Investment Banking

By: Matthew McNamara

St. John's Law Student

American Bankruptcy Institute Law Review Staff

The Delaware district court has affirmed a bankruptcy court decision extending the settlement payment exception to the trustee’s avoiding powers to insulate from attack a leveraged buyout (“LBO”) involving a non-public company in Brandt v. B.A. Capital LP (In re Plassein International Corporation).

[1]

 The Plassein trustee sought to avoid transfers to the selling shareholders under Delaware fraudulent transfer law and section 544 of the Bankruptcy Code.

[2]

  Section 546(e), however, states that a settlement payment falls under an exemption to section 544 and thus the trustee may not void the transfer.

[3]

  Plassein follows and expands upon a line of cases adopting a broad interpretation of the term “settlement payment”.  The Third Circuit has adopted an extremely broad interpretation of the term, noting that it encompasses “almost all securities transactions”.

[4]

  Earlier decisions imposed policy based limitations on the section 546(e) settlement payment exemption in order to exclude payments made to shareholders as part of an LBO.

[5]

  The court in In re Resorts International

[6]

, however, made it clear that “a payment for shares during an LBO is obviously a common securities transaction, and [the court] therefore [held] that it is also a settlement payment for the purposes of section 546(e)”.

[7]

  The shares in question in In re Resorts, however, were securities of a publicly traded company.  The court failed to specify whether the settlement payment exemption in an LBO was limited to shares of publicly traded companies or might also protect LBO’s involving non-public companies.