The opinion of the court was delivered by: McLAUGHLIN, Sean J., District J.,
Currently pending before the Court in this adversary proceeding is a motion for partial summary judgment filed and/or joined in by all of the Defendants. The adversary proceeding was originally commenced in the Bankruptcy Court, but the reference was withdrawn pursuant to our order dated March 1, 2004 upon the agreement of all parties. Consequently, this Court now has original jurisdiction over the matter pursuant to 28 U.S.C. § 157(d) and § 1334(b).
For the reasons set forth below, the Defendants' motion will be granted and judgment will be entered in favor of all Defendants on Counts 1 through 7 of the Amended Complaint. As to Count 8, judgment will be entered in favor of all Defendants, except for E. Roger Clark, Maurice J. Cashman, Dana Beyeler, Robert A. Kaemmerer, and Ashtok Khare.
Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories and admissions on file, together with any affidavits, show that there is no genuine issues as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). In considering a motion for summary judgment, the court must examine the facts in the light most favorable to the party opposing the motion. International Raw Materials, Ltd. v. Stauffer Chemical Co., 898 F.2d 946, 949 (3d Cir.1990). The moving party has the initial burden of demonstrating that, given the evidence of record, no reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Once the moving party satisfies its burden, the burden shifts to the non-moving party, who must go beyond its pleadings and designate specific facts by the use of affidavits, depositions, admissions, or answers to interrogatories showing that there is a genuine issue for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986); Wilson v. Lemington Home for the Aged, No. 99-1893, 2000 WL 33712287 at *1 (W.D. Pa. April 12, 2000). Entry of judgment is mandated against any party who fails to make a showing sufficient to establish the existence of an element essential to that party's case and on which that party will bear the burden of proof at trial. Celotex Corp., 477 U.S. at 322; Wilson, supra, at *1.
The present dispute arises out of the redemption of certain shares of National Forge Company Holding Inc.'s stock which occurred on April 13, 1999. The Official Committee of Unsecured Creditors (the "Committee") seeks, inter alia, to set aside the redemption and recover the payments made to shareholders in connection therewith.*fn1
Some background information is essential to an understanding of the present dispute.*fn2
Prior to its demise, National Forge Company ("NFC") was a Pennsylvania corporation engaged in the business of manufacturing heavy, precision-machined, forged steel components. In 1995 NFC Holdings ("Holdings") was formed by an employee stock ownership plan and certain NFC employees as a vehicle to acquire the stock of NFC's then-owners. The acquisition was partly funded through the employees' purchase of 116,347 shares of Class B stock in Holdings, which generated $1,284,470.88. This sum, together with bank loans, funded Holdings' purchase of NFC's stock and supplied the companies' working capital needs. Thus, in 1995 NFC became a wholly-owned subsidiary of Holdings, whose ownership, in turn, was comprised of two classes of common stock: Class A shares, which were held exclusively by the National Forge Company Holdings, Inc. Employee Stock Ownership Plan (the "ESOP"), and Class B shares, which were held by certain directors, officers, and/or management-level employees of NFC -- almost all of whom have been named as individual Defendants in this action.
Defendants contend that the disputed redemption was the product of an important change in the federal corporate tax laws. In 1997, qualified retirement plan trusts like the ESOP became eligible to be shareholders in corporations that elected to be taxed under Subchapter S of the Internal Revenue Code of 1986. See Small Business Job Protection Act of 1996, Pub. L. No. 104-188, § 1310, and the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 1601. Because qualified retirement plan trusts were generally exempt from federal and state income taxes, this change in the law meant that a corporation wholly owned by an employee stock ownership plan could avoid federal and state income taxes by electing to be taxed under Subchapter S of the IRC, thereby allowing all of the corporate income to pass through to a tax-exempt shareholder.
Defendants maintain that, because the ESOP was Holdings' largest shareholder, these changes in the tax laws offered significant potential tax savings to Holdings. Having been advised by outside legal counsel, accounting professionals and valuation experts as to the benefits of electing Subchapter S status, Holdings on December 22, 1998 unanimously elected -- through its full board of directors -- to take Subchapter S status.*fn3
On the other hand, a corporation electing Subchapter S status could have only one class of stock. See 26 U.S.C. § 1361(b)(1)(West 1998). Thus, Holdings could not eliminate its federal income tax liability until it eliminated its Class B (i.e. non-ESOP held) shares. Accordingly, in the same resolution by which it authorized Holdings to elect Subchapter S status, Holdings' Board of Directors also authorized the corporation to eliminate its outstanding Class B shares by redeeming the stock at a price of $49.42 per share. That redemption price was premised upon a December 14, 1998 report issued by Holdings' valuation expert, Valuemetrics, Inc., which fixed the value of the company's Class A and Class B shares at $49.42 per share as of June 30, 1998.
