The bankruptcy protector

On August 18, 2022, the United States Bankruptcy Court for the Southern District of Indiana, in In re BWGS, LLC, No. 19-01487-JMC-7A, 2022 WL 3568045 (Bankr. SD Ind. August 18 2022), narrowly construed the exemption clause of Section 546(e) of the Bankruptcy Code by refusing to dismiss a lawsuit against a guarantor whose liability was eliminated by the debtor’s payment to the bank who held the guarantee.

Overview of Section 546(e) of the Bankruptcy Code

Congress renamed Section 546(d) as § 546(e) in 1984,[1] and further amended the provision in December 2006 to clarify that safe harbor applies to all transfers (other than actual fraudulent transfers) made to designated financial intermediaries in connection with their facilitation of transactions executed through the securities clearing and settlement system or the commodity clearing system.[2] As the House Financial Services Committee explained, the 2006 amendment seeks to “reduce systemic risk in financial markets by clarifying” the application of the Safe Harbor to transactions similar to those already covered. by existing law. HR Rep. No. 109-648, p. 1-2. “The red thread of these transactions [covered by the safe harbor] is that they involve financial intermediaries – securities brokers, financial institutions, financial participants or securities clearing agencies – who often hedge their risk on these transactions through other market transactions, replenish collateral in securities received in connection with these transactions, or both. Identifier. at 5 and 8.


A company was owned by an employee stock ownership plan (“ESOP”) trust. A private equity investor brokered a deal to buy the company by acquiring the ESOP shares. The shares held by the ESOP were not publicly traded. To complete the acquisition, the buyer secured a $24.9 million bridge loan from a bank. The buyer was obligated to the bank, but the acquired company was not responsible for the loan. A month after the acquisition was completed, the debtor secured loans from another bank and repaid the $24.9 million bridge loan owed by the buyer, but not the debtor. To secure the loan, the debtor pledged all of its assets as collateral.

The debtor’s business began to deteriorate after the acquisition. Approximately two years after closing, the company’s creditors filed an involuntary petition under Chapter 7 of the Bankruptcy Code.

Because the transfer took place more than two years before the filing, the Chapter 7 trustee brought adversarial proceedings to avoid the transfer by invoking the power under section 544(b) to stand in the place. of a real creditor and to sue the buyer for a fraudulent act. transfer under Indiana law. The Chapter 7 trustee alleged that the transfer repaying the bridge loan was “to or for the benefit” of the purchaser and that the debtor received no consideration for encumbering his property.

Decision of BWGS, LLC

Noting that the new loan repaid a financial institution and was used to purchase ESOP stock, the buyer filed a motion to dismiss based on the Section 546(e) exemption rule. The paragraph provides: “the trustee cannot avoid a transfer[faiteparouà(ouauprofitde)uninstitutionfinancièreouquiestuntransferteffectuéparouà(ouauprofitde)uninstitutionfinancièredanslecadred’uncontratdevaleursmobilièrestelquedéfiniàl’article741(7)saufenvertudel’article548(a)(1)(A)duprésenttitre[for a transfer made with actual intent to hinder, delay or defraud].”

After ruling that the Chapter 7 trustee had made a plausible claim for constructive fraudulent conveyance, the Court then turned to defending the buyer’s safe harbor.

Reviewing the 1984 amendments giving rise to Section 546(e), the Court said Congress intended to “clarify that Safe Harbor applies to all transfers (other than actual fraudulent transfers) made to designated financial intermediaries in connection with their facilitation of transactions executed through the securities clearing and settlement system or the commodity clearing system”. BWGS, LLC, 2022 WL 3568045, at *5. The court further held:

Even with this clear legislative intent, courts do not have a clear mandate in the language of section 546(e) to apply safe harbor to protect transfers that do not involve the clearing and settlement system. securities. Courts should be particularly reluctant to do so where, as here, the impugned transfer does not involve the national government securities trading system or pose systemic risk to the financial centre. Nevertheless, in such circumstances, there is no conflict between (1) the application of the Bankruptcy Code’s policy of maximizing bankruptcy assets by protecting “the well-established and substantial powers of avoidance of the trustee”; and (2) purpose § 546(e) was enacted to serve.


The buyer had advocated a “liberal interpretation of the broadly defined safe harbor terms[.]Identifier. Rejecting this interpretation, the Court held that “the underlying purchase of stock was a private transaction that in no way involved the system that Section 546(e) was intended to protect.” .

The Court went on to explain what must be shown to invoke the safe harbor provision:[t]The Court must determine whether there is a sufficient nexus between the Transfer and a “securities contract” that would lead to the conclusion that the Transfer was made “in connection with” such a “securities contract”. 6.

For the definition of “in connection with”, the court cited Chadbourne & Parke LLP v Troice, 571 US 377, 387 (2014), where the Supreme Court stated in a SLUSA suit that “in connection with” “suggests a connection that matters”. The Court then avoided an overbroad interpretation to avoid interfering “with the state’s efforts to provide remedies to victims of ordinary frauds of state law.” Identifier. at 391.

Accordingly, the Court ruled, “an overly broad interpretation of ‘in relation to’ would not advance any underlying purpose of Congressional enactment of Section 546(e) safe harbor or the policies under it.” underlying the avoidance provisions of Chapter 5 of the Bankruptcy Code or the [state fraudulent transfer law].” The Court saw “no material connection” between the buyer’s contract to buy ESOP shares and the repayment of the loan to the bridge lender. According to the Court, nothing in the share purchase agreement “indicates that [it] was performed or performed “in connection with” the repayment of the bridge loan.

“Instead,” the court said the stock purchase and the loan repayment were “two separate transactions” that took place “a month apart.” The Court noted that the trustee did not seek to avoid payment to the ESOP that made the stock purchase.

The Court denied the safe harbor motion to dismiss because the new loan one month after closing had “nothing to do with the purchase or sale of securities or any ‘contract of securities'” and that there was not “sufficient connection between the [stock purchase agreement] and the [loan payoff] to engage the “safe harbour” of Section 546(e)”.