RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

File Name: 09a0230p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT _________________

In re: QSI HOLDINGS, INC.;

QUALITY STORES, INC.,

Debtors.

_____________________________________

QSI HOLDINGS, INC.; QUALITY STORES, INC.,

Plaintiffs-Appellants,

v.

DENNIS E. ALFORD, et al.,

Defendants-Appellees.

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No. 08-1176

Appeal from the United States District Court

for the Western District of Michigan at Grand Rapids.

No. 06-00876—Janet T. Neff, District Judge.

Argued: March 4, 2009

Decided and Filed: July 6, 2009 

Before: NORRIS, COOK, and GRIFFIN, Circuit Judges.

_________________

COUNSEL

ARGUED: John K. Cunningham, WHITE & CASE LLP, Miami, Florida, for Appellants.

Boyd A. Henderson, MILLER JOHNSON, Grand Rapids, Michigan, for Appellees.

ON BRIEF: John K. Cunningham, Matthew C. Brown, WHITE & CASE LLP, Miami,

Florida, Glenn M. Kurtz, WHITE & CASE LLP, New York, New York, Robert S.

Hertzberg, PEPPER HAMILTON LLP, Detroit, Michigan, Benjamin M. Mather, Michael

H. Reed, PEPPER HAMILTON LLP, Philadelphia, Pennsylvania, for Appellants. Boyd A.

Henderson, MILLER JOHNSON, Grand Rapids, Michigan, for Appellees. 

_________________

OPINION

_________________

ALAN E. NORRIS, Circuit Judge. In this appeal, we must determine whether

§ 546(e) of the Bankruptcy Code applies to privately traded securities. If that is indeed the

case, then the settlement payments made to defendant shareholders are exempt from

1
No. 08-1176 In re QSI Holdings, Inc., et al. Page 2

avoidance. This is an issue of first impression in this circuit and we now hold, as did the

bankruptcy and district courts below, that § 546(e) is not limited to publicly traded securities

but also extends to transactions, such as the leveraged buyout at issue here, involving

privately held securities. 

I.

“When reviewing an order of a bankruptcy court on appeal from a decision of a

district court, this Court ‘review[s] the bankruptcy court’s order directly and give[s] no

deference to the district court’s decision.’” LPP Mortgage, Ltd. v. Brinley, 547 F.3d 643, 647

(6th Cir. 2008) (quoting In re Lee, 530 F.3d 458, 463 (6th Cir. 2008)). We review the

bankruptcy court’s resolution of questions of law de novo and questions of fact for clear

error. In re Triple S Rests., Inc., 519 F.3d 575, 578 (6th Cir. 2008). The facts in this appeal

are uncontested and hence our review is de novo.

Because the facts are not in dispute, we rely upon the bankruptcy court’s recitation

to set the stage for our discussion:

This adversary proceeding arises from the 1999 leveraged buyout

(“LBO”) of the Debtor, Quality Stores, Inc. (“Quality”). The Plaintiffs, QSI

Holdings, Inc. and Quality, acting through their chief litigation officer

(collectively, the “Plaintiffs”), seek to avoid payments made to

approximately 170 shareholders of Quality (the “Defendants”) resulting

from the LBO. Almost all of the Defendants have filed motions for summary

judgment asserting that the transfers are exempt from avoidance based on

the settlement payment defense in § 546(e) of the Bankruptcy Code.

Accordingly, the legal issue presented is whether the transfers from the

disbursing agent to the Defendants are exempt from avoidance because they

constitute “settlement payments” made by a “financial institution” under

§ 546(e).

. . . . 

. . . Quality was a privately held corporation that operated a chain of

retail stores specializing in agricultural and related products. In 1999,

Quality and certain of Quality’s principal shareholders entered into a merger

agreement with Central Tractor Farm and Country, Inc. (“Central Tractor”)

and its parent company, CT Holdings, Inc. (collectively the “CT Parties”).

Pursuant to the agreement, Quality was to merge with and into Central

Tractor, with the surviving entity changing its name to Quality Stores, Inc.

The agreement also called for Quality’s shareholders to be paid, in cash or

stock, for their respective equity interests. The assets of both Quality and
No. 08-1176 In re QSI Holdings, Inc., et al. Page 3

Central Tractor were pledged as collateral for the loan that was obtained and

partially utilized to pay the Quality shareholders.

The total purchase price for the LBO was approximately $208

million. Of this amount, Quality’s shareholders were to receive $111.5

million in cash with $91.8 million of stock in CT Holdings, Inc. Central

Tractor also agreed to assume and pay $42.1 million of Quality’s existing

indebtedness.

The Quality LBO involved both individual shareholders and

company employees who were shareholders by virtue of their participation

in Quality’s Employee Stock Ownership Trust (“ESOT”). To effectuate the

securities transaction contemplated by the LBO, the CT Parties made a

$111.5 cash payment to their exchange agent, HSBC Bank USA (“HSBC

Bank”). HSBC Bank collected the shares of Quality stock from individual

shareholders. It then transferred the securities to the CT Parties and

distributed the cash, or shares in CT Holdings, Inc., to the individual

shareholders.