The Board further resolved that, in the event Class B shareholders did not agree to the terms of redemption, management was to take the steps necessary to merge Holdings into a new entity so that the outstanding Class B shares could be replaced with shares of a single class in the successor entity. The resolution further authorized Holdings to borrow funds as needed by drawing upon an existing credit facility with the Defendant Banks. Holdings subsequently obtained approval from the Banks to use up to $4 million to fund the redemption of the Class B share. These loans were secured by a lien upon substantially all of NFC's assets.
Ultimately, all of the Class B shareholders accepted Holdings' redemption offer. To effectuate the payment, NFC on April 13, 1999 directed The Chase Manhattan Bank to transfer $5,749,868.74 (the aggregate redemption price) from an NFC operating account to a Holdings' account at Chase. That same day, Holdings repurchased the outstanding Class B shares in one of two ways. For those 94,538 shares held in individual retirement accounts at National City Bank, Holdings directed Chase to wire transfer to National City Bank a single payment of $4,672,067.96, which was then distributed by National City Bank to the relevant IRA accounts according to the number of shares being redeemed. For those individuals holding shares outside of IRAs, Holdings issued each shareholder a check in the relevant amount drawn on a Holdings' account at Chase. The payments to redeem non-IRA shares totaled $1,077,800.78. Thus, following the redemption of its Class B shares, Holdings had only a single class of stock, all of which was owned by the ESOP.
On March 6, 2002 NFC, Holdings, and another affiliated company (NFC Components) each filed petitions for relief under Chapter 11 of the Bankruptcy Code. The Bankruptcy Court subsequently approved an amended joint plan of liquidation filed by NFC and NFC Components, pursuant to which substantially all of the companies' assets were sold and the proceeds and remaining assets re-vested in a new entity, Liquidating NFC, for distribution to creditors.
We have previously discussed the procedural history relative to the filing of this Adversary Proceeding, see In re National Forge Co., 326 B.R. 532 (W.D. Pa. 2005), and we need not repeat that discussion here. For present purposes, it is sufficient to note that the Committee filed its Amended Complaint on August 22, 2005 (see Doc. # 39), asserting eight causes of action against three groups of Defendants involved, directly or indirectly, with the stock redemption.*fn4 Counts 1-3 assert claims against all Defendants for alleged violations of the Pennsylvania Uniform Fraudulent Transfer Act (UFTA). Counts 4-6 assert claims against the Director and Officer Defendants for alleged violations of the Pennsylvania Business Corporation Law. Counts 7 and 8 assert claims against the Director and Officer Defendants for alleged violations of, respectively, the Delaware General Corporation Law and Delaware common law breach of fiduciary duty.
Certain of the Director and Officer Defendants (i.e., Defendants Clark, Cashman, Beyeler and Kaemmerer, hereafter the "Moving Defendants") have filed a motion for summary judgment relative to Counts 1 through 7 in their entirety. As to Counts 1-3 and Count 7, the Moving Defendants contend that the Committee's claims are barred by the provisions of 11 U.S.C. § 546(e). In addition, they insist that Counts 4-6 are untimely as a matter of law and should therefore be dismissed. With respect to Count 8, the Moving Defendants contend that the Committee's claim should proceed only against themselves and not against Defendants Olsen or Jackson, who were neither directors nor officers of Holdings during the time period in question. The remaining Defendants have joined in the arguments of the Moving Defendants. The Committee has filed its opposition to the instant motion and the issues, having been fully briefed, are now ripe for consideration.
Pursuant to § 544(b)(1) of the Bankruptcy Code, the trustee (or in this case, the Committee) "may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title ..." 11 U.S.C. § 544(b)(1). This "strong arm" provision thus grants the trustee power to avoid fraudulent transfers under any applicable theories of state law. Here, the Committee asserts three different theories in Counts 1 through 3 of the Amended Complaint as to how the stock redemption violated provisions of the Pennsylvania UFTA.
