Section 546(e) – When Unambiguous Statutes Spawn Conflicting Interpretations
By Michael Enright
Anyone who has ever defended a fraudulent transfer action regarding a prepetition business transaction probably has spent some time parsing Section 546(e) of the Bankruptcy Code, the so-called “safe harbor” provision, and the statutory definitions that accompany it, looking for a Get Out of Jail Free card in their thorny text. Although the Supreme Court ruled on the provision authoritatively in Merit Management Group, L.P. v. FTI Consulting, Inc., holding that the presence of a “financial institution” as a “mere conduit” in the transaction under scrutiny did not shelter transfers from exposure, many tricky questions remain. In particular, whether a debtor could be a “financial participant” within the meaning of the statutes, was left an open question. At least one court has ruled that a debtor cannot be a financial participant, given what it viewed as the clear language of the definition of that term in Section 101(22A) of the Bankruptcy Code. The definition includes a requirement that a financial participant have an agreement or transaction “with the debtor or any other entity (other than an affiliate),” and the court in In re Tribune Co. Fraudulent Conveyance Litigation concluded that the reference to the debtor would be rendered mere surplusage if the language were construed to permit the debtor to be a financial participant. However, the court in In re Samson Resources Corp., Case No. 15-11934 (Bankr. D. Del. Dec. 23, 2020), construed the same language differently, holding that the debtor indeed could be a financial participant within the meaning of the definition, based on analysis of the same statutory text. “A natural reading of this language supports a broad interpretation that allows debtors to be included in the definition.” Therefore, the court granted partial summary judgment to the defendants on this issue. Fraudulent transfer defendants in Delaware and New York will want to consider these different outcomes in fashioning their defensive positions until the courts of appeal further clarify these issues.