Opinion ID: 2978067
Heading Depth: 3
Heading Rank: 1

Heading: Statutes at Issue

Text: 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,  (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.