Nevertheless, §546(e) of the Code limits the trustee's (and thus, the Committee's) avoidance power under § 544(b) when the transfer in question is a "settlement payment ... 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..." 11 U.S.C. § 546(e). Defendants contend that this "safe harbor" provision (a/k/a the "settlement payment" defense) bars the Committee's claims
This line of defense raises four issues for our consideration: first, whether the events culminating in the redemption of Holdings' Class B shares -- including the transfer of approximately $5.75 million from NFC to Holdings and the subsequent distribution of those monies from Holdings to its Class B shareholders -- should be viewed as a single, integrated transaction for purposes of the Committee's fraudulent transfer claims; second, whether the payments at issue constitute "settlement payments" within the meaning of § 546(e); third, whether these alleged "settlement payments" were made "by or to" a "financial institution"; and, fourth, whether Count 2 falls outside the scope of § 546(e) in any event. We address these issues in turn.
1. Was the Stock Redemption a Single, Integrated Transaction?
The Moving Defendants assert that the events culminating in the redemption of Holdings' Class B shares must be viewed as one integrated transaction. By so arguing, the Defendants seek to bring the entirety of the transaction, including the transfer of approximately $5.7 million from NFC to Holdings, within the safe harbor provision of § 546(e).
The Committee, on the other hand, insists that, as a matter of law, the transfer of $5.7 million from NFC to Holdings and the subsequent distribution of those monies by Holdings to its Class B shareholders must be viewed as separate and distinct transactions. In so arguing, the Committee seeks to focus our attention exclusively on the NFC-to-Holdings transfer which, Plaintiff believes, is exempt from § 546(e)'s "settlement payment" defense. The Committee theorizes that, if the transfer between NFC and Holdings is avoided, then pursuant to § 550(a)(2) of the Code,*fn5 the Committee can obtain recovery from the Defendants as immediate or mediate transferees of Holdings. Analysis of the payments subsequently made by Holdings to the Transferee Defendants thereby becomes superfluous.
It is now widely accepted that multilateral transactions may under appropriate circumstances be "collapsed" and treated as phases of a single transaction for purposes of applying fraudulent conveyance principles. HBE Leasing Corp. v. Frank, 48 F.3d 623, 635 (2d Cir. 1995) (as amended on denial of pet. for reh'g en banc); Orr v. Kinderhill Corp., 991 F.2d 31, 35 (2d Cir. 1993) (citing cases). Under this "integrated transaction" doctrine (or "step transaction" doctrine as it is sometimes known), "[i]nterrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction." In re Foxmeyer Corp., 286 B.R. 546, 573 (Bankr. D. Del. 2002) (quoting In re Big v. Holding Corp., 267 B.R. 71, 92-93 (Bankr. D. Del. 2001)). "[B]y 'linking together all interdependent steps with legal or business significance, rather than taking them in isolation,' the result may be based 'on a realistic view of the entire transaction.'" Id.
This doctrine has often been applied in the context of leveraged buyouts where the target company ultimately becomes insolvent. See HBE Leasing, 48 F.3d at 635; Kupetz v. Wolf, 845 F.2d 842 (9th Cir. 1988); United States v. Tabor Court Realty Corp., 803 F.2d 1288 (3d Cir. 1986); Crowthers McCall Pattern, Inc. v. Lewis, 129 B.R. 992, 998 (S.D.N.Y. 1991); Wiebolt Stores, Inc. v. Schottenstein, 94 B.R. 488, 500-04 (N.D. Ill. 1988); In re Best Products Co., Inc., 168 B.R. 35, 56-57 (Bankr. S.D.N.Y. 1994). Typically, however, it is the plaintiff/trustee/creditor who seeks to invoke the "integrated transaction" doctrine, often for purposes of demonstrating that the insolvent target company did not, in the aggregate, receive fair consideration or reasonably equivalent value for the transfer in question. See, e.g., Orr, 991 F.2d at 35-36; In re Best Products Co., 168 B.R. at 56-57; In re O'Day Corp., 126 B.R. 370, 394-95 (Bankr. D. Mass. 1991); In re Suburban Motor Freight, Inc., 124 B.R. 984, 998 (Bankr. S.D. Ohio 1990).
