Committee”) seeks, inter alia, to set aside the

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 2 of 69
1

 The Bankruptcy Court granted the Committee retroactive derivative standing to

pursue this action on behalf of the Debtor’s estate. See In re National Forge Co., 304

B.R. 214 (Bankr. W.D. Pa. 2004). Following our withdrawal of the reference to the

Bankruptcy Court, we reconsidered the issue and determined that the Bankruptcy

Court’s grant of retroactive derivative standing should stand. See In re National Forge

Co., 326 B.R. 532 (W.D. Pa. 2005). The Official Committee of Retirees of National

Forge Company have been granted intervenor status and they join in the prosecution of

these claims as well as the defense of the instant Rule 56 motions. For the sake of

simplicity, both the Committee and the Intervenors will be referred to collectively as the

“Committee” or the “Plaintiff” in this Memorandum Opinion.

2 The background facts set forth herein are taken primarily from the September

26, 2005 sworn declaration of Maurice J. Cashman, formerly the Chief Financial Officer

of NFC. [See Cashman Decl. (9/26/05), Ex. A to Def.s’ Appendix in Supp. of Mot. for

Summ. Judg. (Doc. # 45)]. These facts stand undisputed, except as otherwise

indicated in this memorandum opinion.

3

redemption and recover the payments made to shareholders in connection therewith.1 

Some background information is essential to an understanding of the present dispute.2

Prior to its demise, National Forge Company (“NFC”) was a Pennsylvania

corporation engaged in the business of manufacturing heavy, precision-machined,

forged steel components. In 1995 NFC Holdings (“Holdings”) was formed by an

employee stock ownership plan and certain NFC employees as a vehicle to acquire the

stock of NFC’s then-owners. The acquisition was partly funded through the employees’

purchase of 116,347 shares of Class B stock in Holdings, which generated

$1,284,470.88. This sum, together with bank loans, funded Holdings’ purchase of

NFC’s stock and supplied the companies’ working capital needs. Thus, in 1995 NFC

became a wholly-owned subsidiary of Holdings, whose ownership, in turn, was

comprised of two classes of common stock: Class A shares, which were held

exclusively by the National Forge Company Holdings, Inc. Employee Stock Ownership

Plan (the “ESOP”), and Class B shares, which were held by certain directors, officers,

and/or management-level employees of NFC – almost all of whom have been named

as individual Defendants in this action.

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 3 of 69
3

 Defendants contend, based on internally prepared calculations, that Holdings’

federal income tax savings for fiscal years 1998 through 2003, as a result of electing

Subchapter S status, was projected to total $5,517,000. Thus, they contend, in just six

years Holdings would have recovered all but $233,000 of the approximately $5,750,000

that it paid to redeem its Class B shares.

4

Defendants contend that the disputed redemption was the product of an

important change in the federal corporate tax laws. In 1997, qualified retirement plan

trusts like the ESOP became eligible to be shareholders in corporations that elected to

be taxed under Subchapter S of the Internal Revenue Code of 1986. See Small

Business Job Protection Act of 1996, Pub. L. No. 104-188, § 1310, and the Taxpayer

Relief Act of 1997, Pub. L. No. 105-34, § 1601. Because qualified retirement plan

trusts were generally exempt from federal and state income taxes, this change in the

law meant that a corporation wholly owned by an employee stock ownership plan could

avoid federal and state income taxes by electing to be taxed under Subchapter S of the

IRC, thereby allowing all of the corporate income to pass through to a tax-exempt

shareholder.

Defendants maintain that, because the ESOP was Holdings’ largest shareholder,

these changes in the tax laws offered significant potential tax savings to Holdings. 

Having been advised by outside legal counsel, accounting professionals and valuation

experts as to the benefits of electing Subchapter S status, Holdings on December 22,

1998 unanimously elected – through its full board of directors – to take Subchapter S

status.3

On the other hand, a corporation electing Subchapter S status could have only

one class of stock. See 26 U.S.C. § 1361(b)(1)(West 1998). Thus, Holdings could not

eliminate its federal income tax liability until it eliminated its Class B (i.e. non-ESOP

held) shares. Accordingly, in the same resolution by which it authorized Holdings to

elect Subchapter S status, Holdings’ Board of Directors also authorized the corporation

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 4 of 69
5

to eliminate its outstanding Class B shares by redeeming the stock at a price of $49.42

per share. That redemption price was premised upon a December 14, 1998 report

issued by Holdings’ valuation expert, Valuemetrics, Inc., which fixed the value of the

company’s Class A and Class B shares at $49.42 per share as of June 30, 1998.

The Board further resolved that, in the event Class B shareholders did not agree

to the terms of redemption, management was to take the steps necessary to merge

Holdings into a new entity so that the outstanding Class B shares could be replaced

with shares of a single class in the successor entity. The resolution further authorized

Holdings to borrow funds as needed by drawing upon an existing credit facility with the

Defendant Banks. Holdings subsequently obtained approval from the Banks to use up

to $4 million to fund the redemption of the Class B share. These loans were secured by

a lien upon substantially all of NFC’s assets.

Ultimately, all of the Class B shareholders accepted Holdings’ redemption offer. 

To effectuate the payment, NFC on April 13, 1999 directed The Chase Manhattan Bank

to transfer $5,749,868.74 (the aggregate redemption price) from an NFC operating

account to a Holdings’ account at Chase. That same day, Holdings repurchased the

outstanding Class B shares in one of two ways. For those 94,538 shares held in

individual retirement accounts at National City Bank, Holdings directed Chase to wire

transfer to National City Bank a single payment of $4,672,067.96, which was then

distributed by National City Bank to the relevant IRA accounts according to the number

of shares being redeemed. For those individuals holding shares outside of IRAs,

Holdings issued each shareholder a check in the relevant amount drawn on a Holdings’

account at Chase. The payments to redeem non-IRA shares totaled $1,077,800.78.

Thus, following the redemption of its Class B shares, Holdings had only a single class

of stock, all of which was owned by the ESOP. 

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 5 of 69
4 The three groups of Defendants are: (i) JPMorgan Chase & Co. (successor to

The Chase Manhattan Bank), Fleet Business Credit Corporation, and National City

Bank of Pennsylvania (collectively, the “Lenders”), (ii) E. Roger Clark, Maurice J.

Cashman, Dana Beyeler, Robert A. Kaemmerer, Thomas H. Jackson, and Charles R.

Olson, individually and in their capacities as Directors and/or Officers of NFC and/or

Holdings (collectively, the “Director and Officer Defendants”); and (iii) nineteen other

management level employees of NFC and/or Holdings who were shareholders of

Holdings’ Class B stock and who received various forms of payment in redemption of

their Class B shares (collectively, the “Transferee Defendants”).

6

On March 6, 2002 NFC, Holdings, and another affiliated company (NFC

Components) each filed petitions for relief under Chapter 11 of the Bankruptcy Code. 

The Bankruptcy Court subsequently approved an amended joint plan of liquidation filed

by NFC and NFC Components, pursuant to which substantially all of the companies’

assets were sold and the proceeds and remaining assets re-vested in a new entity,

Liquidating NFC, for distribution to creditors.

We have previously discussed the procedural history relative to the filing of this

Adversary Proceeding, see In re National Forge Co., 326 B.R. 532 (W.D. Pa. 2005),

and we need not repeat that discussion here. For present purposes, it is sufficient to

note that the Committee filed its Amended Complaint on August 22, 2005 (see Doc.

# 39), asserting eight causes of action against three groups of Defendants involved,

directly or indirectly, with the stock redemption.4 Counts 1-3 assert claims against all

Defendants for alleged violations of the Pennsylvania Uniform Fraudulent Transfer Act

(UFTA). Counts 4-6 assert claims against the Director and Officer Defendants for

alleged violations of the Pennsylvania Business Corporation Law. Counts 7 and 8

assert claims against the Director and Officer Defendants for alleged violations of,

respectively, the Delaware General Corporation Law and Delaware common law breach

of fiduciary duty.

Certain of the Director and Officer Defendants (i.e., Defendants Clark, Cashman,

Beyeler and Kaemmerer, hereafter the “Moving Defendants”) have filed a motion for

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 6 of 69
7

summary judgment relative to Counts 1 through 7 in their entirety. As to Counts 1-3

and Count 7, the Moving Defendants contend that the Committee’s claims are barred

by the provisions of 11 U.S.C. § 546(e). In addition, they insist that Counts 4-6 are

untimely as a matter of law and should therefore be dismissed. With respect to Count

8, the Moving Defendants contend that the Committee’s claim should proceed only

against themselves and not against Defendants Olsen or Jackson, who were neither

directors nor officers of Holdings during the time period in question. The remaining

Defendants have joined in the arguments of the Moving Defendants. The Committee

has filed its opposition to the instant motion and the issues, having been fully briefed,

are now ripe for consideration.

III. DISCUSSION

A. Counts 1 through 3

Pursuant to § 544(b)(1) of the Bankruptcy Code, the trustee (or in this case, the

Committee) “may avoid any transfer of an interest of the debtor in property or any

obligation incurred by the debtor that is voidable under applicable law by a creditor

holding an unsecured claim that is allowable under section 502 of this title ...” 11

U.S.C. § 544(b)(1). This “strong arm” provision thus grants the trustee power to avoid

fraudulent transfers under any applicable theories of state law. Here, the Committee

asserts three different theories in Counts 1 through 3 of the Amended Complaint as to

how the stock redemption violated provisions of the Pennsylvania UFTA.

Nevertheless, §546(e) of the Code limits the trustee’s (and thus, the

Committee’s) avoidance power under § 544(b) when the transfer in question is a

“settlement payment ... made by or to a commodity broker, forward contract merchant,

stockbroker, financial institution, or securities clearing agency, that is made before the

commencement of the case...” 11 U.S.C. § 546(e). Defendants contend that this “safe

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 7 of 69
8

harbor” provision (a/k/a the “settlement payment” defense) bars the Committee’s claims

in Counts 1 through 3.

This line of defense raises four issues for our consideration: first, whether the

events culminating in the redemption of Holdings’ Class B shares – including the

transfer of approximately $5.75 million from NFC to Holdings and the subsequent

distribution of those monies from Holdings to its Class B shareholders – should be

viewed as a single, integrated transaction for purposes of the Committee’s fraudulent

transfer claims; second, whether the payments at issue constitute “settlement

payments” within the meaning of § 546(e); third, whether these alleged “settlement

payments” were made “by or to” a “financial institution”; and, fourth, whether Count 2

falls outside the scope of § 546(e) in any event. We address these issues in turn.

1. Was the Stock Redemption a Single, Integrated Transaction?

The Moving Defendants assert that the events culminating in the redemption of

Holdings’ Class B shares must be viewed as one integrated transaction. By so arguing,

the Defendants seek to bring the entirety of the transaction, including the transfer of

approximately $5.7 million from NFC to Holdings, within the safe harbor provision of

§ 546(e).

The Committee, on the other hand, insists that, as a matter of law, the transfer of

$5.7 million from NFC to Holdings and the subsequent distribution of those monies by

Holdings to its Class B shareholders must be viewed as separate and distinct

transactions. In so arguing, the Committee seeks to focus our attention exclusively on

the NFC-to-Holdings transfer which, Plaintiff believes, is exempt from § 546(e)’s

“settlement payment” defense. The Committee theorizes that, if the transfer between

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 8 of 69
5

 Section 550 provides, in relevant part, that:

(a) [T]o the extent that a transfer is avoided under section 544 .... the

trustee may recover, for the benefit of the estate, the property transferred,

or, if the court so orders, the value of such property, from – 

(1) the initial transferee of such transfer or the entity for whose

benefit such transfer was made; or

(2) any immediate or mediate transferee of such initial transferee.

11 U.S.C. § 550(a).

9

NFC and Holdings is avoided, then pursuant to § 550(a)(2) of the Code,5 the Committee

can obtain recovery from the Defendants as immediate or mediate transferees of

Holdings. Analysis of the payments subsequently made by Holdings to the Transferee

Defendants thereby becomes superfluous.

It is now widely accepted that multilateral transactions may under appropriate

circumstances be “collapsed” and treated as phases of a single transaction for

purposes of applying fraudulent conveyance principles. HBE Leasing Corp. v. Frank,

48 F.3d 623, 635 (2d Cir. 1995) (as amended on denial of pet. for reh’g en banc); Orr v.

Kinderhill Corp., 991 F.2d 31, 35 (2d Cir. 1993) (citing cases). Under this “integrated

transaction” doctrine (or “step transaction” doctrine as it is sometimes known),

“[i]nterrelated yet formally distinct steps in an integrated transaction may not be

considered independently of the overall transaction.” In re Foxmeyer Corp., 286 B.R.

546, 573 (Bankr. D. Del. 2002) (quoting In re Big v. Holding Corp., 267 B.R. 71, 92-93

(Bankr. D. Del. 2001)). “[B]y ‘linking together all interdependent steps with legal or

business significance, rather than taking them in isolation,’ the result may be based ‘on

a realistic view of the entire transaction.’” Id.

This doctrine has often been applied in the context of leveraged buyouts where

the target company ultimately becomes insolvent. See HBE Leasing, 48 F.3d at 635;

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 9 of 69
10

Kupetz v. Wolf, 845 F.2d 842 (9th Cir. 1988); United States v. Tabor Court Realty Corp.,

803 F.2d 1288 (3d Cir. 1986); Crowthers McCall Pattern, Inc. v. Lewis, 129 B.R. 992,

998 (S.D.N.Y. 1991); Wiebolt Stores, Inc. v. Schottenstein, 94 B.R. 488, 500-04 (N.D.

Ill. 1988); In re Best Products Co., Inc., 168 B.R. 35, 56-57 (Bankr. S.D.N.Y. 1994).

Typically, however, it is the plaintiff/trustee/creditor who seeks to invoke the “integrated

transaction” doctrine, often for purposes of demonstrating that the insolvent target

company did not, in the aggregate, receive fair consideration or reasonably equivalent

value for the transfer in question. See, e.g., Orr, 991 F.2d at 35-36; In re Best Products

Co., 168 B.R. at 56-57; In re O’Day Corp., 126 B.R. 370, 394-95 (Bankr. D. Mass.

1991); In re Suburban Motor Freight, Inc., 124 B.R. 984, 998 (Bankr. S.D. Ohio 1990). 

In determining whether a series of transactions should be “collapsed” into a

single integrated one, courts focus not on the form of the transaction but on its

substance – especially the knowledge and intent of the parties involved in the

transaction and whether there was an overall scheme to defraud creditors. See HBE

Leasing Corp., supra; Orr, 991 F.2d at 35-36; In re Hechinger Investment Co. of

Delaware, 327 B.R. 537, 546 (D. Del. 2005); MFS/Sun Life Trust - High Yield Series v.

Van Dusen Airport Serv. Co., 910 F. Supp. 913, 934 (S.D.N.Y. 1995); Wiebolt Stores,

Inc., supra; In re OODC, LLC, 321 B.R. 128, 138 (Bankr. D. Del. 2005); Best Products

Co., supra; O’Day Corp., supra; Suburban Motor Freight, supra. Among other things,

courts consider whether all of the defendants were aware of the multiple steps of the

transaction. See HBE Leasing Corp., supra, at 635-36; Hechinger Investment Co.,

supra, at 546-47; MFS/Sun Life Trust, 910 F. Supp. at 934; O’Day Corp., supra, at 394. 

Courts also consider whether each step would have occurred on its own or,

alternatively, whether each step depended upon the occurrence of the additional steps

in order to fulfill the parties’ intent. See Hechinger Investment Co. of Delaware, supra,

at 546; MFS/Sun Life Trust, supra, at 934.

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 10 of 69
11

Two third circuit cases illustrate these general principles. In United States v.

