Opinion ID: 3011035
Heading Depth: 2
Heading Rank: 2

Heading: The section 546(e) exception

Text: Section 546(e) provides an exception to the rule of section 548(a)(1)(B), preventing its operation when the payment in question was a securities settlement payment. Section 546(e) states: Notwithstanding section[ ] . . . 548(a)(1)(B) . . . of this title, the trustee may not avoid a transfer that is a . . . 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, or securities clearing agency, that is made before the commencement of the case . . . . Id. S 546(e).8 The issue is whether the Bankruptcy Court erred by holding that Resorts' payment to Lowenschuss was a settlement payment, and that section 546, therefore, barred the application of section 548(a)(1)(B). Section 741 defines settlement payment as a preliminary settlement payment, a partial settlement payment, an interim _________________________________________________________________ 7. The Bankruptcy Court recited evidence that Resorts was insolvent when it paid Lowenschuss (including the fact that prior to making the payment, Lowenschuss had encouraged a group of Resorts shareholders to put the company into bankruptcy). See Resorts I, at 18-22. The court did not, however, make factual findings on this issue or the issue of reasonably equivalent value. Instead, the court assumed the existence of these elements and applied section 546(e) of the code. Because we determine that section 546(e) controls the outcome here, we need not address these factors. 8. The exception does not apply to transfers that are avoidable under section 548(a)(1)(A), which requires, inter alia, a showing that a transfer was made with the intent to defraud creditors. That is clearly not the case here. 14 settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade. Id. S 741(8) (emphasis added). Section 101 provides a similar definition, but limits it to payments used in the forward contracts trade. See id. S 101(51A). In Bevill, Bresler & Shulman Asset Management Corp. v. Spencer Savings & Loan Ass'n, 878 F.2d 742 (3d Cir. 1989), we addressed the meaning of settlement payment under section 546(f) in a securities transfer under repo agreements. Section 546(f) is similar to section 546(e) except that it applies specifically to settlement payments made by or to a repo participant in connection with a repurchase agreement. 11 U.S.C. S 546(f). In Bevill, we noted that section 546 is at the intersection oftwo important national legislative policies . . . on a collision course -- the policies of bankruptcy and securities law. 878 F.2d at 751. We stated that the extremely broad, id., statutory definition of settlement payment is consistent with Congress's intent: 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. Id. at 752. Our prior recognition that the definition is extremely broad indicates that it is likely to encompass the instant transaction. Bevill, however, did not consider payments made pursuant to a leveraged buyout (LBO), and therefore does not definitively determine the outcome here. We begin every statutory interpretation by looking to the plain language of the statute. See Idahoan Fresh v. Advantage Produce, Inc., 157 F.3d 197, 202 (3d Cir. 1998). When the language is clear, no further inquiry is necessary unless applying the plain language leads to an absurd result. See id. 15 In the securities industry, a settlement payment is generally the transfer of cash or securities made to complete a securities transaction. See Kaiser Steel Corp. v. Charles Schwab & Co., 913 F.2d 846, 849 (10th Cir. 1990) (citing various securities industry texts). 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 them 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. 11 U.S.C. S 546(e). 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); Wiebolt 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. The only other court of appeals to directly address this question, however, followed a Bevill analysis and held that payments to shareholders as part of an LBO were settlement payments under the statute. See Kaiser Steel Corp. v. Pearl Brewing Co., 952 F.2d 1230, 1239-40 (10th Cir. 1991);9 see also In re Comark, 971 F.2d 322, 325 (9th Cir. 1992) (citing Kaiser approvingly for the proposition that a settlement is `the completion of a securities transaction' ). The general thrust of Kaiser Steel, Bevill and In re Comark is that the term settlement payment is a broad one that includes almost all securities transactions. Including payments made during LBOs within the scope of the definition is consistent with the broad meaning these _________________________________________________________________ 9. Resorts argues that Kaiser Steel is inapposite because the transactions therein involved a clearing agency; however, some of the transactions also were made through a financial institution. See Kaiser Steel, 952 F.2d at 1240. 16 cases discern. A payment for shares during an LBO is obviously a common securities transaction, and we therefore hold that it is also a settlement payment for the purposes of section 546(e).10 Resorts alternatively encourages us to follow Munford v. Valuation Research Corp., 98 F.3d 604, 610 (11th Cir. 1996), in which the Eleventh Circuit Court of Appeals considered the application of section 546 to similar payments made to shareholders in an LBO. The two judges in the majority found it unnecessary to determine whether the payments were settlement payments under section 546, holding that even if they were, section 546(e) is not applicable unless the transfer (or settlement payment) was made by or to a commodity broker, forward contract merchant, stockbroker, financial institution, or securities clearing agency. 11 U.S.C. S 546(e). . . . 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 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. Munford, 98 F.3d at 610 (emphasis added). The court went on to hold that trustees may only avoid transfers to a transferee, and that the bank was not such a transferee because it never acquired a beneficial interest in the funds. See id. (citing In re Chase & Sanborn Corp., 848 F.2d 1196, 1200 (11th Cir. 1988)). It concluded that the shareholders were the only `transferees' of the funds [and that] section 546(e) offers no protection from the trustee's avoiding powers to shareholders; rather, section _________________________________________________________________ 10. Despite this logical conclusion, a number of commentators have criticized Kaiser Steel for applying section 546 to a transaction that did not implicate the concerns that Congress had in creating the law. See, e.g., Frank R. Kennedy & Gerald K. Smith, Fraudulent Transfers and Obligations: Issues of Current Interest, 43 S.C. L. Rev. 709 (1992). 17 546(e) protects only commodity brokers, forward contract merchants, stockbrokers, financial institutions, and securities clearing agencies. Id. The court therefore held section 546(e) inapplicable because the transaction did not involve a transfer to one of the listed protected entities. Id. We, however, are more persuaded by the dissent which relied, as we do, on the plain language of the statute. See id. at 613 (Hatchett, C.J., concurring in part and dissenting in part). Section 546(e) protects from trustee's avoidance powers settlement payments made by . . . a financial institution. The majority in Munford seems to have read into section 546(e) the requirement that the commodity brokers, forward contract merchants, stockbrokers, financial institutions, and securities clearing agencies obtain a beneficial interest in the funds they handle for the section to be applicable. This requirement is not explicit in section 546.11 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. We hold, therefore, that section 546 applies to the transaction and prevents its avoidance under section 548(a)(1)(B).12