The Scope of 11 U.S.C. § 546(e) Is Not Restricted To Publicly Traded Securities; Bad Faith or Intent to Defraud Must Be Demonstrated to Collapse Otherwise Independent Transactions
Plassein Int’l Corp. v. B.A. Capital Co. LP (In re Plassein Int’l Corp.), No. 03-14489, 2008 WL 2073495 (D. Del. May 15, 2008) (Judge Joseph J. Farnan, Jr.)
The Debtors’ Chapter 7 Trustee (the “Trustee”) commenced an adversary proceeding against B.A. Capital Co. LP alleging that a series of fraudulent transfers rendered the Debtors insolvent or with unreasonably small capital for its businesses. The Bankruptcy Court had dismissed the Complaint because the court concluded (i) the transfers were settlement payments, pursuant to 11 U.S.C. § 546(e) and thus, not subject to avoidance under 11 U.S.C. § 544(b); (ii) the Complaint failed to state a claim upon which relief could be granted because it failed to assert that Plassein or any of the related Debtors made the allegedly fraudulent transfers; and (iii) the allegations within the Complaint could not be collapsed because neither the intent to defraud nor bad faith was alleged. The District Court affirmed.
On appeal, the Trustee first asserted that the prohibition on avoiding transfers listed in 11 U.S.C. § 546(e) only applied to publicly traded securities. On the other hand, Appellees asserted that the plain language of 11 U.S.C. § 546(e) and applicable Third Circuit case law demonstrated that the applicability of section 546(e) is not limited to publicly traded securities. The District Court concluded that the Bankruptcy Court correctly held that 11 U.S.C. 546(e) is not limited to publicly traded securities. Rather, the Court noted, Third Circuit case law, including In re Resorts Intl., Inc., 181 F.3d 505 (3d Cir. 1999) demonstrated that the phrase “settlement payment” should be broadly construed.
Second, the Trustee contended that the record established that the transferor, Plassein Packaging, was a debtor or the same entity as the Debtors. The Trustee asserted that the court should have looked to the public record to conclude that Plassein Packaging and Plassein International were the same entity. Appellees conversely argued that the Trustee failed to allege such a relationship in the Complaint. The District Court affirmed the Bankruptcy Court’s dismissal of the Complaint for failure to state a claim upon which relief could be granted. The District Court concluded that the Complaint failed to state such an allegation and this deficiency could not be cured by subsequent briefing or affidavits. Further, the Court determined that the Bankruptcy Court’s decision not consult the public record was not erroneous.
Finally, the Trustee argued that actual intent to defraud was not a required element to collapse the transactions. The Trustee sought to avoid the implication that Plassein Packaging was not a debtor by arguing that the transactions were a single integrated plan. Appellees countered, arguing that Third Circuit precedent requires a showing of bad faith or intent to defraud to collapse otherwise separate transactions. The District Court held that the allegations within the Complaint did not support collapsing the transactions. The court noted that collapsing otherwise separate transactions requires proof of bad faith or intent to defraud.
Thus, the District Court affirmed the Bankruptcy Court’s order.