In determining whether a series of transactions should be "collapsed" into a single integrated one, courts focus not on the form of the transaction but on its substance -- especially the knowledge and intent of the parties involved in the transaction and whether there was an overall scheme to defraud creditors. See HBE Leasing Corp., supra; Orr, 991 F.2d at 35-36; In re Hechinger Investment Co. of Delaware, 327 B.R. 537, 546 (D. Del. 2005); MFS/Sun Life Trust - High Yield Series v. Van Dusen Airport Serv. Co., 910 F. Supp. 913, 934 (S.D.N.Y. 1995); Wiebolt Stores, Inc., supra; In re OODC, LLC, 321 B.R. 128, 138 (Bankr. D. Del. 2005); Best Products Co., supra; O'Day Corp., supra; Suburban Motor Freight, supra. Among other things, courts consider whether all of the defendants were aware of the multiple steps of the transaction. See HBE Leasing Corp., supra, at 635-36; Hechinger Investment Co., supra, at 546-47; MFS/Sun Life Trust, 910 F. Supp. at 934; O'Day Corp., supra, at 394. Courts also consider whether each step would have occurred on its own or, alternatively, whether each step depended upon the occurrence of the additional steps in order to fulfill the parties' intent. See Hechinger Investment Co. of Delaware, supra, at 546; MFS/Sun Life Trust, supra, at 934.
Two third circuit cases illustrate these general principles. In United States v. Tabor Realty Corp., 803 F.2d 1288 (3d Cir. 1986), the Third Circuit considered the applicability of the Pennsylvania UFTA in the context of a leveraged buy-out wherein the highly leveraged target companies, Raymond Colliery Co., Inc. and its subsidiaries (collectively, the "Raymond Group"), were acquired by Great American, a holding company formed by Raymond's president, James Durkin. The millions of dollars needed to finance the acquisition were obtained through loans made by the Institutional Investors Trust ("IIT") at an extremely high rate of interest; these loans were secured by mortgages on substantially all of the assets of the Raymond Group. The loan arrangement involved a two-part process whereby loan proceeds went from IIT to certain Raymond Group companies, which then immediately turned the funds over to Great American in exchange for an unsecured promissory note. Great American then used the borrowed funds to effectuate the purchase of the Raymond Group. Following a lengthy bench trial, the district court found that the two loans were, in reality, an integrated transaction and that the mortgages given by the borrowing Raymond Group companies to IIT were invalid fraudulent conveyances which had rendered the Raymond Group insolvent.
The Third Circuit Court of Appeals upheld these findings, including the district court's treatment of the IIT-Raymond Group-Great American transaction as a single, integrated transaction. In so ruling, the Court of Appeals observed that: Durkin, the president of Great American (and also president of Raymond), had solicited financing from IIT for the purchase; the loan negotiations had included representatives from all three parties; and immediately upon receipt of the IIT loan proceeds, the Raymond Group "loaned" Great American the cash needed for the buy-out, receiving in return only an unsecured promissory note. 803 F.2d at 1302. The appellate court agreed with the district court that, "for purposes of determining IIT's knowledge of the use of the proceeds under section 353(a) [of the Pennsylvania UFTA], there was one integral transaction." Id. at 1303. Significantly, the evidence showed that IIT was "intimately involved" in formulating the agreement "whereby the proceeds of its loan were funneled into the hands of the purchasers of the stock of a corporation that was near insolvency." Id. at n. 8.
In Voest-Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206 (3d Cir. 1990), the court of appeals reviewed a district court's ruling that the foreclosure upon and resale of Paige Steel Corporation's assets to a newly formed transferee corporation, Vantage Steel Corporation, constituted a fraudulent conveyance. In that case the plaintiff, Voest-Alpine Trading USA Corp. (VATCO), was an unsecured judgment creditor of Paige Steel Corporation, a company controlled by the Defendants Marvin and Holley Sue Stabler. The evidence showed that the Stablers formed Vantage for the purpose of acquiring Paige's assets at less than fair market value while freezing out VATCO and other unsecured creditors of Paige. The scheme was hatched through the planned foreclosure by New Jersey National Bank (NJNB) on an outstanding loan of some $1.5 million which NJNB had previously granted to Paige and secured through a lien on Paige's assets. On August 8, 1986, NJNB foreclosed on all Paige's assets. Simultaneously therewith, NJNB extended to Vantage various credit facilities through which Vantage was able to purchase from NJNB virtually all of Paige's assets at less than fair market value. Thus, as the court noted, "on Monday morning August 11, 1986 Vantage opened for business with Stabler as an officer of Vantage and with the same address, staff, office, telephone number, and assets that Paige had closed with at the end of the day on Friday, August 8." 919 F.2d at 209. The district court had concluded that the transactions of August 8, 1986 were effectively a single, integrated transaction that functioned as a subterfuge, the purpose of which was to secure the Stabler's equity position in the new company while defrauding VATCO and other unsecured creditors.
