Petr v. BMO Harris Bank N.A. (In re BMO Harris Bank N.A.)
The Seventh Circuit adopted a broad reading of the Section 546(e) safe harbor to dismiss a fraudulent transfer suit attacking a sale of nonpublic securities.
- Rochelle Quick Take
View Rochelle Summary- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- No. 23-1931 (7th Circuit, Mar 15,2024) Published
- Tag(s):
- Ruling:
- The U.S. Court of Appeals for the Seventh Circuit held the "safe harbor" of 11 U.S.C. § 546(e), which shields from avoidance certain transfers made “in connection with a securities contract,” (a) extends to transactions involving private securities that do not implicate the national securities clearance market; and (b) preempts state law claims seeking to recover the value of avoidable (as opposed to avoided) transfers such that a bankruptcy trustee may not bring the claims under 11 U.S.C. § 544(a).
- Procedural context:
- Reviewing the bankruptcy court's factual findings for clear error and its legal conclusions de novo, the Seventh Circuit framed the questions presented as follows: "The crux of the instant appeal thus centers on whether § 546(e)’s safe harbor [which bars a trustee from avoiding certain transfers] precludes the [Appellant Chapter 7] Trustee’s claims to avoid and recover the value of the Transfer. In resolving this dispute, we must consider two ancillary questions. First, does § 546(e) apply to the Trustee’s claims to avoid the Transfer here? And second, if so, can the Trustee nevertheless circumvent § 546(e) and proceed with claims to recover the value of the Transfer under § 544(a) of the Bankruptcy Code and § 18(b)(1) of the [Indiana Uniform Voidable Transactions Act, which allows a creditor to recover a judgment for the value of an asset transferred to the extent the transfer is avoidable]?" Appellant Trustee contended (a) based on legislative history, "§ 546(e) applies only to transactions that implicate the national system for the clearance and settlement of publicly held securities[,]" which made the safe harbor inapplicable as the challenged transfer related to a sale of privately held stock, and (b) he could pursue a claim under § 544(a) and Indiana law that allows recovery for the value of a transfer that is "avoidable" without actually avoiding the transfer, thereby averting the bar against avoidance in § 546(e).
- Facts:
- BWGS, LLC ("BWGS") had all its outstanding stock in an Employee Stock Ownership Plan Trust (“ESOP Trust”). making it a privately held company whose stock was never publicly traded. Sun Capital Partners VI, L.P. (“Sun Capital”) reached a stock purchase agreement with the ESOP Trust, under which Sun Capital’s subsidiary would buy all the stock in BWGS for nearly $38 million. The subsidiary (“Intermediate Holding”) purchased the stock in December 2016, making BWGS a direct, wholly owned subsidiary of Intermediate Holding. To finance the transaction, Intermediate Holding and BMO Harris Bank N.A. ("BMO") signed a loan authorization agreement under which BMO extended a $25.8 million bridge loan to Intermediate Holding. Sun Capital guaranteed the agreement. On the cloisng date, BMO transferred this amount to Intermediate Holding, which then transferred the funds to the ESOP Trust in exchange for the BWGS stock. In January 2017, Sun Capital caused BWGS and Intermediate Holding to borrow and transfer funds to BMO in full payment of the bridge loan (the "Transfer"). While the Transfer "relieved Intermediate Holding and Sun Capital of their obligations under the Bridge Loan[,] BWGS received no value from the Transfer." BWGS entered "dire financial straits" and, in 2019, its creditors filed an involuntary chapter 7 petition against it in the U.S. Bankruptcy Court for the Southern District of Indiana. The appointed chapter 7 trustee later filed suit against, inter alia, BMO and Sun Capital seeking to "avoid the Transfer [to BMO] and recover its value from either BMO or Sun Capital under" 11 U.S.C. § 544(b)(1) (which allows a trustee to step into the shoes of an unsecured creditor with an allowed claim and avoid a debtor's transfers or obligations that are "voidable under applicable law," i.e., state law). Specifically, the trustee contended the Transfer was constructively fraudulent under the Indiana Uniform Voidable Transactions Act ("IUVTA"), and sought to recover from BMO or Sun Capital the value of the Transfer for the benefit of the estate under 11 U.S.C. § 550(a) and Indiana law. BMO and Sun Capital moved to dismiss, arguing "the Transfer is not avoidable because it falls within the safe harbor of § 546(e), which prevents a bankruptcy trustee from undoing certain transfers." The bankruptcy court denied the motion. As an alternative ruling, the bankruptcy court sua sponte concluded the safe harbor does not apply to an IUVTA claim "against Sun Capital brought pursuant to the strong-arm power of [11 U.S.C.] § 544(a)[.]" (The trustee's complaint did not assert a claim under § 544(a).) On an interlocutory appeal to the U.S. District Court for the Southern District of Indiana, the court reversed, holding (a) the safe harbor barred the trustee's asserted avoidance claims as the Transfer was made in connection with securities contracts, and (b) the trustee could not seek relief for the first time on appeal under § 544(a)--though, on the merits, the safe harbor also precluded such a claim. The trustee appealed to the Seventh Circuit.
- Judge(s):
- ST. EVE, KIRSCH, and LEE
