February 03, 2021

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

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.

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.