On appeal, the Third Circuit concluded there was abundant evidence in the record to support the lower court's finding that the transactions of August 8 were, in reality, a single transaction functioning as a subterfuge. 919 F.2d at 212. Of particular significance were the district court's well supported findings that each portion of the August 8 transaction was dependent upon the occurrence of the other and that both the Stablers' efforts to conceal the August 8 transaction as well as the structure of the transaction itself evidenced an intent by the defendants to hinder, delay and defraud unsecured creditors. The court of appeals found that Tabor Court Realty was instructive and supported treatment of the various August 8 transactions as a unitary transaction. Given the fact that NJNB had foreclosed at the request of the defendants and at a time and place convenient to them, the court found the situation in Voest-Alpine akin to that in Tabor, where the lender had been "intimately" aware of and involved with the defendants' use of the loan proceeds to accomplish the disputed stock buyout. 919 F.2d at 213 (quoting Tabor, 803 F.2d at 1303 n. 8).
The dispute in the case at bar involves a stock redemption rather than a leveraged acquisition or sale of corporate assets; thus, the facts involved in Tabor Court Realty and Voest-Alpine are not precisely on point. Moreover, we recognize that the standard of review involved in those cases (a review of factual findings under the clearly erroneous standard) is different from the standard we employ on motions for summary judgment. Nevertheless, we find their analyses instructive and consistent with the principles of the "integrated transaction" doctrine, as discussed in the above-cited cases.
We conclude that the transfers which culminated in the April 13, 1999 stock redemption must, as a matter of law, be viewed as one integrated transaction. At all times relevant to this litigation, NFC was the wholly owned subsidiary of Holdings. Ownership of Holdings (and therefore of NFC) was held by various company employees. Not only were the Board of Directors for each company comprised of the same members, but (by the Committee's own assertions) those Boards generally conducted joint meetings. In fact, it is the Committee's contention that the Boards of NFC and Holdings met "concurrently" on December 22, 1998 when all of the critical decisions relative to the stock redemption were made. Thus, there was a strong identity of interests among the players in the disputed transaction.
Moreover, the Committee acknowledges that NFC, Holdings and the Lenders were all jointly involved in arranging the financing that would fund the stock redemption. It is undisputed on this record that, on or about March 29, 1999, NFC, Holdings, National Forge Europe Limited, and the Lenders entered into an agreement which permitted NFC and/or Holdings to borrow up to $4 million (secured by liens on NFC's assets) under an existing credit agreement in order to effectuate the stock redemption. (See Def.'s Append. in Supp. of Mot. for Summ. Judg. [Doc. # 45] at Ex. A-2.) Those who received distributions under the stock redemption included individuals who were directors, officers or management-level employees of NFC and Holdings, and the mechanics of the stock redemption were spelled out in Holdings' corporate minutes. Given these uncontroverted facts, we conclude that all of the relevant parties to the disputed transfer had knowledge of the stock redemption plan.*fn6 While the Committee insists that the Defendants' allegations regarding the knowledge and intent of the parties are "replete" with material issues of fact, it provides nothing further by way of explanation or example to buttress its claim.
In addition, it appears undisputed that each critical step of the stock redemption plan would not have occurred on its own, but instead depended upon the occurrence of the others. For example, NFC would not have sought to borrow the additional $4 million from the Lenders (and the Lenders would not have lent those monies) if not for the purpose of financing the stock redemption. Similarly, NFC would not have undertaken the disputed transfer of $5.7 million to Holdings absent Holdings' intent to use the funds to accomplish the stock redemption. Again, it appears uncontroverted that all parties were aware of the ultimate purpose of loans to NFC, the transfer of loan proceeds from NFC to Holdings, and the distribution of those monies to Holdings' Class B shareholders -- namely, the redemption of Holdings' Class B shares.