Tabor Realty Corp., 803 F.2d 1288 (3d Cir. 1986), the Third Circuit considered the

applicability of the Pennsylvania UFTA in the context of a leveraged buy-out wherein

the highly leveraged target companies, Raymond Colliery Co., Inc. and its subsidiaries

(collectively, the “Raymond Group”), were acquired by Great American, a holding

company formed by Raymond’s president, James Durkin. The millions of dollars

needed to finance the acquisition were obtained through loans made by the Institutional

Investors Trust (“IIT”) at an extremely high rate of interest; these loans were secured by

mortgages on substantially all of the assets of the Raymond Group. The loan

arrangement involved a two-part process whereby loan proceeds went from IIT to

certain Raymond Group companies, which then immediately turned the funds over to

Great American in exchange for an unsecured promissory note. Great American then

used the borrowed funds to effectuate the purchase of the Raymond Group. Following

a lengthy bench trial, the district court found that the two loans were, in reality, an

integrated transaction and that the mortgages given by the borrowing Raymond Group

companies to IIT were invalid fraudulent conveyances which had rendered the

Raymond Group insolvent.

The Third Circuit Court of Appeals upheld these findings, including the district

court’s treatment of the IIT-Raymond Group-Great American transaction as a single,

integrated transaction. In so ruling, the Court of Appeals observed that: Durkin, the

president of Great American (and also president of Raymond), had solicited financing

from IIT for the purchase; the loan negotiations had included representatives from all

three parties; and immediately upon receipt of the IIT loan proceeds, the Raymond

Group “loaned” Great American the cash needed for the buy-out, receiving in return

only an unsecured promissory note. 803 F.2d at 1302. The appellate court agreed with

the district court that, “for purposes of determining IIT’s knowledge of the use of the

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 11 of 69
12

proceeds under section 353(a) [of the Pennsylvania UFTA], there was one integral

transaction.” Id. at 1303. Significantly, the evidence showed that IIT was “intimately

involved” in formulating the agreement “whereby the proceeds of its loan were funneled

into the hands of the purchasers of the stock of a corporation that was near insolvency.” 

Id. at n. 8.

In Voest-Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206 (3d Cir.

1990), the court of appeals reviewed a district court’s ruling that the foreclosure upon

and resale of Paige Steel Corporation’s assets to a newly formed transferee

corporation, Vantage Steel Corporation, constituted a fraudulent conveyance. In that

case the plaintiff, Voest-Alpine Trading USA Corp. (VATCO), was an unsecured

judgment creditor of Paige Steel Corporation, a company controlled by the Defendants

Marvin and Holley Sue Stabler. The evidence showed that the Stablers formed

Vantage for the purpose of acquiring Paige’s assets at less than fair market value while

freezing out VATCO and other unsecured creditors of Paige. The scheme was hatched

through the planned foreclosure by New Jersey National Bank (NJNB) on an

outstanding loan of some $1.5 million which NJNB had previously granted to Paige and

secured through a lien on Paige’s assets. On August 8, 1986, NJNB foreclosed on all

Paige’s assets. Simultaneously therewith, NJNB extended to Vantage various credit

facilities through which Vantage was able to purchase from NJNB virtually all of Paige’s

assets at less than fair market value. Thus, as the court noted, “on Monday morning

August 11, 1986 Vantage opened for business with Stabler as an officer of Vantage

and with the same address, staff, office, telephone number, and assets that Paige had

closed with at the end of the day on Friday, August 8.” 919 F.2d at 209. The district

court had concluded that the transactions of August 8, 1986 were effectively a single,

integrated transaction that functioned as a subterfuge, the purpose of which was to

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 12 of 69
13

secure the Stabler’s equity position in the new company while defrauding VATCO and

other unsecured creditors. 

On appeal, the Third Circuit concluded there was abundant evidence in the

record to support the lower court’s finding that the transactions of August 8 were, in

reality, a single transaction functioning as a subterfuge. 919 F.2d at 212. Of particular

significance were the district court’s well supported findings that each portion of the

August 8 transaction was dependent upon the occurrence of the other and that both the

Stablers’ efforts to conceal the August 8 transaction as well as the structure of the

transaction itself evidenced an intent by the defendants to hinder, delay and defraud

unsecured creditors. The court of appeals found that Tabor Court Realty was

instructive and supported treatment of the various August 8 transactions as a unitary

transaction. Given the fact that NJNB had foreclosed at the request of the defendants

and at a time and place convenient to them, the court found the situation in VoestAlpine akin to that in Tabor, where the lender had been “intimately” aware of and

involved with the defendants’ use of the loan proceeds to accomplish the disputed stock

buyout. 919 F.2d at 213 (quoting Tabor, 803 F.2d at 1303 n. 8).

The dispute in the case at bar involves a stock redemption rather than a

leveraged acquisition or sale of corporate assets; thus, the facts involved in Tabor Court

Realty and Voest-Alpine are not precisely on point. Moreover, we recognize that the

standard of review involved in those cases (a review of factual findings under the clearly

erroneous standard) is different from the standard we employ on motions for summary

judgment. Nevertheless, we find their analyses instructive and consistent with the

principles of the “integrated transaction” doctrine, as discussed in the above-cited

cases. 

We conclude that the transfers which culminated in the April 13, 1999 stock

redemption must, as a matter of law, be viewed as one integrated transaction. At all

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 13 of 69
6

 We also note that, pursuant to 11 U.S.C. § 550(a)(2), the Committee is

attempting to recover from the Defendants as immediate or mediate transferees of the

NFC-to-Holdings transfer. However, recovery can only be obtained under § 550(a)(2)

to the extent that the Defendants are not “transferee[s] that [took] for value... in good

faith, and without knowledge of the voidability of the transfer avoided” (or immediate or

mediate good faith transferees of such a transferee). See § 550(b)(1) and (2). 

Accordingly, implicit in the Committee’s theory of recovery is the assumption that the

Defendants had knowledge that the challenged transfer was voidable.

14

times relevant to this litigation, NFC was the wholly owned subsidiary of Holdings. 

Ownership of Holdings (and therefore of NFC) was held by various company

employees. Not only were the Board of Directors for each company comprised of the

same members, but (by the Committee’s own assertions) those Boards generally

conducted joint meetings. In fact, it is the Committee’s contention that the Boards of

NFC and Holdings met “concurrently” on December 22, 1998 when all of the critical

decisions relative to the stock redemption were made. Thus, there was a strong identity

of interests among the players in the disputed transaction. 

Moreover, the Committee acknowledges that NFC, Holdings and the Lenders

were all jointly involved in arranging the financing that would fund the stock redemption. 

It is undisputed on this record that, on or about March 29, 1999, NFC, Holdings,

National Forge Europe Limited, and the Lenders entered into an agreement which

permitted NFC and/or Holdings to borrow up to $4 million (secured by liens on NFC’s

assets) under an existing credit agreement in order to effectuate the stock redemption. 

(See Def.’s Append. in Supp. of Mot. for Summ. Judg. [Doc. # 45] at Ex. A-2.) Those

who received distributions under the stock redemption included individuals who were

directors, officers or management-level employees of NFC and Holdings, and the

mechanics of the stock redemption were spelled out in Holdings’ corporate minutes. 

Given these uncontroverted facts, we conclude that all of the relevant parties to the

disputed transfer had knowledge of the stock redemption plan.6 While the Committee

insists that the Defendants’ allegations regarding the knowledge and intent of the

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 14 of 69
15

parties are “replete” with material issues of fact, it provides nothing further by way of

explanation or example to buttress its claim.

In addition, it appears undisputed that each critical step of the stock redemption

plan would not have occurred on its own, but instead depended upon the occurrence of

the others. For example, NFC would not have sought to borrow the additional $4

million from the Lenders (and the Lenders would not have lent those monies) if not for

the purpose of financing the stock redemption. Similarly, NFC would not have

undertaken the disputed transfer of $5.7 million to Holdings absent Holdings’ intent to

use the funds to accomplish the stock redemption. Again, it appears uncontroverted

that all parties were aware of the ultimate purpose of loans to NFC, the transfer of loan

proceeds from NFC to Holdings, and the distribution of those monies to Holdings’ Class

B shareholders – namely, the redemption of Holdings’ Class B shares.

Finally, the timing of events further buttresses our conclusion that the NFC-toHoldings transfer and the Holdings-to-shareholder distribution must be viewed as a

single, integrated transaction. As noted, on or about March 29, 1999 the Lenders

authorized the $4 million in loan monies which would fund the stock redemption. 

Approximately two weeks later, on April 13, 1999, NFC directed Chase Manhattan to

transfer $5.7 million from NFC’s operating account to Holdings’ bank account at the

same institution. That same day, Holdings directed Chase to disburse the funds in one

of two ways: a) wire payment to National City Bank to redeem those Class B shares

held in IRA accounts at National City and b) checks drawn upon Holdings’ Chase

account and issued directly to shareholders for the remaining non-IRA shares. Thus,

the transfer of funds from NFC to Holdings and the distribution of those funds to

Holdings’ shareholders occurred on the same day and within approximately two weeks

of the parties’ agreement with the Lenders relative to the financing of the redemption.

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 15 of 69
16

In light of these facts, we reject the Committee’s suggestion that the NFC-toHoldings transfer can rationally be viewed in isolation, as a transaction separate and

distinct from the Holdings-to-shareholder distributions. “[W]here a transfer is only a

step in a general plan, the plan ‘must be viewed as a whole with all its composite

implications.’” Orr, 991 F.2d at 35 (citation omitted).

The Committee insists there is a genuine issue of material fact as to whether it

was Holdings or NFC that authorized the stock redemption. Referring us to a version of

the December 22, 1998 corporate minutes which suggests that the Boards of NFC and

Holdings met concurrently on that date, the Committee posits that it is unclear on

whose behalf the Directors were acting when the resolutions of December 22, 1998

were passed. We do not agree, however, that this creates a material issue of fact

relative to our application of the “integrated transaction” doctrine. On the contrary, if

anything, it underscores the identity of interests between NFC and Holdings (as well as

the commonality of their principle players) such that, for all intents and purposes, the

stock redemption plan as conceived and executed must be viewed as an integrated

one.

2. Did the Stock Redemption Involve “Settlement Payments”?

The Committee further argues that, even if the events culminating in the stock

redemption are viewed as an integrated transaction, § 546(e) does not bar its

fraudulent transfer claims because the distributions of funds made to Class B

shareholders in this case were not “settlement payments” within the meaning of

§ 546(e). Defendants strongly disagree. 

Because this dispute involves a question of statutory interpretation, we begin

with the language of the statute itself. See In re Resorts Int’l, Inc., 181 F.3d 505, 515

(3d Cir. 1999) (“We begin every statutory interpretation by looking to the plain language

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 16 of 69
7

 A standard “repurchase agreement,” commonly referred to as a “repo,” consists

of a two-part transaction: the first part is the transfer of specified securities by one party

(the dealer) to another party (the purchaser) in exchange for cash; the second part

consists of a contemporaneous agreement by the dealer to repurchase the securities at

the original price, plus an agreed upon additional amount (usually representing interest)

on a specified future date. See In re Bevill, 878 F.2d at 743 (citing 11 U.S.C. § 101(40)-

17

of the statute.”). Section 546(e) precludes the avoidance of any transfer that is a

“settlement payment, as defined in section ... 741 of this title.” 11 U.S.C. § 546(e). 

Section 741, in turn, provides the following definition:

(8) “settlement payment” means a preliminary settlement payment,

a partial settlement payment, an interim settlement payment, a

settlement payment on account, a final settlement payment, or any

other similar payment commonly used in the securities trade.

11 U.S.C. § 741(8).

The Defendants insist that the transfer of funds which occurred in relation to the

Holdings stock redemption constituted “settlement payments” within the meaning of

§§ 546(e) and 741(8). Such a conclusion, they argue, is inescapable under the

decision in Bevill, Bresler & Schulman Asset Management Corp. v. Spencer Sav. &

Loan Ass'n, 878 F.2d 742 (3d Cir. 1989); Kaiser Steel Corp. v. Charles Schwab & Co.,

Inc., 913 F.2d 846 (10th Cir. 1990) (“Kaiser I”); In re Kaiser Steel Corp., 952 F.2d 1230

(10th Cir. 1991) (“Kaiser II”); In re Comark, 971 F.2d 322 (9th Cir. 1992); and In re

Resorts Int’l, Inc., 181 F.3d 505 (3d Cir. 1999). Because these cases are central to the

Defendant’s theory, some discussion of their holdings is warranted.

In Bevill, Bresler & Schulman Asset Management Corp., the Third Circuit

addressed the meaning of “settlement payment” under § 546(f) of the Bankruptcy Code,

which provides a “settlement payment defense” nearly identical to that contained in

§ 546(e), except that § 546(f) applies to settlement payments “made by or to a repo

participant, in connection with a repurchase agreement...” See 11 U.S.C. § 546(f). 

Bevill involved a dispute over repurchase agreements7 that the debtor, AMC (a

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 17 of 69
(41); S. Rep. No. 65, 98th Cong., 1st Sess. 44 n. 1 (1983)); In re Comark, 971 F.2d 322,

323 (9th Cir. 1992). Repo agreements thereby function as a kind of short-term

investment vehicle for the purchaser.

8 A “hold-in-custody” (HIC) repo is one where the dealer may retain control of the

securities and earmark them on its own books as securities subject to a specific repo

transaction rather than deliver them to the purchaser or to a third party custodian. In a

HIC repo, the securities will be subject only to the control of the dealer and its clearing

bank, and the dealer may commingle the purchaser’s securities with its own during the

day so as to facilitate deliveries of securities to third parties as necessary. See In re

Bevill, 878 F.2d at 746 (citations omitted). Thus, the Treasury Department has

recognized that HIC repos represent “the greatest potential for loss on the part of the

investors [i.e. purchasers] since the securities purchased remain in the control of the

seller.” Id. (quoting 52 Fed. Reg. 5671(1987)) (other citations omitted).

18

secondary dealer in government securities), had entered into with various lending

institutions and municipalities. Under the terms of the repurchase agreements, the

lending institutions and municipalities agreed to purchase certain securities from AMC

and simultaneously agreed to sell the securities back to AMC on an agreed upon date

and for an agreed upon price. The agreements at issue were known as “hold-incustody” agreements,8

 which meant that AMC initially retained possession of the

securities and the purchasers did not take physical custody of them until weeks after

entering into the agreements. Within 90 days following this physical transfer of the

securities from AMC to the purchasers, AMC filed a Chapter 11 petition.

The trustee subsequently filed a complaint asserting that the transfers of

securities to the purchasers were “fraudulent” under 11 U.S.C. § 548. The purchasers

countered that the trustee’s claims were barred by § 546(f) of the Code. Thus, the

question before the court of appeals was whether the deliveries in question were

“settlement payments” for purposes of § 546(f), such that they would be shielded from

the trustee’s avoidance powers.

In addressing this question, the Court of Appeals first reviewed the legislative

history of § 546(e), the “model” provision upon which 546(f) was based:

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 18 of 69
19

...At the time [that the 1982 amendments enacting § 546(e) were passed],

Congress was concerned about the volatile nature of the commodities and

securities markets, and decided that certain protections were necessary to

prevent “the insolvency of one commodity or security firm from spreading to

other firms and possibly threatening the collapse of the affected market.” H.Rep.

No. 97-420, 97th Cong., 2d Sess. 1 (1982) (“1982 House Report”), U.S.Code

Cong. & Admin. News 1982, p. 583. As stated in the House Report on the 1982

amendments:

The Bankruptcy Code now expressly provides certain protections to

the commodities market to protect against such a ‘ripple effect.’

One of the market protections presently contained in the

Bankruptcy Code, for example, prevents a trustee in bankruptcy

from avoiding or setting aside, as a preferential transfer, margin

payments made to a commodity broker ...

.

Id.

Congress wanted to go further to protect margin payments and settlement

payments made by and to participants in the securities market generally.

Accordingly, it added a new subsection [§ 546(e)] to 11 U.S.C. § 546. ...

In re Bevill, 878 F.2d at 747.

