DOES BANKRUPTCY CODE SECTION 546(E) PROTECT TRANSACTIONS INVOLVING PRIVATELY HELD SECURITIES FROM AVOIDANCE?
One of the most powerful leverage tools a debtor in bankruptcy or a bankruptcy trustee has at its disposal is the ability to recapture the value of, or avoid, certain transactions deemed to be ‘constructive fraudulent transfers’. Investors and other parties – whether those who hold public or private securities – who find themselves facing such claims may question why their securities transactions could be unwound, and the money they received returned to the debtor. Thankfully, the Bankruptcy Code contains provisions that protect parties to securities transactions.
Specifically, section 546(e) of the Bankruptcy Code provides a safe harbour that exempts certain of these transactions from avoidance. Among other things, section 546(e) provides that a debtor or trustee cannot avoid a transfer “made by or to (or for the benefit of) a…financial institution…in connection with a securities contract”. While courts have traditionally applied this provision to ‘safe harbour’ transactions involving publicly traded securities (in other words, courts prevented debtors and bankruptcy trustees from recovering on account of fraudulent transfer claims), there has been considerable uncertainty and controversy around the breadth of the safe harbour, including whether it protects transactions involving private securities. A recent ruling from the US Court of Appeals for the Seventh Circuit, however, directly addressed the issue.
Jul-Sep 2024 issue
King & Spalding LLP