Finally, the timing of events further buttresses our conclusion that the NFC-to-Holdings transfer and the Holdings-to-shareholder distribution must be viewed as a single, integrated transaction. As noted, on or about March 29, 1999 the Lenders authorized the $4 million in loan monies which would fund the stock redemption. Approximately two weeks later, on April 13, 1999, NFC directed Chase Manhattan to transfer $5.7 million from NFC's operating account to Holdings' bank account at the same institution. That same day, Holdings directed Chase to disburse the funds in one of two ways: a) wire payment to National City Bank to redeem those Class B shares held in IRA accounts at National City and b) checks drawn upon Holdings' Chase account and issued directly to shareholders for the remaining non-IRA shares. Thus, the transfer of funds from NFC to Holdings and the distribution of those funds to Holdings' shareholders occurred on the same day and within approximately two weeks of the parties' agreement with the Lenders relative to the financing of the redemption.
In light of these facts, we reject the Committee's suggestion that the NFC-to-Holdings transfer can rationally be viewed in isolation, as a transaction separate and distinct from the Holdings-to-shareholder distributions. "[W]here a transfer is only a step in a general plan, the plan 'must be viewed as a whole with all its composite implications.'" Orr, 991 F.2d at 35 (citation omitted).
The Committee insists there is a genuine issue of material fact as to whether it was Holdings or NFC that authorized the stock redemption. Referring us to a version of the December 22, 1998 corporate minutes which suggests that the Boards of NFC and Holdings met concurrently on that date, the Committee posits that it is unclear on whose behalf the Directors were acting when the resolutions of December 22, 1998 were passed. We do not agree, however, that this creates a material issue of fact relative to our application of the "integrated transaction" doctrine. On the contrary, if anything, it underscores the identity of interests between NFC and Holdings (as well as the commonality of their principle players) such that, for all intents and purposes, the stock redemption plan as conceived and executed must be viewed as an integrated one.
2. Did The Stock Redemption Involve "Settlement Payments"
The Committee further argues that, even if the events culminating in the stock redemption are viewed as an integrated transaction, § 546(e) does not bar its fraudulent transfer claims because the distributions of funds made to Class B shareholders in this case were not "settlement payments" within the meaning of § 546(e). Defendants strongly disagree.
Because this dispute involves a question of statutory interpretation, we begin with the language of the statute itself. See In re Resorts Int'l, Inc., 181 F.3d 505, 515 (3d Cir. 1999) ("We begin every statutory interpretation by looking to the plain language of the statute."). Section 546(e) precludes the avoidance of any transfer that is a "settlement payment, as defined in section ... 741 of this title." 11 U.S.C. § 546(e). Section 741, in turn, provides the following definition:
(8) "settlement payment" means 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.
The Defendants insist that the transfer of funds which occurred in relation to the Holdings stock redemption constituted "settlement payments" within the meaning of §§ 546(e) and 741(8). Such a conclusion, they argue, is inescapable under the decision in Bevill, Bresler & Schulman Asset Management Corp. v. Spencer Sav. & Loan Ass'n, 878 F.2d 742 (3d Cir. 1989); Kaiser Steel Corp. v. Charles Schwab & Co., Inc., 913 F.2d 846 (10th Cir. 1990) ("Kaiser I"); In re Kaiser Steel Corp., 952 F.2d 1230 (10th Cir. 1991) ("Kaiser II"); In re Comark, 971 F.2d 322 (9th Cir. 1992); and In re Resorts Int'l, Inc., 181 F.3d 505 (3d Cir. 1999). Because these cases are central to the Defendant's theory, some discussion of their holdings is warranted.
In Bevill, Bresler & Schulman Asset Management Corp., the Third Circuit addressed the meaning of "settlement payment" under § 546(f) of the Bankruptcy Code, which provides a "settlement payment defense" nearly identical to that contained in § 546(e), except that § 546(f) applies to settlement payments "made by or to a repo participant, in connection with a repurchase agreement..." See 11 U.S.C. § 546(f). Bevill involved a dispute over repurchase agreements*fn7 that the debtor, AMC (a secondary dealer in government securities), had entered into with various lending institutions and municipalities. Under the terms of the repurchase agreements, the lending institutions and municipalities agreed to purchase certain securities from AMC and simultaneously agreed to sell the securities back to AMC on an agreed upon date and for an agreed upon price. The agreements at issue were known as "hold-in-custody" agreements,*fn8 which meant that AMC initially retained possession of the securities and the purchasers did not take physical custody of them until weeks after entering into the agreements. Within 90 days following this physical transfer of the securities from AMC to the purchasers, AMC filed a Chapter 11 petition.
