Court Grants Summary Judgment To Recipient Of Alleged Fraudulent Transfer On "Settlement Payment" Defense Of 11 U.S.C. § 546(e)
Official Comm. of Unsecured Creditors of the IT Group, Inc. v. Acres of Diamonds, L.P. (In re the IT Group, Inc.), 359 B.R. 97 (Bankr. D. Del. 2006) (Judge Mary F. Walrath)
Within a year prior to the petition date of the IT Group, Inc. debtors, defendant Acres of Diamonds L.P. sold to Organic Waste Technologies, Inc. five shares of the common stock of Keystone Recovery, Inc. Organic Waste paid for the shares by making a wire transfer of $575,000 from debtor IT Corporation’s Citibank account. Prior to confirmation of the debtors’ Chapter 11 plan, the debtors commenced a preference action against Acres, seeking to avoid and recover the $575,000 payment. The complaint was thereafter amended to add a fraudulent transfer cause of action, and amended again to drop the preference claim.
The court granted Acres’ motion for summary judgment, finding that the transfer was a payment for securities, made by a financial institution, and therefore excepted from avoidance under section 546(e) of the Bankruptcy Code.
Section 546(e) of the Bankruptcy Code operates as a defense to avoidance actions brought under the Bankruptcy Code. Under section 546(e), a transfer cannot be avoided if, in relevant part, it was made through a financial institution as a “settlement payment” for the purchase of securities. Acres argued that the transfer could not be recovered because there was a sale of securities for which payment was made through Citibank, a financial institution. This argument was supported by Third Circuit precedent in In re Resorts Int’l, Inc., which broadly interpreted section 546(e) to include any transfer of cash or securities through a financial institution to complete a securities transaction.The plaintiff argued that the court should consider Congressional intent and find that the section 546(e) defense was inapplicable because the sale did not involve a public stock market, a clearing or settlement agency or another intermediary that obtained only a beneficial interest in the stock during the settlement process. In support of this argument, the plaintiff referred to a number of cases from outside the Third Circuit.
The court noted that the Third Circuit has found the term “settlement payment” to apply broadly to any transfer of stock or cash to pay for stock. In the Resorts case, the Third Circuit found it irrelevant (i) that there was no clearing agency involved in the transaction there, and (ii) that the stock was sold privately, rather than on the stock market. Accordingly, there was no reason to find Resorts inapplicable to the present case. Moreover, Resorts is binding precedent in the Third Circuit. As the parties acknowledged that payment for the stock had been made by wire transfer from Citibank, the court found there was no material fact in dispute, and granted summary judgment in favor of Acres.
