District Court Rejects the Narrowing of § 546(e) “Safe Harbor” Provision and Applies Safe Harbor to Privately Held Securities

Nino Aspanadze

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff


In the U.S. Bankruptcy Code, there are various provisions that allow debtors and trustees to avoid certain types of prepetition transfers.[1] The safe harbor rule set out in Section 546(e) of Title 11 of the United States Code (the “Bankruptcy Code”) provides, in part, that a trustee may not avoid a transfer made before the commencement of the case in connection with a securities contract, as defined in Section 741(7), made by, to, or for the benefit of a financial institution.[2]  The purpose of this exception was to minimize the “[d]isplacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries.”[3] In BMO Harris Bank v. Petr, the United States District Court for the Southern District of Indiana rejected a narrow interpretation of the safe harbor rule, holding that it applies to privately held securities and, Petr (the Chapter 7 Trustee) could not avoid a transfer because various contested transactions all fall within the definition of “securities contract” as defined by Section 741(7).[4]

In 2016, BWGS Intermediate Holding, (“Intermediate Holding”) an affiliate of Sun Capital Partners, VI, L.P. (“Sun Capital”) entered into a stock purchase agreement (“the Stock Purchase Agreement”) to acquire all of BWGS, LLC’s (the debtor’s) stock from ESOP Trust.[5] In order to fund a portion of the stock purchase, BMO Harris Bank, N.A. (“BMO”) provided a bridge loan (“the Bridge Loan”) to Intermediate Holding.[6] Sun Capital either guaranteed the Bridge Loan or was otherwise obligated to ensure that the Bridge Loan was repaid ("the Sun Capital Guaranty").[7] In 2017, Sun Capital caused BWGS and Intermediate Holding to repay the bridge loan in full.[8] BWGS paid the vast majority of the loan by transferring its own property worth $24.8 million to BMO (“the Transfer”).[9] In 2019, BWGS’s creditors filed an involuntary petition under Chapter 7 of the Bankruptcy Code.[10] The Bankruptcy Court entered an order for relief under Chapter 7 and Petr was appointed as the chapter 7 trustee.[11]

In 2021, Petr sued BMO and Sun Capital seeking to avoid the $24.8 million transfer pursuant to Section 544(b) of the Bankruptcy Code and the Indiana Uniform Voidable Transactions Act (“IUVTA”) and to recover the amount of the transfer. BMO and Sun Capital moved to dismiss Petr’s complaint contending that Petr could not avoid the Transfer because it was made in connection with securities contracts.[12] The Bankruptcy Court denied BMO and Sun Capital’s motion to dismiss, finding, in relevant part, that Section 546(e)’s safe harbor didn’t apply because the Transfer was not made in connection with a securities contract since it did not implicate publicly held securities.[13] BMO and Sun Capital appealed.

            On appeal, the District Court decided four issues. First, the Court held that even if the state law claim had been sufficiently stated, it would have been preempted by the safe harbor rule in Section 546(e).[14] Otherwise, allowing a recovery on state law claims that falls within Section 546(e) would render it meaningless.[15] The court stated that even if the state law claim was not preempted, Petr’s argument that Section 544(b) allowed him to rely on IUVTA to avoid the transaction failed because Petr cannot take advantage of Section 544(b) when the disputed transactions are covered by Section 546(e).[16]

Second, the Court found that the Bankruptcy Court erred in its analysis of whether the transfer was in connection with securities contracts. Section 741(7) of the Bankruptcy Code defines a securities contract as:

  1. a contract for the purchase, sale, or loan of a security;
  2. any extension of credit for the clearance or settlement of securities transactions;
  3. any ... credit enhancement related to any agreement or transaction referred to in this subparagraph, including any guarantee or reimbursement obligation by or to a ... financial institution ... in connection with any agreement or transaction referred to in this subparagraph; and
  4. any combination of agreements or transactions referred to this subparagraph.[17]


Applying this definition, the District Court concluded that the Stock Purchase Agreement and the Bridge Loan fall within Section 741(7)(2) because it was “[t]he transaction by which Intermediate Holding acquired the stock of BWGS.”[18]  Finally, the Sun Capital Guaranty falls under Section 741(7)(3) because it involved Sun Capital “providing credit enhancement in some manner to [BMO] with respect to the Bridge Loan.”[19] Therefore, all instruments were covered by § 546(e).

Third, the District Court held that there is no temporal requirement to satisfy the “in connection with” requirement under Section 546(e) and that this language shall be construed liberally.[20] The court reasoned that the Transfer was made in connection with the Stock Purchase Agreement because “…[It] was made to pay off the Bridge Loan that was used to close the Stock Purchase Agreement ….”[21]

            Fourth, the District Court clarified that privately held securities are covered by Section 546(e). There is nothing in the text of the statute that distinguishes between transactions that implicate publicly traded securities versus one that implicate privately held securities.[22] Therefore, the District Court remanded the case back to the Bankruptcy Court with instructions to dismiss Petr’s claims with prejudice.[23]

            This case is significant because the District Court provided important guidance and clarification in interpreting the safe harbor provision. The District Court rejected the lower court’s narrow interpretation of the safe harbor rule by choosing to apply the plain language of Section 546(e) and the definitions under Section 741(7).

[1] See Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329, 334 (2d Cir. 2011).

[2] 11 U.S.C. § 546(e); see 11 U.S.C. § 741(7).

[3] Enron Creditors Recovery Corp., 651 F.3d at 334.

[4] See BMO Harris Bank v. Petr, No. 1:22-cv-01742-JMS-MKK, 2023 WL 3203113, at *5 (S.D. Ind. May 2, 2023).

[5] Id. at *2.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] BMO Harris Bank, 2023 WL 320113, at *3.

[13] In re BWGS, LLC, 643 B.R. 576, 583 (Bankr. S.D. Ind. 2022); 11 U.S.C. § 546(e).

[14] Id. at *12.

[15] Id.

[16] Id. at *13.

[17] 11 U.S.C. § 741(7).

[18] BMO Harris Bank, 2023 WL 3203113, at *5.

[19] Id.

[20] Id.

[21] Id. at *7.

[22] Id. at *9.

[23] Id. at *13.