The trustee subsequently filed a complaint asserting that the transfers of securities to the purchasers were "fraudulent" under 11 U.S.C. § 548. The purchasers countered that the trustee's claims were barred by § 546(f) of the Code. Thus, the question before the court of appeals was whether the deliveries in question were "settlement payments" for purposes of § 546(f), such that they would be shielded from the trustee's avoidance powers.
In addressing this question, the Court of Appeals first reviewed the legislative history of § 546(e), the "model" provision upon which 546(f) was based:
...At the time [that the 1982 amendments enacting § 546(e) were passed], Congress was concerned about the volatile nature of the commodities and securities markets, and decided that certain protections were necessary to prevent "the insolvency of one commodity or security firm from spreading to other firms and possibly threatening the collapse of the affected market." H.Rep. No. 97-420, 97th Cong., 2d Sess. 1 (1982) ("1982 House Report"), U.S.Code Cong. & Admin. News 1982, p. 583. As stated in the House Report on the 1982 amendments:
The Bankruptcy Code now expressly provides certain protections to the commodities market to protect against such a 'ripple effect.' One of the market protections presently contained in the Bankruptcy Code, for example, prevents a trustee in bankruptcy from avoiding or setting aside, as a preferential transfer, margin payments made to a commodity broker ... . Id.
Congress wanted to go further to protect margin payments and settlement payments made by and to participants in the securities market generally. Accordingly, it added a new subsection [§ 546(e)] to 11 U.S.C. § 546. ... In re Bevill, 878 F.2d at 747.
Turning next to the legislative purpose behind § 546(f), the court of appeals made the following observations about the1984 "Repo Amendments" to the Bankruptcy Code:
After the 1982 amendments were in effect, Congress became concerned that the amendments did not "adequately [ ] protect liquidations of repos in the event of the insolvency of a dealer or other participant in the repo market, even though the principal objective of Public Law 97-222 (the 1982 amendments) was to prevent the insolvency of one commodities or securities firm from spreading to other firms and possibly threatening the stability of the affected market." 1983 Senate report at 47. Congress noted: "The repo market serves a crucial function for both parties to the repo transaction. The country's major institutional and fiduciary investors make heavy use of repos. For these investors, including such entities as state and local governments, public and private pension funds, money market and other mutual funds, banks, thrift institutions, and large corporations, repos have become a vital tool of cash management." Id. at 45. Moreover, Congress stated, "The repo is particularly well-suited to the needs of these investors. Receipts of taxes and the proceeds of bond issues in the case of state and local governments, cash flows from corporate operations, and liquidity needs of thrift institutions and money market funds often fail to coincide with the planned expenditures of such funds, thereby creating the need for such entities to invest idle funds for short periods in as risk-free a manner as possible." Id. Accordingly, Congress came to the decision that:
The effective functioning of the repo market can only be assured if repo investors will be protected against open-ended market loss arising from the insolvency of a dealer or other counter-party in the repo market. The repo market is as complex as it is crucial. It is built upon transactions that are highly interrelated. A collapse of one institution involved in repo transactions could start a chain reaction, putting at risk hundreds of billions of dollars and threatening the solvency of many additional institutions.
The uncertainty was highlighted when Lombard-Wall, Inc., filed a Chapter 11 bankruptcy petition in the Southern District of New York in August, 1982. A bench decision in the Lombard-Wall case held that the holder of securities subject to a repurchase agreement was subject to the automatic stay provision of the Code, and that the holder was precluded from closing out its position with the debtor without approval of the court. Lombard-Wall Inc. v. Columbus Bank & Trust Co. ( In re Lombard-Wall Inc.), No. 82 B 11556 (Bankr. S.D.N.Y. Sept. 16, 1982). ... Under [this] holding, the repo participant would be subjected "both to the unexpected inability to liquidate securities it holds and to the risk of capital loss should unfavorable interest rate changes occur; these risks impair the qualities that are the essence of the appeal of repo agreements." ...
Congress, the Board of Governors of the Federal Reserve, the Public Securities Association, the Investment Company Institute and others, were concerned that if Lombard-Wall became the law governing repo transactions, the failure of one repo dealer, and the consequent inability of repo participants to promptly liquidate their investments to obtain cash to meet obligations, could have a ripple effect throughout the ...