Turning next to the legislative purpose behind § 546(f), the court of appeals

made the following observations about the1984 “Repo Amendments” to the Bankruptcy

Code:

After the 1982 amendments were in effect, Congress became concerned

that the amendments did not “adequately [ ] protect liquidations of repos

in the event of the insolvency of a dealer or other participant in the repo

market, even though the principal objective of Public Law 97-222 (the

1982 amendments) was to prevent the insolvency of one commodities or

securities firm from spreading to other firms and possibly threatening the

stability of the affected market.” 1983 Senate report at 47. Congress

noted: “The repo market serves a crucial function for both parties to the

repo transaction. The country's major institutional and fiduciary investors

make heavy use of repos. For these investors, including such entities as

state and local governments, public and private pension funds, money

market and other mutual funds, banks, thrift institutions, and large

corporations, repos have become a vital tool of cash management.” Id. at

45. Moreover, Congress stated, “The repo is particularly well-suited to the

needs of these investors. Receipts of taxes and the proceeds of bond

issues in the case of state and local governments, cash flows from

corporate operations, and liquidity needs of thrift institutions and money

market funds often fail to coincide with the planned expenditures of such

funds, thereby creating the need for such entities to invest idle funds for

short periods in as risk-free a manner as possible.” Id. Accordingly,

Congress came to the decision that:

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 19 of 69
20

The effective functioning of the repo market can only be assured if

repo investors will be protected against open-ended market loss

arising from the insolvency of a dealer or other counter-party in the

repo market. The repo market is as complex as it is crucial. It is

built upon transactions that are highly interrelated. A collapse of

one institution involved in repo transactions could start a chain

reaction, putting at risk hundreds of billions of dollars and

threatening the solvency of many additional institutions.

Id. at 47.

The uncertainty was highlighted when Lombard-Wall, Inc., filed a Chapter

11 bankruptcy petition in the Southern District of New York in August,

1982. A bench decision in the Lombard-Wall case held that the holder of

securities subject to a repurchase agreement was subject to the automatic

stay provision of the Code, and that the holder was precluded from closing

out its position with the debtor without approval of the court. 

Lombard-Wall Inc. v. Columbus Bank & Trust Co. ( In re Lombard-Wall

Inc.), No. 82 B 11556 (Bankr. S.D.N.Y. Sept. 16, 1982). ... Under [this]

holding, the repo participant would be subjected “both to the unexpected

inability to liquidate securities it holds and to the risk of capital loss should

unfavorable interest rate changes occur; these risks impair the qualities

that are the essence of the appeal of repo agreements.” ...

Congress, the Board of Governors of the Federal Reserve, the Public

Securities Association, the Investment Company Institute and others,

were concerned that if Lombard-Wall became the law governing repo

transactions, the failure of one repo dealer, and the consequent inability of

repo participants to promptly liquidate their investments to obtain cash to

meet obligations, could have a ripple effect throughout the country's

financial markets, causing an otherwise isolated financial problem to

spread to many other entities.

***

Congress determined to correct these “uncertainties” by amending the

Code to “ensure there is no question that repo participants are afforded

the same treatment with respect to the stay and avoidance provisions of

the Code in connection with repurchase agreements” as is afforded other

market participants under the 1982 amendments. 1983 Senate report at

44-45. ...

In re Bevill, 878 F.2d at 747-48 (alterations in the original) (internal citations omitted). 

The result was the enactment of Bankruptcy Code §§ 546(f), 559, 101(41), 362(b)(7),

and 548(d)(2)(C), the collective effect of which was to ensure that repo participants

could liquidate their securities and also keep the proceeds of that liquidation to the

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 20 of 69
21

extent of their contract price. Id. at 748. As Robert C. Brown, Chairman of the Public

Securities Association explained:

The ability of the repo market to serve all of its functions in the money

market depends upon a high level of certainty about the ability of the

various repo participants to close out repo transactions in the event of

insolvency of the other party to the transaction, and to assure that repo

transaction payments previously received from that party will not be

reclaimed by the trustee under the Bankruptcy Code. 

Id. at 749 (citation omitted).

With the legislative histories of the 1982 and 1984 amendments as its “guide,”

the Bevill court undertook to determine whether Congress had intended that the type of

pre-petition transfers at issue be treated as “settlement payments” under § 546(f). The

court of appeals turned first to the statutory language, noting that “‘[i]n expounding a

statute, we (are) not ... guided by a single sentence or member of a sentence, but look

to the provisions of the whole law, and to its object and policy.’” 878 F.2d at 750

(quoting Massachusetts v. Morash, 490 U.S. 107, 109 S. Ct. 1668, 1673 (1989)). 

Indeed, the Bevill court felt it was presented with a “classic instance” where it would

need to “ascertain the precise congressional intent represented by the words, as well as

their literal meaning,” because “two important national legislative policies [– i.e., the

bankruptcy policy giving the trustee broad powers to avoid preferential or fraudulent

transfers on one hand and, on the other, the intent of Congress to limit the trustee’s

avoidance powers in certain circumstances, as reflected in the 1982 and 1984

amendments – ] are on a collision course here, and it behooves the courts of the Third

Article to decide which policy Congress intended must yield.” Id. at 751.

The district court in Bevill had equated the term “settlement payment” with the

concept of “settlement date” as it is commonly understood in traditional corporate

securities transactions – i.e., normally the date five days after a trade is executed. 

Because the delivery of securities to the purchasers in Bevill occurred outside this 5-

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 21 of 69
22

day window, the district court concluded that the actual deliveries were not part of any

“settlement” for purposes of § 546(f). 

The court of appeals rejected this interpretation of “settlement payment” as

contrary to both the realities of the repo market and congressional intent. The court

noted that it was “well understood” in the securities market that the settlement process

includes not just the purchaser’s payment for the securities, but also the record transfer

of securities. 878 F.2d at 751. As for Congress’ intent to insure the liquidity of

repurchase agreements, the court noted that Congress ensured liquidity in two respects

– to wit, by limiting the trustee’s authority to avoid repo transactions and by limiting the

effect of the automatic stay so as to permit completion of the repo agreement. Id. at

751-52. From consideration of the overall statutory scheme, the court of appeals

extrapolated “two significant observations” – “Congress intended (1) that the phrase

‘settlement payment’ include transfer or deposit of ‘securities, or other property held by

or due from such repo participant,’ and (2) that the same interpretation of ‘settlement

payment’ be applied in prohibiting avoidance as well as prohibiting the operation of the

traditional stay order.” Id. at 752. This interpretation, it concluded, was consistent with

“two basic intentions of Congress: that a ‘settlement payment’ may be the deposit of

cash by the purchaser or the deposit or transfer of the securities by the dealer, and that

it includes transfers which are normally regarded as part of the settlement process,

whether they occur on the trade date, the scheduled settlement day, or any other date

in the settlement process for the particular type of transaction at hand.” 878 F.2d at

752. The court noted that “Congress would not have found it necessary in the 1982

amendments to provide such an expansive list of possible types of settlement

payments in section 741(8) if it intended that all of them would in effect have to been

made on or before a scheduled ‘settlement day’ in order to qualify under the definition.” 

Id. Thus, the Bevill court held that AMC’s delivery of securities to the purchasing

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 22 of 69
23

lending institutions and municipalities was part of the settlement process, and thereby a

“settlement payment” for purposes of § 546(f), notwithstanding the fact that the

disputed transfer of securities had occurred outside of the traditional 5-day window. Id.

at 752-53.

In Kaiser Steel Corp. v. Charles Schwab & Co., Inc. (“Kaiser I”), 913 F.2d 846

(10th Cir. 1990), the Court of Appeals for the Tenth Circuit addressed the issue of

whether corporate payments made in connection with a leveraged buyout were

“settlement payments” within the meaning of § 546(e). The dispute arose out of the

acquisition of Kaiser Steel, a publicly traded corporation, pursuant to which Kaiser’s

common stock was converted into the right to receive $22 and two shares of preferred

stock in the surviving entity. The $162 million deal was financed from Kaiser’s cash

reserves and a loan secured by its assets. Shareholders of Kaiser Steel were required

to tender their common stock shares to Kaiser’s disbursing agent (Bank of America),

which distributed the cash and preferred stock. Among the common stock

shareholders were customers of Charles Schwab & Company, Inc., a securities broker. 

Some of the transfers were made directly between Schwab and Bank of America, but

most of the certificates of Schwab customers were in the possession of a securities

clearing house (Depository Trust Company or “DTC”). DTC tendered the shares of

Kaiser common stock to Bank of America and, after receiving the cash and preferred

stock in exchange, transferred the cash payment on to Schwab via a third party

entity. Schwab then credited its customers’ accounts within a few days of receiving the

funds. Thus, Schwab’s only role in the transaction was as an intermediary which

delivered its customers’ shares of Kaiser Steel stock for payment and transferred the

payments it received back to the accounts of its customers.

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 23 of 69
24

After Kaiser filed for bankruptcy, the debtor-in-possession brought a fraudulent

conveyance action against numerous defendants, including Schwab, seeking to avoid

the LBO and recover the $162 million. Schwab asserted that the LBO payments were

exempt from avoidance as settlement payments under § 546(e). 

The court of appeals agreed that the transfer of consideration in connection with

the LBO constituted settlement payments. The Tenth Circuit noted that § 741(8)’s

definition of “settlement payment,” while “somewhat circular,” is also “extremely broad”

and “clearly includes anything which may be considered a settlement payment.” 913

F.2d at 848 (citations omitted). Such an interpretation, the court found, was consistent

with the congressional intent behind § 546 “to protect the nation’s financial markets

from the instability caused by the reversal of settled securities transactions.” Id.

(citation omitted). The court explained:

Section 546 was first enacted in 1978, and applied only to commodities

markets. See11 U.S.C. § 764(c) (repealed 1982). ... “Settlement

payment” was not defined. Congress sought to “promote customer

confidence in commodity markets generally” via “the protection of

commodity market stability.” S. Rep. No. 989, 95th Cong., 2d Sess. 8

(1978), reprinted in1978 U.S. Code Cong. & Admin. News 5787, 5794. 

However, because the provision only applied to margin payments to

brokers and settlement payments from clearing organizations, it could be

said only to “protect() the ordinary course of business in the market.” H.R.

Rep. No. 595, 95th Cong., 2d Sess. 392 (1978), reprinted in1978 U.S.

Code Cong. & Admin. News 5963, 6348. But see 124 Cong. Rec. 17,433

(1978) (the section “protect[s] all margin payments in the customerbroker-clearinghouse chain”) (statement of Sen. Mathias).

***

In 1982, “Congress was concerned about the volatile nature of the

commodities and securities markets...,” Bevill, Bresler & Schulman Asset

Management Corp. v. Spencer Savings & Loan Ass'n, 878 F.2d at 747, so

former section 764(c) was replaced by sections 546(e) and 741(5) and (8)

“to clarify and, in some instances, broaden the commodities market

protections and expressly extend similar protections to the securities

market.” H.R. Rep. No. 420, 97th Cong., 2d Sess. 2 (1982), reprinted in

1982 U.S. Code Cong. & Admin. News 583, 583. The protection was

expanded beyond the ordinary course of business to include margin and

settlement payments to and from brokers, clearing organizations, and

financial institutions. ... Again, Congress's purpose was “to minimize the

displacement caused in the commodities and securities markets in the

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 24 of 69
25

event of a major bankruptcy affecting those industries.” Id. at 1, reprinted

in 1982 U.S. Code Cong. & Admin. News at 583. ...

913 F.2d at 848-49 (internal footnotes omitted). The court noted that “[t]he danger of a

‘ripple effect,’ ... on the entire market is at least as inherent in the avoidance of an LBO

as it is in the avoidance of a routine stock sale.” Id. at 849. The court further observed

that interpreting “settlement payment” to include the transfer of consideration in an LBO

is consistent with the way “settlement” is defined in the securities industry – i.e., “the

completion of a securities transaction.” Id. (citation omitted). The court acknowledged

the existence of some authority limiting the concept of “settlement” to routine securities

transactions, but it rejected this view. “[B]ecause of the variety and scope of different

securities transactions, and the absence of any restrictions in sections 546(e) and

741(8),” the court wrote, “it would be an act of judicial legislation to establish such a

limitation.” Id. at 850. The court of appeals concluded:

What occurred in this case was “the delivery and receipt of funds and

securities.” National Securities Clearing Corp., 42 Fed. Reg. 3916, 3920

n. 56 (1977). The LBO was a securities transaction. ... The transfer of

money and preferred stock was the settlement of that transaction. 

Therefore, the transfers to Schwab were exempt from avoidance under

section 546(e) as “settlement payment(s) ... to a ... stockbroker.”

Id. (internal footnote omitted) (alterations in the original).

In In re Kaiser Steel Corp. (“Kaiser II”), 952 F.2d 1230 (10

th Cir. 1991), the Tenth

Circuit was asked to consider whether the holding of Kaiser I – that payments made by

Kaiser’s disbursing agent to Schwab or other financial intermediaries were “settlement

payments” exempt from recovery under § 546(e) – should be extended so as to bring

within the protection of § 546(e) payments made to shareholders or other beneficial

owners of stock which had been tendered in connection with the LBO. Kaiser argued

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 25 of 69
26

that the such payments to beneficial shareholders should not be considered settlement

payments, but the Tenth Circuit disagreed. 

The court began by again noting the “extremely broad” definition of “settlement

payment” set forth in § 741(8), the “clear aim” of which, the court found, was “to

encompass all ‘settlement payments’ commonly used in the securities trade.” 952 F.2d

at 1237 (citations omitted). In applying § 741(8)’s definition, the court wrote, “our task is

to apply the term ‘settlement payment’ according to its plain meaning,” giving due effect

to the term “as it is plainly understood within the securities industry.” Id. To that end,

the court noted that, in the routine purchase and sale of a security, there are at least

two opportunities for “settlement”: the first (“street-side” settlement) takes place

between the brokers and the clearing agency during the process of clearance and

settlement; the second (“customer-side” settlement) occurs between the broker and its

customer. Id. at 1237-38. Thus, “settlement payments” logically encompass both the

transfer of securities and funds between brokers and the clearing agency on the “streetside” and the payments made to settle a customer’s account with its broker on the

“customer-side.” Id. at 1238. 

The court rejected Kaiser’s assertion that the scope of § 546(e) and the “broad

notion” that “settlement” is “the completion of a securities contract,” 952 F.2d at 1239

(quoting Kaiser I, 913 F.2d at 849), only applies in the context of routine securities

transactions. As in Kaiser I, the Kaiser II court observed that neither §§ 546(e) nor

741(8) is facially limited to “securities contracts” or “trades,” as opposed to the less

routine exchange of stock for consideration in an LBO situation. See id. at 1239

(“Given the wide scope and variety of securities transactions, we will not interpret the

term ‘settlement payment’ so narrowly as to exclude the exchange of stock for

consideration in an LBO. ... there is no reason to narrow the plain concept of

“settlement” to a single type of securities transaction.”). The court concluded that: 

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 26 of 69
9

 As explained by the Comark court, each GNMA represents an interest in a pool

of home mortgages. 971 F.2d at 323.

27

[w]hile the leveraged buy out may not be a “routine” securities trade, at

least as viewed by Kaiser, we cannot deny what in substance took place

here. The LBO was a securities transaction, varying only in form from the

various other ways in which a shareholder's equity interest can be sold.

The former Kaiser Steel shareholders effectively sold their equity interests

to the new investors in exchange for money and a continuing stake in the

new entity as preferred shareholders. In settlement of that transaction, the

Kaiser Steel shareholders tendered their shares and received payment.

These payments were “settlement payments.” Schwab, 913 F.2d at 850.

Consequently, those shareholders who tendered their shares one day

after the LBO and received the LBO consideration are treated just the

same under the Code as shareholders who sold their shares in the market

one day prior to the LBO and received a settlement payment reflecting the

market value of the LBO consideration. Neither type of investor will be

forced to disgorge the payments several years later. 

