Opinion ID: 1434350
Heading Depth: 2
Heading Rank: 1

Heading: Settlement Payments and Our Opinion In Resorts

Text: Resorts dealt with Resorts International, Inc., a publicly-traded corporation that had been purchased in a leveraged buyout. One shareholder, Fred Lowenschuss, initially refused the buyout offer of $36 per share and demanded a judicial appraisal of his shares to establish the price for their purchase. He subsequently changed his mind about seeking an appraisal as he later filed a petition in the District Court requesting payment of $36 per share in exchange for the immediate tender of his shares. Lowenschuss delivered his shares to his broker (Merrill Lynch) who tendered the shares to Resorts International's transfer agent (Chase Manhattan Bank). When Chase Manhattan informed Resorts International of Lowenschuss's tender, Resorts International's treasurer directed Chase Manhattan to pay Lowenschuss the $36 per share that Lowenschuss sought. Consequently, Chase Manhattan Bank sent a check to Merrill Lynch for $36 per share and Merrill Lynch, in turn, paid the funds to Lowenschuss. Resorts International subsequently realized that it had paid Lowenschuss the full merger price instead of the lower price it hoped to win in the appraisal proceeding from the court. Therefore Resorts International initiated a suit to recover the payment, but before the suit was complete Resorts International filed a petition in bankruptcy. In the bankruptcy court, the trustee sought to avoid the payment as a fraudulent transfer. [5] Lowenschuss argued that the payment to him could not be avoided because he had received his funds through a settlement payment and section 546(e), the provision at issue in this case, provides that a trustee may not avoid a transfer made as a settlement payment by or to a financial institution. In Resorts we focused on the final clause of the definition of settlement payment in 11 U.S.C. § 741(8) which 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. We were concerned in Resorts with whether the payment to Lowenschuss involved any other similar payment commonly used in the securities trade. In our opinion, we cited several district court opinions that excluded leveraged buyout payments from the definition of settlement payment as those courts reasoned that the payments did not use the system of intermediaries and guarantees that normal public-securities transactions employ. Resorts, 181 F.3d at 515 (citing Zahn v. Yucaipa Capital Fund, 218 B.R. 656, 675-76 (D.R.I.1998); Wieboldt Stores, Inc. v. Schottenstein, 131 B.R. 655, 664-65 (N.D.Ill.1991)). In Resorts we also reviewed an opinion of the Court of Appeals for the Eleventh Circuit holding that a financial institution was not involved in a leveraged buyout payment because a bank did not acquire a beneficial interest in the shares being exchanged; rather the banks were merely acting as conduits. Id. at 516 (citing Munford, Inc. v. Valuation Research Corp., 98 F.3d 604, 610 (11th Cir.1996)). The court's approach in Munford was clearly a different way of expressing the same position as the district courts whose opinions we had cited in Resorts when they excluded leveraged buyouts payments from the definition settlement paymentsnamely, that settlement payments must travel through the system of intermediaries and guarantees that normal securities transactions employ. In Resorts we recognized that a clearing agency had not been involved in the settlement for Lowenschuss's shares and that the financial institutions involved acted only as conduits. In view of our recognition of the limited role of the financial institutions in Resorts, if we had accepted the view of the Court of Appeals for the Eleventh Circuit in Munford and the several district court opinions that we cite above, we would have concluded that the payment to Lowenschuss was not a settlement payment, safe from being avoided as a fraudulent transfer, but we rejected the courts' reasoning. Instead we held that the definition of settlement payment was broad and that in the securities trade, a settlement payment is generally the transfer of cash or securities made to complete a transfer payment. Id. at 515 (citing Kaiser Steel Corp. v. Charles Schwab & Co., 913 F.2d 846, 849 (10th Cir.1990) (relying on several industry texts)). We concluded, [a] payment for shares during [a leveraged buyout] is obviously a common securities transaction, and we therefore hold that it is also a settlement payment for the purposes of section 546(e). Id. at 516. Based on this conclusion, we dismissed the adversary proceeding against Lowenschuss.