In the case below the stocks were private, therefore the transaction did not qualify for section 546 (e)'s safe harbor.
However, in our case with Lehman Brothers the stocks are public and the stocks did impact financial markets...you know the rest of the story.
Will JPMorgans affiliates class 10B public stock qualify for section 546 (e)'s safe harbor?
"Once the court decided to consult the legislative history behind section 546(e), its holding became somewhat predictable. The court denied the former shareholders the protections of section 546(e)'s safe harbor because of the "clear and consistent" legislative history to the effect that the purpose of section 546(e)'s safe harbor is to protect financial markets. The shareholders' private stock transaction posed no risk to the financial markets and therefore did not qualify for section 546(e)'s safe harbor."
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IN RE MACMENAMIN'S GRILL
New Rochelle, New York, bar and grill MacMenamin's Grill (the "Debtor") was the target of what the bankruptcy court later described as "a classic LBO, although writ small." In 2007, the Debtor's three shareholders, each holding 31 percent of the Debtor's issued and outstanding common stock, entered into an agreement to sell their stock to the Debtor. To finance the purchase, the Debtor borrowed $1.15 million from a bank, granting the bank a security interest in substantially all of its assets. At the closing of the transaction, the lender bank wire-transferred each shareholder's share of the loan proceeds directly to the shareholder's bank account.
The Debtor filed a chapter 1 1 petition in New York in November 2008. Thereafter, a chapter 11 trustee appointed in the case commenced an adversary proceeding against the shareholders and the bank seeking to avoid, among other things, the stock purchase as a constructively fraudulent transfer under section 548 of the Bankruptcy Code and the New York Debtor and Creditor Law, as incorporated by section 544 of the Bankruptcy Code. The shareholders and the bank moved for summary judgment on the ground that the transaction was protected from avoidance by section 546(e) of the Bankruptcy Code.
The trustee made several concessions with respect to the availability of section 546(e)'s safe harbor. The trustee did not dispute that the banks involved were "financial institutions" within the meaning of that subsection and that, generally, an agreement to purchase stock is a "securities contract," whether or not the stock is publicly traded. The trustee also acknowledged that a payment on account of such a purchase is a "settlement payment" notwithstanding the Bankruptcy Code's "frustratingly self-referential" definition of the term. The issue thus presented to the court was whether the safe harbor of section 546(e) would protect an otherwise qualifying private sale of stock in the absence of evidence that avoidance of the transfer would affect securities markets in any way.
As a threshold matter, the court disagreed with a number of courts that have held that the addition of the phrase "or any other similar payment commonly used in the securities trade" to section 741(8)'s definition of "settlement payment" by the FNIA somehow restricts the definition of "settlement payment" to payments involving the securities trade. To the contrary, the court found that the amendment was added to broaden, and not restrict, the scope of the "settlement payment" definition.
The court concluded that the plain meaning of the terms of section 546(e)—as amended by the FNIA—provided no basis to limit the scope of the safe harbor to those transactions that have at least some prospect of impacting financial markets. The court thus proceeded to consider those arguments for applying one or more exceptions to the "plain meaning" rule of statutory interpretation.
The court acknowledged several Southern District of New York decisions identifying multiple factors that may be relevant to whether a transaction should be denied the protections of section 546(e) of the Bankruptcy Code, notwithstanding its plain meaning. At the same time, the court recognized that a number of courts, including several circuit courts of appeal (other than the Second Circuit), had concluded that they were constrained by the plain meaning of section 546(e) to enforce it according to its terms.
Ultimately, the bankruptcy court was unable to ignore what it considered to be Congress's clear intent against unrestricted access to the safe harbor for purely private transactions. Quoting the U.S. Supreme Court's decision in United States v. Ron Pair Enterprises, 489 U.S. 235 (1989), the court concluded that it was authorized to stray beyond the language of section 546(e) because literal application of its plain terms would " 'produce a result demonstrably at odds with the intention of its drafters.' "
The court determined that the textual context of key defined terms upon which section 546(e) relies opened the door to consultation of the relevant (and, in its view, dispositive) legislative history. The court noted that section 546(e) draws its definitions from sections 741 and 761 of the Bankruptcy Code, provisions that deal with the liquidation of stockbrokers and commodity brokers, respectively. Given the context of these definitions and, in some cases, their ambiguity in isolation, the court deemed it appropriate to refer to the legislative history of section 546(e) as a means of divining congressional intent.
Once the court decided to consult the legislative history behind section 546(e), its holding became somewhat predictable. The court denied the former shareholders the protections of section 546(e)'s safe harbor because of the "clear and consistent" legislative history to the effect that the purpose of section 546(e)'s safe harbor is to protect financial markets. The shareholders' private stock transaction posed no risk to the financial markets and therefore did not qualify for section 546(e)'s safe harbor.
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