Id. at 1239-40. The court noted that, “[f]or the public customer,” this “symmetry of

treatment” is justified not only by application of the “plain notion” of settlement, but also

by the legislative policy interests in “promoting finality and in ‘promoting speed and

certainty in resolving complex financial transactions.’” Id. at 1240 n. 10 (citation

omitted). The court felt its holding was further supported by Congress’ policy of

“promoting the health of the clearance and settlement system, which by all accounts is

one of the fundamental aims of the 546(e) exemption.” Id. 

In In re Comark, 971 F.2d 322 (9th Cir. 1992), the Ninth Circuit Court of Appeals

joined the Tenth and Third Circuits in adopting a broad definition of the term “settlement

payment.” The Comark court was faced with the question whether, upon cancellation

of a reverse-repo transaction between the debtor and a lending institution, the debtor’s

return of government securities that had served as “additional margin” constituted a

“settlement payment” for purposes of § 546(e). Comark, the debtor, was engaged in

the business of trading in government securities known as “Ginnie Maes” or “GNMAs.”9

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 27 of 69
10 In a reverse-repo situation, the dealer buys securities and agrees to resell the

securities to the seller/customer in the future. The transaction thereby functions as a

loan in which the seller receives cash for the securities, but must repurchase them in

the future at a specified price, while the dealer essentially holds as collateral the

securities which have been “sold” to it. See Comark, 971 F.2d at 323.

28

In 1982, Comark entered into six reverse-repo10 agreements with the Great American

Federal Savings & Loan Association, whereby GreatAmerican sold the GNMAs to

Comark with the understanding that GreatAmerican would repurchase the GNMAs at a

later time for the original purchase price, plus an additional interest payment. For each

of the reverse-repos, GreatAmerican also delivered to Comark additional GNMAs to

serve as additional margin for the purchase price. Shortly thereafter, Comark entered

into six “matching” repo agreements, pursuant to which Comark sold the GNMAs to

other third parties. After Comark began to experience financial difficulties and withdrew

from the securities market, it entered into an agreement with GreatAmerican and the

firms that had “matched” the Comark-GreatAmerican reverse repos. Under this new

agreement, Comark withdrew as an intermediary and the remaining parties contracted

to complete the repurchase transactions directly with each other; thus, GreatAmerican

agreed to repurchase the original GNMAs directly from the third party firms who had

purchased them from Comark. Comark, however, remained in possession of the

additional GNMAs that were meant to serve as additional margin and, shortly before

filing for bankruptcy under Chapter 7, returned these additional GNMAs to

GreatAmerican.

Comark’s trustee subsequently tried to recover the value of the additional

GNMAs as an avoidable preferential transfer. Both the bankruptcy and district courts

held that Comark’s transfer of the additional securities were “settlement payments”

exempt from avoidance under § 546, and the court of appeals affirmed. 

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 28 of 69
29

The appellate court began by revisiting § 741(8)’s definition of a “settlement

payment” and observing that “[g]enerally, a settlement is ‘the completion of a securities

transaction.’” 971 F.2d at 325 (quoting Kaiser I, 913 F.2d at 849). Citing In re Bevill

and Kaiser I and II, the Ninth Circuit adopted a broad definition of the term “settlement

payment”:

A settlement payment clearly includes a transfer of securities that

completes a securities transaction. Bevill, 878 F.2d at 752. Therefore, a

transfer of securities needed to complete a Repo transaction is a

“settlement payment.” Id. This includes any transfers that occur during

the settlement process. Id. In the present case, Comark’s withdrawal

from the Reverse Repo agreement was a Repo “transaction” and the

return of the Additional GNMAs was a transfer of securities necessary to

complete the transaction and return Comark and GreatAmerican to a kind

of status quo ante. Regardless of whether all the securities were

transferred on June 18th as Comark now argues, or whether they occurred

from June 18th until July 8th as the Bankruptcy Court found, the transfer

occurred during the settlement process. Thus, the transfer was an

unavoidable settlement payment.

971 F.2d at 326. Comark’s trustee argued that no trade had “settled” when Comark

merely withdrew itself from the reverse-repo transaction and, because Comark’s

rescission of the reverse-repo was unusual, the return of the additional GNMAs could

not be considered “normally” part of a settlement payment. However, the court of

appeals rejected this theory. “The return of the Additional GNMAs,” the court wrote,

“was a step in the process of ‘settling’ Comark’s withdrawal from the Reverse Repo

agreement. Neither party reasonably could consider Comark’s withdrawal ‘settled’ until

GreatAmerican received the over $9 million dollars [sic] worth of securities Comark had

in its possession.” Id. at 326. 

Most relevant for our purposes and most heavily relied upon by the Defendants

is the Third Circuit’s decision in In re Resorts Int’l, Inc., 181 F.3d 505 (3d Cir. 1999), a

case wherein the Court of Appeals had the opportunity to consider for the first time

whether § 546(e)’s protection should apply to payments made in connection with the

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 29 of 69
30

leveraged buyout of the debtor. The dispute in Resorts arose out of the debtor’s errant

payment for shares tendered by one Fred Lowenschuss, a Resorts shareholder who

had previously demanded an appraisal of his shares in Delaware’s Chancery Court. 

Instead of being properly tendered to the Chancery Court, Lowenschuss’ shares were

tendered, through his brokerage firm (Merrill-Lynch), to the debtor’s transfer agent,

Chase Manhattan. Chase then forwarded a list of tendering shareholders to Resorts

and Resorts wired funds to Chase in payment of the shares. Upon its receipt of the

wired funds, Chase delivered a check to Merrill Lynch for some $3.8 million

(representing the proffered merger price for the shares) which was then paid over to

Lowenschuss. After Resorts realized that it had mistakenly paid Lowenschuss the

merger price for his shares, it filed suit seeking to recover the payment under the theory

(among others) that the payment was an avoidable, fraudulent transfer. The question

thus arose whether the payment to Lowenschuss was a “settlement payment” within the

meaning of § 546(e).

In addressing this question, the Third Circuit began by reviewing its holding in

Bevill and observed that the “extremely broad” definition attributed to the term

“settlement payment” indicated that it would likely encompass the payments at issue. 

Since Bevill did not involve an LBO situation, the court of appeals recognized that it did

not definitively control the outcome of the Resorts Int’l dispute, so the court turned next

to the relevant statutory language, recalling the well-established rule that “[w]hen the

language is clear, no further inquiry is necessary unless applying the plain language

leads to an absurd result.” 181 F.3d at 515 (citing Idahoan Fresh v. Advantage

Produce, Inc., 157 F.3d 197, 202 (3d Cir. 1998)). The court concluded that, under a

literal application of § 546(e), the payments to Lowenschuss were “settlement

payments”:

In the securities industry, a settlement payment is generally the transfer of

cash or securities made to complete a securities transaction. See

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 30 of 69
31

[Kaiser I, 913 F.2d at 849]. Here, the securities passed from

Lowenschuss’s broker, Merrill Lynch, to the transfer bank, Chase

Manhattan. Resorts wired funds to Chase which Chase then forwarded ...

to Merrill Lynch who paid Lowenschuss. Although no clearing agency was

involved in this transfer, two financial institutions – Merrill Lynch and

Chase – were. Under a literal reading of section 546, therefore, this was

a settlement payment “made by ... a financial institution.” 

Id. Relying on Kaiser Steel, Bevill, and Comark, the Third Circuit observed that “[t]he

general thrust of [these cases] is that the term “settlement payment” is a broad one that

includes almost all securities transactions,” id. at 515, and it reasoned that including

payments made in consideration of an LBO within this definition is “consistent with the

broad meaning these cases discern.” Id. at 515-16. The court found that such

payments are “obviously [ ] common securities transaction[s],” although perhaps not the

most common type, and it concluded that no absurdity would result from applying the

plain language of the statute so as to extend § 546(e)’s protection to the payments

made for Lowenschuss’s shares. Id. at 516.

As our review of the foregoing cases illustrate, none is precisely on point with the

facts of the case at bar. The parties therefore dispute the extent to which the rulings of

Bevill, Kaiser, Comark, and Resorts Int’l inform and/or control the application of

§ 546(e) in this case. The Committee contends that these decisions are all completely

inapposite in that each involved a series of complex publicly traded securities

transactions – in the form of either complicated leveraged buyouts or transfers pursuant

to repurchase agreements – that were afforded the protections of the national securities

clearance and settlement system. According to the Committee, the case at bar is

fundamentally distinguishable in that the disputed transfer here involved merely a

simple redemption of privately held corporate stock without the involvement of third

party intermediaries such as clearing houses, disbursing agents, or stock brokers. 

The Committee urges this Court to follow the approach taken in Bevill, wherein

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 31 of 69
32

the Third Circuit, in attempting to discern the meaning of “settlement payment” for

purposes of § 546(f), examined the congressional intent behind the statute (and its

precurser, § 546(e)) by considering “the provisions of the whole law, and ... its object

and policy.” Bevill, 878 F.2d at 750. The Committee submits that this approach is

consistent with that taken by the courts in Kaiser and Resorts, wherein the courts

(according to the Committee) determined “that avoidance of large complex securities

transactions that could gravely impact the national securities market is what Congress

intended to protect against in fashioning Section 546(e).” (Pl.’s Br. in Opp. to Summ.

Judg. [Doc. 57] at p. 18.) The Committee reads Resorts Int’l for the principle that the

scope and application of § 546(e) needs to be analyzed on an individualized basis;

while application of the statute’s plain language led to no absurd result in Resorts, the

Committee insists that a rigid application of the statute here would produce an absurd

result.

In support of its position, the Committee relies on In re Grand Eagle Companies,

Inc., 288 B.R. 484 (Bankr. N.D. Ohio 2003) as a case that is supposedly analogous to

the matter before us. The Committee insists that, unlike the cases relied upon by the

Defendants, Grand Eagle is relevant and persuasive authority because it addresses the

applicability (or more accurately, the non-applicability) of § 546(e) to stock transactions

concerning privately held companies. Like the Committee here, the court in Grand

Eagle viewed the Kaiser and Resorts Int’l decisions as both (a) consistent with

Congress’ intent in enacting § 546(e), and (b) inapplicable to transactions involving only

privately held companies. Unfortunately for the Committee, we do not agree that the

relevant case law creates such a neat distinction in the application of § 546(e).

As we’ve noted, the most relevant authority for our present purposes is the Third

Circuit’s decision in Resorts Int’l which, to date, appears to be the only ruling from our

circuit court of appeals applying § 546(e). We therefore take our guidance primarily

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 32 of 69
33

from that decision. However, we interpret that decision in the context of Bevill and

Kaiser, which the Resorts court followed in rendering its ruling, as well as two district

court cases – Zahn v. Yucaipa Capital Fund, 218 B.R. 656 (D.R.I. 1998), and Wieboldt

Stores, Inc. By and Through Raleigh v. Schottenstein, 131 B.R. 655 (N.D. Ill. 1991) – 

which adopted a narrower application of § 546(e) and which also factored into the

Resort court’s analysis. As Bevill, Kaiser, et al. have already been discussed, we now

briefly review the Zahn and Wieboldt decisions.

In Wieboldt the U.S. District Court for the Northern District of Illinois held that

payments received by shareholders in exchange for their stock in connection with the

leveraged acquisition of the debtor corporation were not “settlement payments” and,

therefore, could be attacked as preferential transfers by the chapter 11 trustee. In

attempting to apply § 546(e) and interpret the definition of “settlement payment” as set

forth in § 741(8), the district court found that the statutory definition lacked “plain

meaning”; it therefore turned to an examination of the legislative history. In particular,

the district court focused upon Congress’ concern that avoidance of settled securities

transactions might adversely impact the national securities clearance and settlement

chain. See 131 B.R. at 664 (“A review of the legislative history of §546(e) reveals that

Congress exempted settlement payments in the commodities (and later the securities)

industry out of concern that the bankruptcy of one party in the clearance and settlement

chain could spread to other parties in that chain.”) (citing Bevill, 878 F.2d at 747, 751;

Kaiser Steel, 913 F.2d at 849) (internal footnote omitted). As the Wieboldt court noted,

this threat to other parties in the chain occurs because of the fact that the chain

depends upon a system of guarantees among brokers and other intermediaries on one

hand and the clearing agency on the other. See id. at n. 10. The Wieboldt court found

that requiring the shareholders to disgorge their payments would pose no significant

threat to those in the clearance and settlement chain, since the “inviolability of

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 33 of 69
34

payments to shareholders is simply not basic to the operation of the clearance and

settlement systems.” Id. at 664 and 665 n.11. Quoting one commentator, the court

noted that “while the flow of funds to and between financial intermediaries in the

clearance and settlement chain must be protected in order to insure the stability of

those systems, funds flowing from the intermediaries to the shareholders do not require

protection, and section 546(e) should therefore not apply.” Id. at 665 n. 11 (quoting Neil

M. Garfinkel, Note, No Way Out: Section 546(e) Is No Escape for the Public

Shareholder of a Failed LBO, 1991 Colum.Bus.L.Rev. 51, 66-67). Thus, § 546(e)’s

legislative history, together with consideration of the system which the statute was

designed to protect, “convinced” the Wieboldt court that § 546(e) would not bar the

trustee’s avoidance claims. Id. at 665.

The Zahn case similarly involved a Chapter 11 trustee’s attempt to set aside

allegedly fraudulent transfer payments made to participants in a leveraged buyout of

the debtor corporation. Like the case at bar, the Zahn case involved payments made in

exchange for shares of a privately held company. The district court followed the

reasoning in Wieboldt and held that the transfers at issue were not “settlement

payments” within the meaning of § 546(e) even though they technically “settled” a

purchase and sale of securities. In arriving at this conclusion, the court noted that

§ 741(8)’s definition of “settlement payment” “defies plain meaning” and “is circular and

cryptic.” 218 B.R. at 675 (citations omitted). Finding that a general understanding of

the securities industry would be required to apply the statute as Congress intended, the

Zahn court (like the Wieboldt court) focused its attention on the clearance and

settlement system utilized by the securities industry:

The intermediaries’ role in this system is critical; typically there are several

layers of brokers on each side of a trade, with a clearing agency

positioned in the middle. ... The system depends upon a series of

guarantees, made by all parties in the chain, that they will live up to their

obligations regardless of a default by another party in the chain. .. These

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 34 of 69
35

guarantees allow the parties to trade free of worry about events between

the trade date and the settlement date.

The need to preserve the stability of this system led Congress to create

the § 546(e) exception to the trustee’s avoidance powers. ... If the prebankruptcy trades by a bankrupt intermediary could be set aside, then the

guarantees that allow the system to function would be threatened, the

parties could not proceed with confidence, and a bankruptcy by one party

in the chain could spread to other parties in the chain, threatening a

collapse of the entire industry. ...

Id. at 676 (internal citations omitted). In light of this background, the district court

concluded that it was unlikely Congress intended § 546(e) to apply to the disputed

transfers. In fact, the Zahn court felt its facts compelled such a conclusion even more

so than the facts involved in Wieboldt, because the disputed transaction in Zahn

concerned privately held stock:

The only possible link between this transaction and the securities industry

is the fact that securities were sold; however, the stock at issue was not

even publicly traded. The stock transfers thus had no connection

whatsoever to the clearance and settlement system, and allowing

avoidance would have no impact at all on that system.

Id. at 676. 

Thus, the analysis presently advocated by the Committee was previously

articulated and adopted by the district courts that authored the decisions in Wieboldt

and Zahn. Significantly, the Third Circuit Court of Appeals expressly acknowledged

these rulings in Resorts Int’l:

A number of district courts have held that the term “settlement payment”

does not include payments made for shares by a corporation as part of an

LBO. See, e.g., Zahn v. Yucaipa Capital Fund, 218 B.R. 656, 675 (D.R.I.

1998); Wieboldt Stores, Inc. v. Schottenstein, 131 B.R. 655, 664-65 (N.D.

Ill. 1991). The reasoning of these courts is essentially that “the system of

intermediaries and guarantees” that normal securities transactions involve

is not in play in an LBO. See Zahn, 218 B.R. at 676.