For the ESOT shareholders, many of whom were lesser paid and

mid-level Quality employees, the settlement process involved one additional

step. Most of the ESOT stock was held by the ESOT trustee, LaSalle Bank.

LaSalle Bank tendered the shares of Quality stock to HSBC Bank and

received the cash consideration. The ESOT was eventually terminated and

the funds were distributed by LaSalle Bank to the ESOT participants.

As a result of the merger, Quality incurred substantial integration

costs. The merged company also implemented a costly expansion plan which

aggressively contemplated the opening of twenty-five to fifty new stores

each year. These business decisions, and others, contributed to continuing

financial difficulties which eventually led a group of petitioning creditors to

file an involuntary bankruptcy petition against Quality during October 2001.

In response, before an order for relief was entered, Quality filed a voluntary

petition under chapter 11 on November 1, 2001.

The Plaintiffs filed this fraudulent conveyance action on October 31,

2003. The complaint, as amended, alleges that the Defendants gave less than

reasonably equivalent value when they tendered their Quality stock for cash

as part of the LBO. The complaint further alleges that the LBO left Quality

with unreasonably small capital and caused it to incur debts beyond its

ability to pay. The Plaintiffs seek to avoid and recover the LBO transfers as

constructively fraudulent conveyances pursuant to 11 U.S.C. § 544, § 550,

and the Michigan Uniform Fraudulent Transfer Act, Mich. Comp. Laws

Ann. §§ 566.31 et seq. The Defendants’ motions for summary judgment

assert that the LBO transfers were settlement payments made by a financial

institution. Therefore, the Defendants seek dismissal of this adversary

proceeding because they contend that the transfers are exempt from

avoidance under § 546(e).
No. 08-1176 In re QSI Holdings, Inc., et al. Page 4

In re Quality Stores, Inc., 355 B.R. 629, 631-32 (Bankr. W.D. Mich. 2006) (footnote

omitted). 

II.

A. Statutes at Issue

Section 546(e) provides as follows:

Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this

title, the trustee may not avoid a transfer that is a margin payment, as defined

in section 101, 741, or 761 of this title, or settlement payment, as defined in

section 101 or 741 of this title, made by or to a commodity broker, forward

contract merchant, stockbroker, financial institution, financial participant,

or securities clearing agency that is made before the commencement of the

case, except under section 548(a)(1)(A) of this title.

11 U.S.C. § 546(e) (version in effect prior to December 12, 2006) (emphasis added). Section

741(8), in turn, defines “settlement payment” as “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). 

B. Did the LBO at Issue Involve a Settlement Payment as Defined by § 546(e)?

Plaintiffs frame the central issue on appeal as “whether payments made to purchase

non-public securities in a leveraged buyout can be exempted from avoidance pursuant to

section 546(e) of the Bankruptcy Code by merely funneling [them through] a financial

institution.” In their view, Congress intended that § 546(e) “insulate the nation’s public

securities markets from the adverse effects of a bankruptcy, so as not to cause a ripple effect

in such markets by unwinding settled securities transactions.” 

When construing a statute we look first to its text. Where that language is plain, “the

sole function of the courts – at least where the disposition required by the text is not absurd

– is to enforce it according to its terms.” Lamie v. U. S. Trustee, 540 U.S. 526, 534 (2004)

(quotation omitted); see also Thompson v. North American Stainless, L.P., ____F.3d____,

2009 WL 1563443, *2 (6th Cir. June 5, 2009) (en banc).
No. 08-1176 In re QSI Holdings, Inc., et al. Page 5

Numerous courts, including the courts below, have acknowledged that the definition

of “settlement payment” set out in § 741(8) is somewhat “circular.” See Kaiser Steel Corp.

v. Charles Schwab & Co., Inc., 913 F.2d 846, 848 (10th Cir. 1990); QSI Holdings, Inc. v.

Alford, 382 B.R. 731, 740 (W.D. Mich. 2007) (citing Kaiser Steel); In re Quality Stores, Inc.,

355 B.R. 629, 633 (Bankr. W.D. Mich. 2006) (same). Nonetheless, courts have recognized

that the definition is “extremely broad.” See Contemporary Indus. Corp. v. Frost, 564 F.3d

981, 985 (8th Cir. 2009) (citing Kaiser Steel, 913 F.2d at 848 (quoting In re Bevill, Bresler

& Schulman Asset Mgmt. Corp., 878 F.2d 742, 751 (3d Cir. 1989)); In re Resorts Int’l, Inc.,

181 F.3d 505, 514-15 (3d Cir. 1999); In re Comark, 971 F.2d 322, 326 (9th Cir. 1992)). 

With this in mind, we turn to the definition of “settlement payment.” For the

purposes of this appeal, the critical phrase in the definition is the final one: the payment must

be one “commonly used in the securities trade.” 11 U.S.C. § 741(8). Plaintiffs take issue

with the lower courts’ failure to consider whether the LBO contained the hallmarks of a

payment made in the securities trade. Specifically, they fault the district court for basing its

broad reading of “settlement payment” upon decisions that involve public, not private,

securities transactions. They would have us look to the legislative history of § 546(e). That

history is recounted briefly in Kaiser Steel:

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

commodities and securities markets, 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 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 849 (footnote and quotation omitted). In Kaiser Steel, the court went on to

conclude that “the transfer of consideration in an LBO is consistent with the way ‘settlement’

is defined in the securities industry.” Id.

