By Lee Harrington of Nixon Peabody.
Recently, in In re Physiotherapy Holdings Inc., the Bankruptcy Court in Delaware held that section 546(e) of the Bankruptcy Code did not preempt various state fraudulent transfer actions because the allegedly fraudulent transfers implicated neither the rationale for that section nor preemption generally. The decision is at odds with recent case law, notably: (i) the Tribune litigation, in which the Second Circuit concluded that state law constructive fraudulent transfer claims involving payments in LBO transactions are prohibited under section 546(e); and (ii) a proceeding in which the Southern District of New York concluded that the interest payment at issue, which did not retire the underlying debt, were not “settlement payments” and was thus outside section 546(e).
Section 546(e) precludes certain bankruptcy avoidance actions involving settlement payments made by or to a financial institution and transfers made by or to a financial institution in connection with a securities contract. It is intended to prevent litigation that might have a destabilizing “ripple effect” on the financial markets and provides a defense to constructive fraudulent transfer actions against shareholders receiving LBO payments.
Physiotherapy found that section 546(e) was not intended to shield “LBO payments to stockholders at the very end of the asset transfer chain, where the stockholders are the ultimate beneficiaries of the constructively fraudulent transfers, and can give the money back . . . with no damage to anyone but themselves” without the attendant destabilizing “ripple effect.”
The full memo is available here.
The Bankruptcy Roundtable has previously covered treatment of 546(e), most recently in our Tribune Fraudulent Conveyance Litigation Roundup.