181 F.3d at 515. Nevertheless, the Third Circuit implicitly rejected the reasoning of

Zahn and Wieboldt by holding that § 546(e) would apply to the payments made in

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 35 of 69
36

connection with the Resorts International buyout, despite the fact that no clearing

agency was involved in the disputed transfer. Id. 

The court of appeals opted instead to follow the holding of Kaiser II, which

applied § 546(e) to various LBO-related stock transactions, some of which had similarly

occurred without the involvement of a clearing agency. See id at 515 and 516 n. 9. 

The fact that some commentators had criticized Kaiser II for allegedly applying § 546

improperly to a transaction that did not implicate Congress’ underlying concerns about

the national securities clearance and settlement system was not lost on the Resorts

court, see 181 F.3d at 516 n. 10, yet the Resorts court ultimately was not persuaded by

that criticism. Thus, it appears that consideration of the effect that the avoidance of

settled stock transactions might have on the national clearance and settlement system

was not a determinative factor in the Resorts court’s analysis.

Moreover, while the Wieboldt and Zahn courts premised their respective

analyses on the fundamental determination that § 741(8)’s definition of “settlement

payment” lacks plain meaning – thereby necessitating an examination of the legislative

history, reference to the securities industry, and consideration of congressional intent –

the Third Circuit took a somewhat different approach in its analysis. The Resorts court

based its analysis on the approaches taken in Bevill, Kaiser, and Comark, focusing on

what it viewed as the “general thrust” of those cases: i.e., “that the term ‘settlement

payment’ is a broad one that includes almost all securities transactions.” 181 F.3d at

515. Indeed, the Third Circuit in Resorts cited Bevill for the proposition that the

statute’s “extremely broad” definition of “settlement payment” is consistent with

Congress’ intent

that a “settlement payment” may be the deposit of cash ... or the deposit

or transfer of the securities ... and that it includes transfers which are

normally regarded as part of the settlement process, whether they occur

on the trade date, the scheduled settlement day, or any other date in the

settlement process for the particular type of transaction at hand.

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 36 of 69
37

Id. at 515 (quoting Bevill, 878 F.2d at 752). Citing Kaiser I, the Resorts court

acknowledged the general understanding within the securities industry that “a

settlement payment is ... the transfer of cash or securities made to complete a

securities transaction.” Id. (citing Kaiser I, 913 F.2d at 849 (citing various securities

industry texts)).

In sum, the focus of the Resorts court was on the general breadth and

inclusiveness of the term “settlement payment.” Applying the “plain language” of the

statute and the definition of the term “settlement payment” as it is commonly

understood in the securities industry, the Resorts court concluded that the disputed

transfer fell within the literal definition of “settlement payments,” and it found no

absurdity in this result. See 181 F.3d at 516 (“Despite the fact that payments to

shareholders in an LBO are not the most common securities transaction, we see no

absurd result from the application of the statute’s plain language and will not disregard

it.”).

The Committee insists that applying §546(e) to our facts would lead to an absurd

result and, in support of that argument, it relies on Grand Eagle. That case involved an

allegedly fraudulent pre-petition transfer in which the debtor had acquired a 100%

equity interest in the defendant, ABB Services, Inc. – a privately held company – by

paying ABB some $42 million in cash, which the debtor had obtained through bank

financing. In defending the avoidance action, ABB argued that, since a settlement

payment is “simply ‘the transfer of cash made to complete a securities transaction,’”

288 B.R. at 494, and since the cash transfer to ABB had come from a “financial

institution,” therefore the protections afforded by § 546(e) should apply to the disputed

transfer. Rejecting this defense, the Grand Eagle court reasoned that:

Such a simplistic reading of § 546(e) ignores the meaning of the term

“settlement payment” within the securities industry and would, essentially,

convert that statutory provision into a blanket transactional cleansing

mechanism for any entity savvy enough to funnel payments for the

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 37 of 69
38

purchase and sale of privately held stock through a financial institution. 

Cf. Zahn v. Yucaipa capital Fund, 218 B.R. 656 (D.R.I. 1998) (holding that

§ 546(e) did not apply to the sale of non-publicly traded stocks because

the stock transfers had no connection with the clearance and settlement

system and allowing avoidance would have no impact upon such system);

Jewel Recovery, L.P. v. Gordon, 196 B.R. 348 (N.D. Tex. 1996) (holding

that § 546(e) did not apply to a strictly private stock transaction that did

not implicate the clearance and settlement process) [ ]; Wieboldt Stores,

Inc. v. Schottenstein, 131 B.R. 655 (N.D. Ill.1991) (holding that § 546(e)

would not preclude the chapter 11 trustee from avoiding various

pre-petition stock transfers because the undoing of such transactions

posed no significant threat to the clearance and settlement chain).

288 B.R. at 494 (internal footnote omitted). The Grand Eagle court therefore

suggested, without definitively deciding, that the “settlement payment defense” would

not apply to the buyout of ABB’s privately held stock.

Unlike the Committee, we do not believe that Grand Eagle’s reasoning can be

easily squared with the Third Circuit’s decision in Resorts Int’l. As the foregoing excerpt

indicates, the theory articulated in Grand Eagle had previously been articulated in Zahn,

a case which also concerned the transfer of cash in exchange for privately held stock. 

Again, however, the Third Circuit in Resorts expressly considered but (at least implicitly)

rejected the holding in Zahn. In so doing, the Resorts court did not attempt to

distinguish Zahn on the bases that it involved privately held stock or that application of

§ 546(e) to Zahn’s facts would have led to an absurd result. Instead, the Resorts

court’s analysis seemingly turned on its general preference for giving broad application

to the term “settlement payment.” Accordingly, the holdings of Zahn and Resorts can

not be easily reconciled. See, e.g., Buckley v. Goldman, Sachs & Co., No. Civ. A. 02-

cv-11497RGS, 2005 WL 1206865 at * 7 (D. Mass. May 20, 2005) (observing that

Zahn’s holding is “unmistakably at odds” with those of Kaiser and Resorts Int’l).

The Committee’s reliance on Grand Eagle is also unpersuasive in another

respect. Specifically, the Grand Eagle court apparently dismissed as too “simplistic” the

defendant’s straightforward interpretation of the term “settlement payment” as “the

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 38 of 69
39

transfer of cash made to complete a securities transaction.” See 288 B.R. at 494. Yet

this definition is consistent with the one originally set forth in Kaiser I and applied by the

Third Circuit in Resorts. See Kaiser I, 913 F.2d at 849 (“[s]ettlement is ‘the completion

of a securities transaction’”) (citing various securities industry texts); Resorts Int’l, 181

F.3d at 515 (“In the securities industry, a settlement payment is generally the transfer of

cash or securities made to complete a securities transaction.”) (citing Kaiser I).

In sum, the characteristics of the Holdings stock redemption which the

Committee identifies as materially distinguishable factors do not appear to hold legal

significance under the reasoning of Resorts Int’l. The fact that Bevill, Kaiser, Comark,

and Resorts addressed more complex transactions involving publicly traded securities

that were allegedly afforded protection under the national securities clearance and

settlement system does not appear to have been a determinative factor, at least as

those cases have been interpreted or decided by the Third Circuit. In fact, as we have

already discussed, it does not appear that the clearance and settlement system was

even implicated in the case of Resorts. Nor is it of any apparent legal significance

under Resorts that the Holdings stock redemption occurred without the involvement of

third party intermediaries such as clearing houses, disbursing agents, or stock brokers;

the Resorts court did not base its own analysis on that factor, but instead noted only

that the challenged LBO payment involved “two financial institutions” as intermediaries,

which sufficed to bring the transaction within the literal reading of § 546(e). See In re

Hechinger Investment Co. of Delaware, 274 B.R. 71, 87 (D. Del. 2002) (noting that

Resorts court did not rely on Merrill Lynch’s status as a “stockbroker” in applying

§ 546(e), but rather treated it like a financial institution). Nor, again, is it legally

significant that the Holdings shareholders were directors, officers, and management

level employees. See Hechinger, 274 B.R. at 87(fact that LBO involved payments to

shareholders that were corporate insiders, while a factual distinction vis-a-vis Resorts,

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 39 of 69
40

was not one that held legal significance under § 546(e); Resorts court did not rely on

shareholder’s non-insider status in applying § 546(e), but instead relied on the plain

meaning of the statute). And, for the reasons discussed, we do not agree that Grand

Eagle, or the cases supporting its logic (e.g., Zahn and Wieboldt) can be easily

reconciled with the holding of Resorts Int’l. 

Finally, the Committee insists that there are material issues of fact on this record

which preclude a finding that the payments to Holdings’ Class B shareholders were

“settlement payments” within the meaning of § 546(e). The Committee claims, for

example, that there remains a material issue of fact as to why NFC transferred more

than $5.7 million dollars to NFC Holding and what reasonably equivalent value was

given to NFC in exchange. Because Defendants have not alleged that the NFC-toHoldings transfer was in settlement of a security, the Committee reasons, there remains

a factual issue as to whether the initial NFC-to-Holdings transfer is subject to the

protections of § 546(e). To the extent this issue is actually in dispute, we do not view it

as material given our previous conclusion that, as a matter of law, the initial NFC-toHoldings transfer and the subsequent Holdings-to-shareholder transfers must be

viewed as one integrated transaction for purposes of the Committee’s fraudulent

transfer claims.

The Committee also contends that there are material issues in dispute as to

whether the stock redemption was subject to SEC regulations or the national securities

clearance and settlement system as discussed in Bevill, Kaiser, and Resorts. For

reasons previously explained, however, whether a disputed stock transaction implicates

or affects the national securities clearance and settlement system does not appear to

have been a driving factor in the Resorts court’s analysis; consequently, it does not

materially affect our analysis here. 

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 40 of 69
41

Last, the Committee argues that it is unclear from the record whether the

shareholders who were cashed out ever presented stock certificates to Holdings or

otherwise adhered to any “settlement process” in connection with the stock redemption. 

Unlike the Committee, we do not perceive this dispute, if there is one, as material. If

the broad, general concept of “settlement payment” – i.e., “a transfer of cash or

securities made to complete a securities transaction” – as adopted in Resorts Int’l is

applied here, it appears that the redemption meets this definition. We perceive no real

dispute as to the fact that cash transfers were made to the Defendant shareholders in

order to consummate the redemption of their Class B shares. As in Resorts, no

clearing agency was involved, but financial institutions were. (See Part III (A) (3), infra.) 

Under a literal application of § 546(e), then, the redemption payments constituted

“settlement payments.” See Resorts, 181 F.3d at 515.

3. Were the Payments “By or To a Financial Institution?”

The Committee next argues that, even if the payments in question were

settlement payments, they were not made “by or to a financial institution” for purposes

of § 546(e). Here again, the Committee attempts to distinguish the holdings of Kaiser

II, supra, Resorts, supra, and In re Hechinger Investment Co., 274 B.R. 71 (D. Del.

2002) – another case involving the defendants’ successful application of § 546(e) – on

the ground that each of those decisions “dealt with complex publicly traded security

transactions involving third party intermediaries (including brokers, disbursing agents,

transfer agents, etc., whom the securities were presented to directly for payment) and

the national securities clearance system.” (Pl.’s Br. in Opp. [Doc. # 57] at p. 23.) Thus,

the Committee reads Resorts and Hechinger for the proposition that, “in the event a

third party intermediary is used in the transaction[ ] such that the securities are

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 41 of 69
42

presented to it in exchange for payment, then such payment can be found to have been

made ‘by a financial institution.’” (Pl.’s Br. in Opp. at p. 25.) 

We disagree with the Committee’s interpretation of the Resorts Int’l and

Hechinger decisions. The holdings in those cases did not depend necessarily upon the

shareholders’ physical presentation of securities to a third party intermediary in

exchange for payment, nor did they depend upon the involvement of the national

securities clearance and settlement system. In fact, as we previously discussed, the

plaintiff in Resorts Int’l sought, unsuccessfully, to preclude application of § 546(e) by

pointing out that the disputed payment in that case did not implicate the national

securities clearance and settlement system.

Instead, the rulings in Resorts Int’l and Hechinger turned on the courts’

straightforward application of the plain language of the statute to determine whether the

settlement payments at issue had been made “by or to a financial institution.” In

Resorts, the plaintiff had urged the court to follow the decision of the Eleventh Circuit

Court of Appeals in Munford v. Valuation Research Corp., 98 F.3d 604, 610 (11th Cir.

1996), which held that § 546(e) is inapplicable if the paying agent acquired no beneficial

interest in the subject funds or the shares and acted merely as a conduit in the

transaction. The Third Circuit rejected this authority on the ground that it appeared to

read into § 546(e) “the requirement that the ... financial institutions ... obtain a

‘beneficial interest’ in the funds they handle,” a requirement “not explicit in section 546."

The Resorts court resolved instead to follow the reasoning of the Munford dissent

which, the court found, “relied, as we do, on the plain language of the statute.” 

Because the payment at issue in Resorts had been wired from Resorts to Chase

Manhattan to Merrill Lynch to the shareholder, the court of appeals found that “two

financial institutions – Merrill Lynch and Chase –“ were involved in the transfer and,

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 42 of 69
43

thus, the payment was “made by ... a financial institution” under a literal reading of

§ 546. Id. at 515.

The Hechinger court was similarly presented with the argument that the

disbursing agent, Chase Mellon Financial, was not a “financial institution” within the

meaning of § 546(e) because it had acted solely as an intermediary and never acquired

a beneficial interest in the subject shares. The Hechinger court noted that this

“intermediary or conduit” exception to § 546(e) had been expressly rejected by the

Resorts Int’l court “based on its reading of the plain language of the statute.” 274 B.R.

at 87. “Section 546(e) does not require the financial institution to acquire a beneficial

interest,” the court continued, “rather, it broadly protects from trustee’s avoidance

powers settlement payments made ‘by ... a financial institution.’” Id. (citation omitted). 

The Hechinger court further held that it was of no moment whether a stock broker was

involved in the transfer of monies; “[s]o long as a financial institution is involved,” the

court noted, “the payment is an unavoidable ‘settlement payment.’” Id. at 87.

Applying the plain language of § 546(e), we conclude that it is of no legal

moment whether the Defendants here ever physically presented their stock certificates

to Chase Manhattan in exchange for the redemption payments they received. The

undisputed factual record shows that, on April 13, 1999, NFC directed Chase

Manhattan to transfer the aggregate redemption price (approximately $5.75 million)

from an NFC account at Chase to a Holdings’ account at Chase. From there, Holdings

consummated the redemption that same day by one of two methods: some

shareholders received checks drawn on Holdings’ account at Chase, while other

shareholders received payment to their IRAs at National City Bank via a wire transfer of

funds from Holdings’ account at Chase Manhattan to National City Bank. Under either

method, the shareholder payments came from funds that Chase held in trust for

Holdings. And, in the case of the IRA payments, the funds released by Chase went

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 43 of 69
11 There is no dispute that both Chase Manhattan Bank and National City Bank

are “financial institutions” for purposes of § 546(e).

44

directly to National City Bank and, from there, directly to shareholders’ accounts. Under

a straightforward reading of § 546(e), these were payments “by a financial institution.”11

In support of this conclusion, Defendants refer us to In re Loranger

Manufacturing Corp., 324 B.R. 575 (Bankr. W.D. Pa. 2005). In that case the debtor,

Loranger Manufacturing Corporation (“LMC”), asserted fraudulent transfer claims

against a former officer, director and shareholder (John P. Loranger) arising out the

pre-petition redemption of Loranger’s shares of LMC, which amounted to 50%

ownership of the debtor company. To effectuate the transaction, LMC had borrowed

some $16.6 million from PNC Bank, $9 million of which was wire transferred to

Loranger in payment for his shares. In attempting to avoid this payment, the debtor

asserted that, even though PNC Bank had facilitated the wire transfer payment, LMC,

and not the Bank, had paid the $9 million to Loranger; consequently, the debtor

reasoned, § 546(e) did not apply because the settlement payments had not been made

“by a financial institution.” The bankruptcy court found that these arguments could not

“overcome the clear counsel of the Court of Appeals for the Third Circuit in Resorts that

the plain meaning of § 546(e) governs its interpretation.” 324 B.R. at 585. The

bankruptcy court went on to reason that, because a wire transfer was involved, and

because only banks can perform wire transfers, the $9 million payment to Loranger was

a securities settlement payment made by PNC Bank, “a financial institution.” Id. at 585-

86.