However, Kaiser Steel involved publicly traded securities. The question posed here

is whether its logic extends to privately traded securities. In a case involving facts similar
No. 08-1176 In re QSI Holdings, Inc., et al. Page 6

to ours, the Eighth Circuit recently held that it does. Contemporary Indus. Corp., 564 F.3d

at 986 (“Nothing in the relevant statutory language suggests Congress intended to exclude

these payments from the statutory definition of ‘settlement payment’ simply because the

stock at issue was privately held”). The court construed the phrase “commonly used in the

securities trade” as “a catchall phrase intended to underscore the breadth of the § 546(e)

exemption.” Id. We agree. While, like the Eighth Circuit, we recognize that other courts

have reached a different conclusion, those courts stressed that Congress intended to protect

publicly traded securities from market volatility caused by bankruptcy by means of § 546(e).

See, e.g., In re Norstan Apparel Shops, Inc., 367 B.R. 68, 76 (Bankr. E.D.N.Y. 2007). But

unlike the instant case, the Norstan transaction involved the two sole shareholders of a

closely held Subchapter S corporation, did not implicate public securities markets, and

lacked many of the indicia of transactions “commonly used in the securities trade.” See

Norstan, 367 B.R. at 73. This case, on the other hand, considers a transaction with the

characteristics of a common leveraged buyout involving the merger of nearly equal

companies, and nothing in the statutory language indicates that Congress sought to limit that

protection to publicly traded securities. The value of the privately held securities at issue is

substantial and there is no reason to think that unwinding that settlement would have any less

of an impact on financial markets than publicly traded securities. Accord Contemporary

Indus., 564 F.3d at 987. 

Accordingly, we hold that nothing in the text of § 546(e) precludes its application

to settlement payments involving privately held securities.

C. Did the Transaction Involve a “Transfer” to a Financial Institution?

Even if the LBO transaction qualifies as a “settlement payment,” plaintiffs contend

that another element of § 546(e) remains unsatisfied: the requirement that a “transfer

. . . made by or to a . . . financial institution” occur. In their view, the role played by HSBC

Bank in this transaction did not satisfy this requirement because it never had dominion or

control over those funds. The Eleventh Circuit has taken this position, In re Munford, Inc.,

98 F.3d 604, 610 (11th Cir. 1996), and plaintiffs urge us to adopt its reasoning:

True, a section 546(e) financial institution was presumptively

involved in this transaction. But the bank here was nothing more than an

intermediary or conduit. Funds were deposited with the bank and when the
No. 08-1176 In re QSI Holdings, Inc., et al. Page 7

bank received the shares from the selling shareholders, it sent funds to them

in exchange. The bank never acquired a beneficial interest in either the funds

or the shares.

Importantly, a trustee may only avoid a transfer to a “transferee.” See

11 U.S.C. § 550. Since the bank never acquired a beneficial interest in the

funds, it was not a “transferee” in the LBO transaction. See In re Chase &

Sanborn Corp., 848 F.2d 1196, 1200 (11th Cir. 1988) (“When banks receive

money for the sole purpose of depositing it into a customer’s account . . . the

bank never has actual control of the funds and is not a § 550 transferee.”).

Rather, the shareholders were the only “transferees” of the funds here. And,

of course, section 546(e) offers no protection from the trustees avoiding

powers to shareholders; rather, section 546(e) protects only commodity

brokers, forward contract merchants, stockbrokers, financial institutions, and

securities clearing agencies. Accordingly, regardless of whether the

payments qualify as settlement payments, section 546(e) is not applicable

since the LBO transaction did not involve a transfer to one of the listed

protected entities.

Id. at 610 (footnote omitted). 

In rejecting Munford, the Third Circuit found that the plain language of § 546(e)

simply does not require a “financial institution” to have a “beneficial interest” in the

transferred funds. In re Resorts Int’l, Inc., 181 F.3d at 516. The Eighth Circuit has adopted

this view, Contemporary Indus., 564 F.3d at 986-87 (statute does not “expressly require that

the financial institution obtain a beneficial interest in the funds”), as do we. The role played

by HSBC Bank in the LBO at issue was sufficient to satisfy the requirement that the transfer

was made to a financial institution.

III.

The judgment is affirmed.