Avoidance Kept At Bay: Bank Customers As "Financial Institutions" Under The 546(e) Securities Safe Harbor

• Published date: 01 July 2020
• Subject Matter: Corporate/Commercial Law, Criminal Law, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Contracts and Commercial Law, Securities, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Dechert
• Author: Mr Shmuel Vasser and Yehuda Goor

Analyzing the inner workings of the elements required for the securities contract "safe harbor" protection under Section 546(e) of the Bankruptcy Code, the Bankruptcy Court for the SDNY dismissed a complaint seeking to recover approximately $1 billion in allegedly fraudulent transfers brought against various transferees as part of the Boston Generating Chapter 11 case. The Court found that the transfers at issue, $925 million in tender offer payments made to equity holders and $35 million dividends in a leveraged recapitalization, were safe harbored under Section 546(e) and thus excepted from avoidance and recovery. In reaching this conclusion, the Court relied on the debtor-transferors' status as "customers" of "financial institutions" and outlined the circumstances under which safe harbor protection would be available based on such status. See In re Boston Generating LLC, No. 10-14419 (SCC), 2020 WL 3286207 (Bankr. S.D.N.Y. June 18, 2020).

The Securities Safe Harbor'Brief Background

Pursuant to Section 546(e) of the Bankruptcy Code, certain securities-related transfers are shielded from fraudulent transfer attacks. To qualify for this safe harbor, the payments sought to be avoided must be (i) qualifying payments, such as "settlement payment[s]" or "transfer[s]...in connection with a securities contract," and (ii) made by, or to (or for the benefit of) a "financial institution."

The Bankruptcy Code's definition of "financial institution" covers not only entities such as banks and loan associations, but also the "customers" for whom such entities are acting as agents or custodians "in connection with a securities contract." In In re Tribune Co. Fraudulent Conveyance Litig., 946 F.3d 66 (2d Cir. 2019), for example, the Second Circuit held that the transferor-debtor itself met the statutory definition of a "financial institution" because it was a "customer" of a trust company and bank that was acting as an agent for its customer (the debtor) in connection with a securities contract.

Boston Generating'The Transfer Meets Section 546(e)

The fraudulent transfer complaint in Boston Generating was brought by a trustee of a liquidating trust created to pursue claims on behalf of the debtors' unsecured creditors. Among other interesting issues, the Court focused on whether Section 546(e) applied to the transfers the trustee sought to avoid. The Court concluded that it did, finding the debtor-transferors'Boston Generating LLC and EBG Holdings LLC'qualified as...