The Committee urges us to disregard Loranger as unpersuasive. According to

the Committee, the Loranger court should have distinguished its facts from those

involved in Resorts and Hechinger – “most importantly the fact that Resorts and

Hechinger involved third party intermediaries to which the securities were presented in

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 44 of 69
45

exchange for payment.” (Pl.’s Br. in Opp. at 24.) As we have already discussed,

however, we do not view this factual nuance as legally material to the holdings of

Resorts and Hechinger. Rather, we agree with the Loranger court’s interpretation that

the “clear counsel” of Resorts Int’l is that the “plain meaning of § 546(e) governs its

interpretation.” 324 B.R. at 585.

The Committee goes on to argue that the reasoning of Loranger is incomplete,

misguided, and would lead in this case to an absurd result. “For instance,” the

Committee writes:

as discussed in Grand Eagle, supra, a savvy equity interest holder in a

privately held company that is experiencing financial difficulty could devise

a scheme to have the troubled company buy back his equity making sure

only that the payment be drawn on the troubled company’s bank account

and then simply put the company into a bankruptcy proceeding. In so

doing, the transferee could shield himself or herself from a fraudulent

transfer claim under the safe harbor provisions of Section 546(e).

(Pl.’s Br. in Opp. at 25.) As we have previously observed, a similar argument was laid

out in Zahn. See 218 B.R. at 677 (quoting Jewel Recovery, L.P. v. Gordon, 196 B.R.

348, 353 (N.D. Tex. 1996)). The Third Circuit panel that decided Resorts was clearly

aware of this decision, see 181 F.3d at 515, but apparently was not persuaded by its

reasoning. For the reasons previously discussed, we do not find that the facts of

Loranger are materially distinguishable from those at issue in Resorts Int’l and 

Hechinger. We therefore hold that the plain language of § 546(e) compels the

conclusion that the payments at issue here were made “by a financial institution” within

the meaning of § 546(e).

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 45 of 69
46

4. Is Count 2 Exempt from the Purview of § 546(e)?

Finally, the Committee submits that, even if § 546(e) is otherwise generally

applicable in this case, it is not a defense to Count 2 of the Amended Complaint, which

asserts a claim under § 5104(a)(1) of the Pennsylvania Uniform Fraudulent Transfer

Act (UFTA). As the Committee notes, § 546(e) expressly exempts from its scope

avoidance actions brought under § 548(a)(1)(A) of the Bankruptcy Code, which are

sometimes referred to as “actual fraud” claims. In relevant part, § 548(a)(1)(A)

provides:

(a)(1) The trustee may avoid any transfer of an interest of the debtor in

property, or any obligation incurred by the debtor, ..., if the debtor

voluntarily or involuntarily – 

(A) made such transfer or incurred such obligation with the

actual intent to hinder, delay, or defraud any entity to which the

debtor was or became ... indebted.

11 U.S.C. § 548(a)(1)(A).

In Count 2 of the Amended Complaint, the Committee asserts a claim under

§ 5104(a)(1) of the Pennsylvania UFTA, which contains language substantially similar

to that of Bankruptcy Code § 548(a)(1)(A):

(a) General Rule. — A transfer made or obligation incurred by a debtor is

fraudulent as to a creditor, whether the creditor’s claim arose before or

after the transfer was made or the obligation was incurred, if the debtor

made the transfer or incurred the obligation:

(1) with the actual intent to hinder, delay or defraud any creditor of

the debtor.

12. Pa. C.S.A. § 5104(a)(1). It is the Committee’s allegation in Count 2, among other

things, that “NFC and/or Holdings, under the direction of their Officers and/or Directors,

made the NFC Holdings Transfer and each of the Distributions to the Transferee

Defendants with the actual intent to hinder, delay and/or defraud NFC and/or NFC

Holdings’ creditors.” (Amended Complaint [Doc. 39] at ¶ 71.)

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 46 of 69
47

The Committee maintains “[i]t is clear from the language of Section 546(e) that

Congress did not intend to shield fraudulent transfer recipients from the avoidance

powers of a trustee in cases of actual fraud.” (Pl.’s Br. in Opp. to Summ. Judg. [Doc.

57] at p. 12.) Accordingly, the Committee contends that § 546(e) should not bar its

prosecution of the Pennsylvania UFTA claim in Count 2 of the Amended Complaint.

Notably, the Committee cites no authority in support of its argument that, for

purposes of applying § 546(e), we should treat its “actual fraud claim” under the

Pennsylvania UFTA as the equivalent of an intentional fraud claim brought under

§ 548(a)(1)(A). We have similarly been unable to locate any authority in support of this

approach and, in fact, basic principles of statutory construction would seem to militate

against it. In essence, Plaintiff would have this Court read into the statute terms that

are presently absent. However, to do so “would result ‘not [in] a construction of [the]

statute, but, in effect, an enlargement of it by the court, so that what was omitted,

presumably by inadvertence, may be included within its scope.” Lamie v. United States

Trustee, 540 U.S. 526, 538 (2004) (alterations in the original) (quoting Iselin v. United

States, 270 U.S. 245, 251 (1926)). Such an approach is unwarranted when a statute

may be sensibly interpreted according to its plain terms. See id. (“With a plain,

nonabsurd meaning in view, we need not proceed in this way [by reading an absent

word into the statute].”) See also In re Cavanaugh, 306 F.3d 726, 738 (9th Cir. 2002)

(“We are bound by what Congress did, and we may not add to the statute terms that

Congress omitted even if we believe they would serve the statutory purpose.”).

Here, there is good reason to limit § 546(e) to its plain terms and not

treat § 548(a)(1)(A) and § 5104(a)(1) of the Pennsylvania UFTA as interchangeable. 

While the elements of an actual fraud claim under § 548(a)(1)(A) may well be similar to

the elements of a Pennsylvania UFTA § 5104(a)(1) claim, there is at least one

important difference between the two causes of action: § 548(a)(1)(A) applies a oneCase 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 47 of 69
48

year statute of limitations, see 11 U.S.C.A. § 548(a)(1), while § 5104 utilizes a four-year

statute of repose. See 12 Pa.C.S.A. § 5109 (Purdon's 1999); In re Dolata, 306 B.R. 97,

115 (Bankr. W.D. Pa. 2004) (noting that transfers generally remain assailable under

Pennsylvania statute for four years following transfer, as opposed to one-year look-back

period of bankruptcy fraudulent transfer provision.) Thus, the scope of transactions

potentially captured by § 548(a)(1)(A) is much narrower than that potentially within the

scope of the Pennsylvania UFTA. We presume that, if Congress had intended to

exempt from § 546(e)’s protection allegations of actual fraud under state law fraudulent

transfer theories, it could have easily done so. See Lamie, 540 U.S. at 538 (“There is a

basic difference between filling a gap left by Congress’ silence and rewriting rules that

Congress has affirmatively and specifically enacted.”) (quoting Mobil Oil Corp. v.

Higginbotham, 436 U.S. 618, 625 (1978)).

Moreover, we note that at least two courts have declined to read into § 546(e) an

exception for state law fraudulent transfer claims. See In re Hechinger Investment Co.

of Delaware, 274 B.R. at 98 (finding it “clear” that Congress did not intend to exempt

from § 546(e) state law fraudulent conveyance claims brought under § 544 of the

Bankruptcy Code – “the only section of the Code that provides for the avoidance of

transactions occurring more than a year before bankruptcy”); In re Hamilton Taft & Co.,

176 B.R. 895, 901-02 (Bankr. N.D. Cal. 1995) (finding that § 546(e) does not bar

actions brought under § 548(a)(1) of the Code to recover a transfer made within one

year of the bankruptcy petition date with actual intent to defraud, but it “does bar actions

brought under section 544 (using state fraudulent conveyance statutes) to recover

transfers made more than one year prepetition with actual intent to hinder, delay, or

defraud creditors”), aff’d, 196 B.R. 532 (N.D. Cal. 1995), and aff’d, 114 F.3d 991 (9th

Cir. 1997). We likewise conclude that the Committee’s claim for actual fraud under the

Pennsylvania UFTA is barred by § 546(e).

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 48 of 69
12 Those provisions limit the corporation’s and the board of directors’ general

power to authorize distributions to shareholders as follows:

 (b) Limitation. – A distribution may not be made if, after giving effect thereto:

(1) the corporation would be unable to pay its debts as they become due in the

usual course of its business; or

(2) the total assets of the corporation would be less than the sum of its total

liabilities plus (unless otherwise provided in the articles) the amount that would

be needed, if the corporation were to be dissolved at the time as of which the

distribution is measured, to satisfy the preferential rights upon dissolution of

shareholders whose preferential rights are superior to those receiving the

distribution.

15 Pa. C.S.A. § 1551.

13 Section 1712 provides, in relevant part:

(a) Directors.--A director of a business corporation shall stand in a

49

B. Counts 4 Through 6

In Counts 4, 5, and 6 of the Amended Complaint, the Committee asserts that

Defendants committed various violations of §§ 1551 and 1712 of the Pennsylvania

Business Corporation Law of 1988 (PBCL), 15 Pa. C.S.A. §§ 1101, et seq. Counts 4

and 5 allege that the Director and Officer Defendants engaged in unlawful distributions

of corporate funds in violation of (respectively) §§ 1551(b)(1) and (2)12, the theory being

that, at the time the redemption was undertaken, NFC and/or Holdings were unable to 

pay their debts as they became due in the usual course of business (see Amended

Compl. [Doc. 39] at Count 4, ¶¶ 87-92), and the total assets of NFC and/or Holdings

were less than the sum of their total liabilities (see Amended Compl. at Count 5, ¶¶ 98-

98). In Count 6, the Committee alleges that, by undertaking the redemption at a time

when the total assets of NFC and/or Holdings were less than the sum of their total

liabilities, the Directors and Officers of NFC and/or Holdings breached their respective

fiduciary duties in violation of § 1712.13 (See Amended Compl. at Count 6, ¶¶ 99-104.) 

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 49 of 69
fiduciary relation to the corporation and shall perform his duties as a

director, including his duties as a member of any committee of the board

upon which he may serve, in good faith, in a manner he reasonably

believes to be in the best interests of the corporation and with such care,

including reasonable inquiry, skill and diligence, as a person of ordinary

prudence would use under similar circumstances. ...

***

(c) Officers.--Except as otherwise provided in the bylaws, an officer shall

perform his duties as an officer in good faith, in a manner he reasonably

believes to be in the best interests of the corporation and with such care,

including reasonable inquiry, skill and diligence, as a person of ordinary

prudence would use under similar circumstances. A person who so

performs his duties shall not be liable by reason of having been an officer

of the corporation.

15 Pa. C.S.A. § 1712.

14 Defendants note that, under the “internal affairs doctrine,” courts must look to

the law of the state of formation to resolve issues involving the internal affairs of a

corporation. See CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 89-93 (1987);

First National City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611,

621 (1983). As this court sits in the Commonwealth of Pennsylvania, we apply

Pennsylvania conflict-of-law principles. See Klaxon Co. v. Stentor Electric Mfg. Co.,

313 U.S. 487 (1941). The Commonwealth, as Defendants note, has adopted the

“internal affairs doctrine” by statute. See 15 Pa. C.S.A. § 4145(a). The Committee

does not appear to dispute either the Defendants’ analysis or their conclusions

concerning this point.

50

In each of these counts, the Committee seeks to recover the full amount of the

redemption price (i.e. approximately $5.75 million) from the Director and Officer

Defendants.

As a preliminary matter, the scope of potential liabilities implicated by these

claims must be clarified. Defendants accurately point out that, because NFC is a

Pennsylvania corporation and Holdings is a Delaware corporation, only NFC is subject

to the mandates of the PBCL.14 Moreover, because the statutory violations alleged in

Counts 4 and 5 establish liability only on the part of corporate directors (not officers),

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 50 of 69
15 Section 1553 provides, in relevant part:

(a) Directors.--Except as otherwise provided pursuant to section 1713

(relating to personal liability of directors), a director who votes for or

assents to any dividend or other distribution contrary to the provisions of

this subpart or contrary to any restrictions contained in the bylaws shall, if

he has not complied with the standard provided in or pursuant to section

1712 (relating to standard of care and justifiable reliance), be liable to the

corporation, jointly and severally with all other directors so voting or

assenting, for the amount of the dividend that is paid or the value of the

other distribution in excess of the amount of the dividend or other

distribution that could have been made without a violation of the

provisions of this subpart or the restrictions in the bylaws.

15 Pa. C.S.A. §1553(a).

16 For reasons not clear to the Court, the Committee has identified Ashtok Khare

as a Transferee Defendant only and not as a Director. However, the record is clear that

Mr. Khare served as a Director for both NFC and Holdings at all times relevant to the

Committee’s claims. (See Pl.’s Surreply Br. [Doc. # 79] at Ex. D.) Like Mr. Clark, Mr.

Khare voted to approve the redemption and received corporate payments in exchange

for his personal shares of Holdings’ Class B stock. (See id.; Def.s’ Append. to Mot. for

Partial Summ. Judg. [Doc. # 45] at ¶¶ 7-8.) The Defendants insist that, because Mr.

Khare has not been specifically named in the Amended Complaint as a Director

Defendant, it is too late for the Committee to further amend its pleading and do so now. 

We do not agree. Mr. Khare has been identified as a Defendant since the

commencement of this lawsuit, albeit as a Transferee Defendant only. He has been

properly served, has had ample notice of the nature of the Committee’s claims, and

therefore was at all times in a position to know that, but for the Committee’s inadvertent

mistake, he would likely have been named as a Director Defendant for purposes of

Counts 4 through 8 of the Amended Complaint. The claims asserted in Counts 4-8

arise out of the same transaction which has heretofore served as the basis of the

Committee’s claims against Mr. Khare and the other named Transferee Defendants. 

We can perceive no possible prejudice to Mr. Khare by allowing the Committee to treat

him as a Director Defendant. Thus to the extent Counts 4 through 8 are not otherwise

barred as a matter of law, see our discussion infra, we conclude that the requirements

of Fed.R.Civ.P. 15(c)(2) and (3) are satisfied and the Committee may pursue its claims

51

see 15 Pa. C.S.A. § 1551, supra, and § 1553,15 only those named Defendants who

served as Directors of NFC can be liable for purposes of Counts 4 and 5. The only

named Defendants meeting those qualifications are E. Roger Clark and Ashok K.

Khare.16 Thus, to the extent the Committee could establish liability under Counts 4 and

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 51 of 69
against Mr. Khare as a Director Defendant.

52

5 of the Amended Complaint, it appears that Mr. Clark and Mr. Khare are the only

individuals whom the Committee has properly named as defendants. 

More fundamentally, however, Defendants contend that Counts 4 through 6

cannot survive because they were not asserted within the applicable statute of

limitations period. Violations of § 1551 of the PCBL (Counts 4 and 5) are governed by

a 2-year statute of limitations. See 15 Pa.C.S.A. § 1553(d) (claims for unlawful

dividends and distributions are governed by 2-year limitations period set forth in 42 Pa.

C.S.A. § 5524(5) relative to actions upon a statute for a civil penalty or forfeiture). 

Violations of § 1712 are likewise governed by a 2-year statute of limitations. See 42

Pa.C.S.A. § 5524(7) (2-year limitations period applies to personal injury actions founded

upon negligent, intentional, or otherwise tortious conduct or any other action or

proceeding sounding in trespass, including deceit or fraud); Maillie v. Greater Delaware

Valley Health Care, Inc., 628 A.2d 528, 532 (Pa. Cmwlth. 1993) (applying two year

statute of limitations period to breach of fiduciary duty claim). Because the stock

redemption occurred on April 13, 1999, Defendants calculate that the statute of

limitations expired on April 13, 2001. However, the instant litigation was not

commenced until January 30, 2003. Thus, Defendants maintain that Count 4-6 are now

time-barred.

The Committee does not dispute the applicability of a 2-year statute of

limitations, but it does dispute the assertion that Counts 4-6 are untimely. It posits two

alternative theories as to why the statute of limitations had not expired as of the date

the original complaint was filed.

First, the Committee contends that the statute of limitations accrual date was

tolled by Pennsylvania’s “discovery rule.” Under Pennsylvania law, “a cause of action

accrues when the plaintiff could have first maintained the action to a successful

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 52 of 69
53

conclusion”; consequently, “the statute of limitations begins to run as soon as the right

to institute and maintain a suit arises.” Fine v. Checcio, 870 A.2d 850, 857 (Pa. 2005). 

Nevertheless, the “discovery rule” operates to toll the limitations period in situations

where the plaintiff is reasonably unaware of his injury. Id. at 858. Under the rule, the

limitations period will not begin to run “until ‘the plaintiff reasonably knows, or

reasonably should know: (1) that he has been injured, and (2) that his injury has been

caused by another party’s conduct.’” In re Mushroom Transp. Co., Inc., 382 F.3d 325,

338 (3d Cir. 2004) (quoting In re TMI Litig., 89 F.3d 1106, 1116 (3d Cir. 1996)). Thus,

the “salient point” giving rise to application of the discovery rule is “the inability of the

injured, despite the exercise of reasonable diligence, to know that he is injured and by

what cause.” Fine, 870 A.2d at 858.

The Committee cites In re CITX Corp., Inc., Nos. 01-19604, 03-727, &

03-CV-6766, 2004 WL 2850046 at * 3 (E.D. Pa. Dec. 8, 2004), for the proposition that,

where the bankruptcy trustee steps into the shoes of the debtor company, the discovery

rule tolls the statute of limitations accrual date until the filing of the bankruptcy petition. 

In CITX, the trustee in bankruptcy brought claims of malpractice and negligent

misrepresentation against a firm that had provided pre-petition accounting services for

the debtor. The defendants argued that the claims were time-barred by virtue of the

fact that they had been filed more than two years after the allegedly deficient financial

statements had been issued by the firm. The district court rejected this defense, noting

that a “strict application” of the limitations period would produce an inequitable result: 

While a strict application of the limitations period would commence at the

time the Defendants issued their compiled financial statements, this would

not yield an equitable result, given a practical understanding of the

position and responsibilities of a bankruptcy Trustee. Although the

Trustee steps into the shoes of the bankruptcy company, it is not in a

position, prior to the filing of the bankruptcy action, to be aware of

potential claims arising from injuries to the bankrupt company. A

reasonable person in the Trustee's position could not be aware of, or

reasonably be expected to discover, injuries to CitX prior to the filing of

the bankruptcy petition. Therefore, the discovery rule applies to toll the

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 53 of 69
17 We note that the Committee purports to bring Counts 4 and 5 pursuant to

§§ 1551 and 1553 of the PBCL and § 544(b) of the Bankruptcy Code. (The Committee

does not expressly refer to § 544(b) in Count 6.) Defendants contend, and we agree,

that Counts 4 and 5 are not properly brought under § 544(b) of the Code, since that

provision pertains only to avoidance claims which the trustee (or here, the Committee)

is empowered to bring in its capacity as a putative creditor. See 4 Collier on

Bankruptcy ¶ 554.03, at 544-17 (15th ed. 1986) (“[S]ection 544(b) does not create in

the trustee any independent right or power of action with which to challenge an

allegedly invalid transfer. Like Prometheus bound, the trustee is chained to the rights of

creditors in the case under title 11. If there are not creditors within the terms of section

544(b) against whom the transfer is voidable under applicable law, the trustee is

powerless to act so far as section 544(b) is concerned.”) (footnotes omitted), cited in In

re Kenval Marketing Corp., 69 B.R. 922, 925 (Bankr. E.D. Pa., 1987). The breach of

fiduciary duty claims set forth in Counts 4-6 are causes of action belonging not to

54

statute of limitations until the filing of the bankruptcy petition on July 3,

2001, leaving the Trustee within the applicable statutory period given its

filing on July 2, 2003. See Baehr v. Touche Ross & Co., 62 B.R. 793, 797

(E.D. Pa.1986) (tolling the two-year limitation of § 5524 until the

bankruptcy filing).

In re CITX Corp., Inc., supra, at * 4. 

To the extent Plaintiff relies on CITX Corp. for the proposition that the limitations

period for pre-bankruptcy injuries is per se tolled until the filing of a bankruptcy petition,

we are not persuaded that CITX Corp. accurately states the controlling legal principles. 

Similarly, we are not persuaded by the Committee’s reliance on In re Mushroom

Transp. Co., 382 F.3d at 338, to support its assertion that, “[u]ntil the filing of the

Bankruptcy, there was no reason for creditors or other parties to awaken inquiry and

direct diligence into the issues surrounding the Stock Cancellation.” (Pl.’s Br. in Opp. at

28.) In re Mushroom Transp. is distinguishable from the case at bar in that it involved

alleged post-petition malfeasance in the form of wrongful transfer and embezzlement of

bankruptcy estate property; therefore, it did not implicate the analysis we undertake

below.

Rather, the statute of limitations issue in the instant case appears to be

governed by § 108(a) of the Bankruptcy Code,17 which provides:

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 54 of 69
creditors, but to the debtor corporation itself. See 42 Pa. C.S.A. § 1553(a) (a director

who authorizes any unlawful distribution in violation of his fiduciary duties shall be liable

to the corporation for the amount of the unlawful distribution); id. at § 1717 (directors’

duties of care and loyalty under § 1712 run solely to the business corporation and may

be enforced directly by the corporation or by a shareholder on behalf of the

corporation). Thus, § 544(b) does not provide the Committee a vehicle for pursuing its

breach of fiduciary duty claims. Accord In re Bliss Technologies, Inc., 307 B.R. 598,

608 (Bankr. E.D. Mich. 2004) (holding that §544(b)(1) does not apply to claims of

alleged breach of fiduciary duty).

We mention this distinction because, if § 544(b) does not apply to the breach of

fiduciary duty claims in Counts 4-6, then § 550 is unavailable as a means of recovering

from mediate transferees. See 11 U.S.C. § 550 (“to the extent a transfer is avoided

under section 544 ...,” the trustee may obtain recovery from the initial transferee or any

immediate or mediate transferee). Moreover, if the claims in Counts 4-6 were ones

properly asserted under § 544(b), then they would be subject to a different statute of

limitations provision – to wit, 11 U.S.C. § 546(a), which provides:

(a) An action or proceeding under section 544... of this title may not be

commenced after the earlier of--

(1) the later of–

(A) 2 years after the entry of the order for relief; or

(B) 1 year after the appointment or election of the first

trustee under section 702, 1104, 1163, 1202, or 1302 of this

title if such appointment or such election occurs before the

expiration of the period specified in subparagraph (A); or

(2) the time the case is closed or dismissed.

11 U.S.C. § 546(a). While § 546(a) might render the Committee’s PBCL claims timely,

Defendants contend that the Counts 4-6, if properly asserted under § 544(b), would

nevertheless fall prey to the “settlement payment defense” under subsection 546(e). 

Although this argument has some appeal, we need not definitively decide the issue

because we are satisfied that § 544(b) is inapplicable to Counts 4-6 of the Amended

Complaint.

55

(a) If applicable nonbankruptcy law, an order entered in a nonbankruptcy

proceeding, or an agreement fixes a period within which the debtor may

commence an action, and such period has not expired before the date of

the filing of the petition, the trustee may commence such action only

before the later of–

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 55 of 69
56

(1) the end of such period, including any suspension of such period

occurring on or after the commencement of the case; or

(2) two years after the order for relief.

11 U.S.C. § 108(a). Thus, § 108(a) allows for an extension of the state law limitations

period upon the filing of a bankruptcy petition, but only if “the [applicable] period has not

expired before the date of the filing of the petition.” Our inquiry, therefore, necessarily

focuses on whether Pennsylvania’s 2-year statute of limitations period expired before

March 6, 2002, when the underlying bankruptcy proceedings were commenced. 

The disputed redemption which is the subject of these claims occurred on April

13, 1999. Under a straightforward application of the 2-year limitations period, the

Committee’s breach of fiduciary duty claims would be untimely because the statute of

limitations would have expired on April 13, 2001. Yet the Committee insists that, under

the “discovery rule,” the statute of limitations did not begin running until well after April

13, 1999. As previously noted, the “salient point” giving rise to application of the

discovery rule is the plaintiff’s inability to know that he is injured and by what cause,

despite the exercise of reasonable diligence. Fine, 870 A.2d at 858. Stated differently,

the relevant inquiry is “what might [the plaintiff] have known, by the use of the means of

information within his reach, with the vigilance the law requires of him?” Id. (quoting

Scranton Gas & Water Co. v. Lackawanna Iron & Coal Co., 31 A. 484, 485 (Pa. 1895)). 

See also Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1390 (3d Cir.

1994) (“The discovery rule keys on a plaintiff’s cognizance, or imputed cognizance, of

the actual injury.”)

We must assess the Committee’s “discovery rule” argument in light of the

present record construed, where disputed, in the light most favorable to the Committee. 

The parties agree that the Board of Directors for NFC and the Board of Directors for

Holdings were comprised of the same members and generally conducted joint

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 56 of 69
18 The Amended Complaint incorrectly identifies Defendants Cashman, Beyeler,

and Kaemmerer as both officers and directors of NFC and/or Holdings. (Amended

Complaint at ¶¶ 11-13.) As discussed in n. 16, supra, Defendant Khare is identified

only as a Transferee Defendant, rather than a director. (See id. at ¶ 26.)

57

meetings. (See Amended Compl. [Doc. # 39-1] at ¶ 45; Answer [Doc. # 80] at ¶ 45.) 

Defendants have presented unrebutted evidence that Holdings’ Boards (and therefore,

NFC’s Board) was comprised, during the relevant time period, of the following nine

members: Defendant E. Roger Clark and Defendant Ashok Khare (both of whom

represented management); Patrick A. Flanagan, Charles C. Judd, John G. Koedel, and

Stan Lundine (all of whom were independent); and Robert W. Richards, Harry D.

Rosequist, and Dennis L. Peterson (all of whom represented labor interests). (See

Decl. of Maurice Cashman at ¶ 4, n. 1, Appendix in Supp. of Def.’s Mot. for Summ.

Judg. [Doc. # 45].) During its meeting of December 22, 1998, upon the advice of

Holdings’ outside accounting firm and valuation expert, the Board unanimously voted in

favor of converting Holdings to a Subchapter S corporation and eliminating Holdings’

Class B shares, either through a redemption at a price of $49.42 per share or through a

merger designed to eliminate the Class B shares. (See Cashman Decl. at ¶ 4.) The

proposed redemption price was established by the corporation’s valuation expert,

Valuemetrics, Inc. (Id.) Of the nine Board members who approved the redemption,

only two – Messrs. Clark and Khare – received payments in connection with the

redemption. (See Cashman Decl. at ¶¶ 7-8.) Messrs. Clark and Khare also happen to

be the only two Board members named as Defendants in this litigation.18

Given these facts, it is difficult to discern how the discovery rule has any valid

application with respect to Counts 4-6. The Committee theorizes that “the officers and

directors of NFC and NFC Holdings devised a scheme to effectuate the cancellation of

certain Class B stock and to then transfer approximately $5.7 million dollars to Class B

stockholders, including officers and directors of NFC and NFC Holdings.” (Pl.’s Br. in

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 57 of 69
58

Opp. at 26.) The Committee insists that, until the bankruptcy proceedings were

commenced, there was no reason for creditors or other parties to awaken inquiry and

direct diligence into the issues surrounding the redemption. (Id. at p. 28.) Yet seven

directors approved the disputed stock redemption without any obvious self-interest and

in the absence of any alleged wrongdoing. Pursuant to § 1712, these directors had a

fiduciary responsibility to perform their duties in good faith, in a manner consistent with

the company’s best interests, and with such care, skill and diligence – including

reasonable inquiry – as a person of ordinary prudence would use under similar

circumstances. 15 Pa.C.S.A. § 1712(a). They were, in short, under a fiduciary

obligation to investigate and satisfy themselves of the soundness of the stock

redemption from a business judgment perspective. The Committee has failed to

produce any evidence to explain why the allegedly unlawful nature of the stock

redemption and the alleged malfeasance of the Director and Officer Defendants was

not discoverable by these seven untainted directors.

For example, the evidence does not support an inference that the named

Director and Officer Defendants were controlling shareholders of Holdings; on the

contrary, the record suggests that the Director and Officer Defendants did not own a

majority of the Class B stock. Nor is there any evidence to suggest that the named

Director and Officer Defendants somehow dominated or controlled the actions of the

Board as a whole.

Alternatively, if it were the Committee’s theory that all nine directors conspired

together to effectuate the allegedly unlawful stock redemption in breach of their

respective duties, then the Committee might conceivably state a claim of adverse

domination. Even under this scenario, however, the discovery rule would be

inapplicable because the guilty knowledge of the conspiring directors would be imputed

to the corporation which they dominate. See In re Loranger, 324 B.R. at 580 (discovery

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 58 of 69
19 While a claim of adverse domination might establish a basis for equitable

tolling, see Loranger, 324 B.R. at 580-81, this theory has no relevance here because

the Committee has not asserted wrongdoing or conspiracy on the part of the seven

non-management/non-shareholder directors who voted in favor of the stock redemption

and supported the company’s transition to Subchapter S status.

59

rule did not toll statute of limitations for breach of fiduciary duty, negligence, and unjust

enrichment claims where corporation’s sole owner, director and officer allegedly knew

of injury to corporation arising from disputed stock redemption; dominant principle’s

knowledge was imputed to the corporate debtor itself); PNC Bank, Kentucky, Inc. v.

Housing Mortgage Corp., 899 F. Supp. 1399, 1405 (W.D. Pa. 1994) (knowledge of

wrongdoing of agents who “dominated” a corporation would be imputed to the

corporation).19

Instead, it appears to be the Committee’s theory that the named Director and

Officer Defendants somehow duped the other Board members into voting for the stock

redemption by fraudulently concealing information about the nature of the company’s

true financial position. Thus, the Committee seeks to avoid a limitations bar by invoking

the alternative doctrine of equitable estoppel. See Fine v. Checcio, 870 A.2d at 860

(doctrine of fraudulent concealment serves to toll the running of the statute of limitations

based on a theory of estoppel).

Generally speaking, equitable tolling will suspend the running of the statute of

limitations where (1) the defendant has actively misled the plaintiff respecting the

plaintiff’s cause of action; (2) the plaintiff in some extraordinary way has been

prevented from asserting his rights; or (3) the plaintiff has timely asserted his rights

mistakenly in the wrong forum. In re Mushroom Transp. Co., 382 F.3d at 338-39

(quoting Oshiver, supra, 38 F.3d at 1387). The doctrine of fraudulent concealment

provides that the defendant may not assert the statute of limitations “if through fraud or

concealment, he causes the plaintiff to relax his vigilance or deviate from his right of

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 59 of 69
60

inquiry into the facts.” Fine, supra, at 680 (citation omitted). “Fraud” in this context,

does not require an intent to deceive, but is used in the broadest sense, encompassing

“unintentional deception.” Id. It is the plaintiff’s burden to prove fraudulent

concealment “by clear, precise, and convincing evidence.” Id. (citing Molineux v. Reed,

532 A.2d 792, 794 (Pa. 1987)). Moreover, application of this doctrine (as with the

discovery rule) requires the plaintiff to demonstrate reasonable diligence. Id. at 861. 

Thus, “a statute of limitations that is tolled by virtue of fraudulent concealment begins to

run when the injured party knows or reasonably should know of his injury and its

cause.” Id. 

In its brief, the Committee asserts that the statute of limitations should be tolled

“as the officers and directors fraudulently concealed the insolvency of NFC and NFC

Holdings and misrepresented the true financial condition of NFC and NFC Holdings at

the time of the Stock Cancellation.” (Pl.’s Br. in Opp. at 29.) However, the Committee

has proffered no theory, much less any supporting evidence, to establish how this

concealment might have occurred. No specific theory is laid out in the Committee’s

Amended Complaint to explain why the true financial ramifications of the redemption

were not reasonably discoverable, other than the Committee’s single allegations that

“[t]he book value of NFC and/or NFC Holdings was depleted by approximately 45%,

from $17,764,000 to $9,679,000, as a result of the Stock Cancellation. Intangible

assets, including goodwill, were valued at approximately $19,000,000 and included in

book value.” (Amended Compl. at ¶ 54.)

The moving Defendants, on the other hand, have proffered undisputed evidence

that, as of November 1999, the Board of Directors acquired a new member in Thomas

G. Hessley. Mr. Hessley attended his first board meeting on November 5, 1999 and

received at that time a consolidated balance sheet (actual and projected) for Holdings

covering the period from June 30, 1997 through June 30, 2003 in which the

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 60 of 69
61

corporation’s long-term debt to JP Morgan Chase was laid out. (See Cashman Decl. at

¶ 9; Def.’s Append. [Doc. 45] at Ex. F.) Defendants therefore contend that, at least by

November 5, 1999, there was information on record, and available to a neutral source,

indicating the corporation’s debt obligation relative to the redemption such that the

statute would have expired, at the latest, on November 5, 2001. The Committee has

proffered nothing in rebuttal to this point, except for its suggestion that if, upon further

discovery, the facts establish “‘(1) wrongful concealment of its actions by defendant; (2)

failure of the plaintiff to discover the operative facts or the basis of his cause of action

within the limitations periods; and (3) plaintiff’s due diligence until discovery of the facts,’

then the Committee may be successful in its fraudulent concealment claim.” (Pl.’s Br.

in Opp. at 30 (quoting Bethlehem Steel Corp. v. Fischbach & Moore, Inc., 641 F. Supp.

271, 273 (E.D. Pa. 1986)).)

The Committee also invokes the doctrine of equitable tolling on the alternative

basis that “both the Original Complaint and Amended Complaint clearly set forth claims

of self-dealing for profit by a fiduciary.” (Pl.’s Br. in Opp. at 28-29.) The Committee

relies on In re Sheffield Steel Corp., 320 B.R. 405 (Bankr. N.D. Okla. 2004), wherein

the bankruptcy court denied the defendants’ motion to dismiss on the basis that the

plaintiffs had established a prima facie case for equitable tolling based on allegations of

self-dealing by a fiduciary:

where a complaint satisfies the elements of a prima facie case for

equitably tolling- i.e., it contains allegations of self-dealing for profit by a

fiduciary-it is ordinarily inappropriate to summarily dismiss a claim as

untimely under an otherwise applicable statute of limitations pursuant to

Rule 12(b)(6) of the Federal Rules of Civil Procedure. See, e.g.,

Laventhol, Krekstein, Horwath & Horwath v. Tuckman, 372 A.2d 168, 170

(Del. 1976) (allegations in complaint that directors engaged in fraudulent

self-dealing satisfied the minimum requirements of equitable tolling to

preclude dismissal on statute of limitations grounds). In such cases, the

resolution of a defendant's statute of limitations defense and the plaintiff's

counter-defense of equitable tolling requires factual development and a

full presentation of evidence relevant to the equities that must be

assessed and balanced. Under the liberal rules of notice pleading, a

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 61 of 69
62

plaintiff is not required to state all the evidence it would present in support

of its equitable tolling claim in the complaint.

320 B.R. at 419. 

What the Committee overlooks, however, is the fact that this case is presently

postured not at the Rule 12(b)(6) stage but at the Rule 56 summary judgment stage.

When a defendant makes an initial showing that there is no genuine dispute as to a

material issue of fact, the plaintiff “may not rest upon the mere allegations or denials of

the... pleading,” but must, through affidavits or otherwise, set forth specific facts

showing that there is a genuine issue for trial.” Saldana v. Kmart Corp., 260 F.3d 228,

232 (3d Cir. 2001).

In essence, the Committee contends that the record here requires further factual

development relative to its counter-defense of equitable tolling, but it has not adhered to

the requirements of Rule 56. Under Rule 56(f), a court may order a continuance for

further discovery if it appears “from the affidavits of a party opposing [summary

judgment] that the party cannot for reasons stated present by affidavit facts essential to

justify the party's opposition.” Fed. R. Civ. P. 56(f). Here, the Committee has failed to

file a Rule 56(f) affidavit and has failed to identify “with specificity what particular

information is sought; how, if uncovered, it would preclude summary judgment; and why

it has not previously been obtained.” Bradley v. U.S., 299 F.3d 197, 206-07 (3d Cir.

2002) (quoting St. Surin v. Virgin Island Daily News, Inc., 21 F.3d 1309, 1314 (3d Cir.

1994)).

The Court recognizes that formal discovery has not been completed at this stage

of the proceedings. However, it cannot be said that the Committee’s claims are in their

infancy. The Committee first engaged in due diligence relative to the investigation of its

claims back in early 2002 and it initiated this lawsuit in January of 2003. The Court

recognizes that it did not formally approve the Committee’s standing to pursue this

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 62 of 69
63

litigation until the entry of its memorandum opinion and order on May 26, 2005. 

However, the Court held an initial case management conference shortly thereafter on

June 8, 2005, at which time the Court set a discovery schedule and directed the

immediate commencement of discovery notwithstanding the fact that Defendants were

contemplating filing Rule 56 motions early in the proceedings. The Defendants did, in

fact, file their Rule 56 motions but later withdrew them after we allowed the Committee

to file its Amended Complaint on August 22, 2005. Defendants thereafter re-filed their

Rule 56 motions – i.e., the instant motions – on September 26, 2005, and the

Committee responded on October 17, 2005. In sum, while it may be true that discovery

has not been fully completed in this case, nevertheless the Committee has had

significant time to flesh out its theories insofar as they concern alleged self-dealing

and/or fraudulent concealment by the Director and Officer Defendants. 

Moreover, it was obvious that the statute of limitations would be an issue in this

case: the defense was first invoked by the Transferee Defendants in their January 27,

2004 motion to dismiss (see Doc. # 1); it was raised again in the course of the

derivative standing proceedings and, during a June 22, 2004 status conference, it was

specifically contemplated by the Court and the parties that the statute of limitations

issue could be handled at a future point in time and resolved by way of Rule 56

motions. (See Doc. # 13; Mem. Op. dated 5/26/05 [Doc. # 15] at pp. 19-20.) To the

extent that the Committee requires specific information to establish its proof relative to

the equitable tolling counter-defense, the Committee is required to set forth its

requirements in a Rule 56(f) affidavit which, again, it has failed to do. Based on all the

foregoing considerations, we conclude that the claims set forth in Counts 4 through 6 of

the Amended Complaint are time-barred. 

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 63 of 69
20 Section 160 of the DGCL provides, in relevant part:

(a) Every corporation may purchase, redeem, receive, take or otherwise acquire,

own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use

and otherwise deal in and with its own shares; provided, however, that no

corporation shall:

(1) Purchase or redeem its own shares of capital stock for cash or

other property when the capital of the corporation is impaired or

when such purchase or redemption would cause any impairment of

the capital of the corporation ...

8 Del. C. § 160(a)(1).

21 Section 173 of the DGCL provides:

No corporation shall pay dividends except in accordance with this chapter.

Dividends may be paid in cash, in property, or in shares of the

corporation's capital stock. If the dividend is to be paid in shares of the

corporation's theretofore unissued capital stock the board of directors

shall, by resolution, direct that there be designated as capital in respect of

such shares an amount which is not less than the aggregate par value of

par value being declared as a dividend and, in the case of shares without

par value being declared as a dividend, such amount as shall be

determined by the board of directors. No such designation as capital shall

be necessary if shares are being distributed by a corporation pursuant to

a split-up or division of its stock rather than as payment of a dividend

declared payable in stock of the corporation.

8 Del. C. § 173.

64

C. Count 7

Count 7 of the Amended Complaint alleges that the Director and Officer

Defendants violated §§ 16020 and 17321 of the Delaware General Corporation Law

(“DGCL”) by authorizing and effectuating the stock redemption at a time when the total

assets of NFC and/or Holdings were less than the sum of their total liabilities and at a

time when the companies’ capital was either impaired or caused to be impaired as a

result of the redemption. Based on these alleged violations, the Committee asserts that

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 64 of 69
22 Although § 174(c) allows directors to be subrogated to the rights of the

corporation against stockholders who receive the payment with knowledge of its

unlawfulness, see 8 Del. C. § 174(c), the Committee does not allege that the

Transferee Defendants were possessed of such knowledge.

65

the Director and Officer Defendants are jointly and severally liable for the full value of

the redemption. (Amended Compl. at ¶¶ 107-111.)

Preliminarily, the Moving Defendants point out that only Holdings is subject to the

mandates of the DGCL, as only Holdings (and not NFC) is a Delaware corporation. 

Defendants further note that, under 8 Del. C. § 174, liability for violations of §§ 160 or

173 runs only to corporate directors, as opposed to officers.22 Thus, the only individuals

properly named as Defendants for purposes of Count 7 are those Defendants who, in

their capacities as directors of Holdings, approved the disputed redemption. The record

reflects that the only named Defendants meeting these requirements are E. Roger

Clark and Ashtok Khare. (See n. 16, supra.)

More fundamentally, however, Defendants contend that Count 7 cannot survive

summary judgment because, like Counts 1-3, it is barred by the settlement payment

defense under 11 U.S.C. § 546(e). We agree.

We begin by observing that the Committee has asserted Count 7 under both the

Delaware General Corporation Law and § 544(b) of the Bankruptcy Code. Significantly,

director liability for violations of §§ 160 and 173 of the DGCL runs not only to the

corporation itself, but also to the corporation’s creditors in the event of dissolution or

insolvency. See 8 Del. C. § 174(a). Thus, it appears that a trustee-in-bankruptcy or

debtor-in-possession (or in this case, the Committee through derivative standing) does

acquire a right of action under § 544(b) to prosecute violations of §§ 160 and 173 of the

DGCL in its capacity as a putative creditor. See PHP Liquidating, LLC v. Robbins, 291

B.R. 592, 596 (D. Del. 2003) (“Under Section 544(b), a trustee or debtor-in-possession

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 65 of 69
66

is empowered to bring an avoidance action for a debtor’s violation of Section 160 of the

DGCL.”), aff’d per curiam, 128 Fed. App. 839 (3d Cir. 2005).

Nevertheless, as the Court previously discussed in detail, see Part III(A) supra,

§ 546(e) of the Bankruptcy Code prohibits the trustee (or, here, the Committee) from

utilizing § 544(b) to avoid any transfer that is a “settlement payment ... made by or to a

... financial institution ... that is made before the commencement of the case.” 11

U.S.C. § 546(e). For all of the reasons set forth in Part III(A) above, we have concluded

that the payments at issue here constitute “settlement payments” made “by or to a

financial institution” within the meaning of § 546(e). Accordingly, Count 7 of the

Amended Complaint, like Counts 1 through 3, cannot survive summary judgment.

D. Count 8

Finally, Count 8 of the Amended Complaint asserts that the Director and Officer

Defendants breached their fiduciary duties under Delaware common law in approving

and/or consummating the redemption at a time when the total assets of NFC and/or

Holdings were allegedly less than the sum of their total liabilities. Here again, the

Committee seeks to recover from the Director and Officer Defendants, jointly and

severally, the full value of the redeemed shares.

The Moving Defendants have not sought summary judgment as to this particular

claim, but they maintain that any potential liability must be limited to those named

Defendants who actually served as officers or directors of Holdings (as opposed to

NFC) during the relevant time period. According to the Moving Defendants, of those

individuals named in this lawsuit, only E. Roger Clark, Maurice J. Cashman, Dana

Beyeler, and Robert A. Kaemmerer were officers or directors of Holdings. In addition,

though, we have observed that Ashtok Khare, though named only as a Transferee

Defendant by the Committee, did in fact serve as a director of Holdings during the

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 66 of 69
67

relevant time period and therefore could properly be named as a defendant for

purposes of Count 8. (See n. 16, supra.) Accordingly, we conclude that the

Committee’s claim based on breach of fiduciary duty under Delaware common law is

properly limited to these individuals.

The Moving Defendants further assert that, contrary to the Committee’s

allegation (see Amended Compl. at ¶ 15), Defendant Charles R. Olson was not an

officer of Holdings. The Committee has not factually rebutted this point. Defendant

Thomas H. Jackson is alleged by the Committee to have served as an officer of NFC

but, because NFC is a Pennsylvania corporation rather than a Delaware corporation,

Mr. Jackson could not be liable for purposes of Count 8. Accordingly, we agree with the

Moving Defendants that Count 8 should be dismissed as against these two individuals.

The Committee insists that there are material issues of fact as to who the officers

and directors were for both NFC and Holdings and which directors or officers authorized

the redemption. We do not agree. Defendants Cashman, Beyeler and Kaemmerer

have acknowledged their status as officers of Holdings for purposes of count 8. It

stands unrebutted on this record that, for the time period relevant to these claims, the

Boards of NFC and Holdings were comprised of the same directors and included

Defendants Clark and Khare. The fact that the two boards may have conducted a joint

meeting on December 22, 1998, the date on which the stock redemption was approved,

does not create a genuine issue of material fact as to which individuals can be liable for

purposes of Count 8. Only Holdings was subject to the Delaware General Corporation

Law, and only Holdings’ officers and directors would be authorized to act on Holdings’

behalf. Only the officers and directors of Holdings can be properly named as

defendants for purposes of Count 8. 

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 67 of 69
68

IV. CONCLUSION

Based upon the foregoing discussion, Defendants’ motion for partial summary

judgment will be granted. Counts 1 through 7 of the Amended Complaint will be

dismissed in their entirety, and Count 8 will proceed only as against Defendants Clark,

Cashman, Beyeler, Kaemmerer, and Khare. An appropriate order follows.

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 68 of 69
69

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

In re: )

NATIONAL FORGE COMPANY, et al., )

)

Debtor. )

 )

)

OFFICIAL COMMITTEE OF ) Civil Action No. 04-21 Erie

UNSECURED CREDITORS OF )

NATIONAL FORGE COMPANY, )

)

Plaintiff, )

and )

)

OFFICIAL COMMITTEE OF RETIREES )

OF NATIONAL FORGE COMPANY, )

)

Intervenors, )

v. )

)

E. ROGER CLARK, et al., )

)

Defendants. )

ORDER OF JUDGMENT

AND NOW, to wit, this 9th day of June, 2006, for the reasons set forth in the

accompanying Memorandum Opinion,

IT IS HEREBY ORDERED that the Motion for Summary Judgment as to Counts I

Through VII of the Amended Complaint filed by Defendants E. Roger Clark, Maurice J.

Cashman, Dana Beyeler and Robert A. Kaemmerer [Doc. # 46] is GRANTED.

JUDGMENT is hereby entered in favor of all Defendants and against Plaintiff as

to Counts 1 through 7 of the Amended Complaint. As to Count 8 of the Amended

Complaint, JUDGMENT is hereby entered in favor of all Defendants except for E. Roger

Clark, Maurice J. Cashman, Dana Beyeler, Robert A. Kaemmerer, and Ashtok Khare.

s/ Sean J. McLaughlin

United States District Judge

cm: All counsel of record.

Case 1:04-cv-00021-SJM Document 84 Filed 06/09/06 Page 69 of 69