According to a Memorandum Opinion by Judge Brendan L. Shannon of the United States Bankruptcy Court for the District of Delaware dated August 4, 2022, a party to a safe harbor may qualify as a “financial participant” under Section 546(e) of the Bankruptcy Procedure Code as well if the party was not a financial participant at the time of the transaction. The decision is significant because a broad interpretation of the term “financial participant” could help financial participants protect certain transfers in advance from challenge actions that would otherwise be avoidable under the Bankruptcy Act.1
By way of background, the majority shareholders of Samson Investment Company (“SIC”) completed a leveraged buyout in 2011 through three transactions:
SIC remitted US$2.75 billion in cash to the selling shareholders in a partial redemption of their shares in SIC (the “Redemption Transaction”);
Debtor Samson Resources Corporation (“SRC”) remitted $3.5 billion in cash to the selling shareholders in consideration for the simultaneous transfer of their remaining interest in SIC; and
SIC disposed of significant assets through a series of transactions in which three SIC subsidiaries acquired certain of the assets disposed of; Non-debtor Samson Energy then acquired ownership of those three companies and other divested assets in exchange for the selling shareholders’ redemption of certain subordinated debt payable to them by SIC.
Amid a cyclical downturn in the oil and gas market, on September 17, 2015, SRC and certain affiliates (collectively, the “Debtors”) filed for Chapter 11 bankruptcy protection with the aim of reducing their senior debt and their outstanding second lien, unsecured debt, Preferred Stock and Equity. Pursuant to the Debtors’ plan of reorganization, confirmed February 13, 2017, the Debtors formed a liquidating trust to pursue recoveries of over $2.4 billion of general unsecured claims against the Debtors.
On September 15, 2017, the trustee of the liquidating trust (the “Trustee”) filed a legal challenge to avoid the transactions against the selling shareholders and the Samson entities involved in the leveraged buyout transactions (collectively, the “Defendants”) as fraudulent transfers under the Bankruptcy Act.2 In response, Defendants argued, among other things, that the avoidance actions related to the safe harbor recovery transaction are barred under Section 546(e) of the Bankruptcy Act, which provides:3
Notwithstanding Sections 544, 545, 547, 548(a)(1)(B) and 548(b) of this Title, the Trustee may retain any transfer that is Margin as defined in Section 101, 741 or not avoid 761 of this Title or settlement payment, as defined in Section 101 or 741 of this Title, made by or to (or for the benefit of) any commodity broker, futures dealer, stockbroker, financial institution, financial participant or securities clearing agency, or that is a transfer which is made by or to (or for the benefit of) a commodity broker, futures dealer, stockbroker, financial institution, financial participant or securities clearing house in connection with a securities contract as defined in Section 741(7), Commodity Contracts as defined in Section 761(4), or futures contracts entered into prior to the commencement of the event, except under section 548(a)(1)(A) of this title.
The court heard an oral hearing on May 19, 2022 and delivered its opinion on the memorandum on August 4, 2022.
The Trustee made two main arguments. First, the Trustee argued that a simple interpretation of Section 546(e) led to the conclusion that a transfer could not be “a transfer made by a financial participant” unless the transferor was a financial participant at the time of transfer. Second, the Trustee reinforced this argument by referring to other rulings interpreting other sections of the Bankruptcy Act such as Section 548(a)(1)(B)(ii)(IV) which has been interpreted to require a company to do a to avoid “insiders” as fraudulent at the time of the relevant transmission.4
In contrast, the defendants argued that the wording of Section 546(e) of the Bankruptcy Act requires consideration of the definition of “financial participant” in Section 101(22A) of the Bankruptcy Act, which provides that an entity meets the criteria to be a financial participant: can be measured at one of three points in time: (a) the time the entity enters into a securities contract, (b) the application date, or (c) any day during the 15 month period prior to the application date.5 As such, Defendants argued that although the transfer in question was made almost four years prior to the Application Date, (a) SIC held sufficient transactions to exist on both the Application Date and a date within the 15 months prior to the Application Date, both for the Data was relevant in the Bankruptcy Act’s definition of “financial participant” and (b) the transfers in the repayment transaction were made “in connection with a securities contract”, therefore Section 546(e ) protected those transfers from circumvention. The Defendants further argued that the Trustee’s argument was incorrect because the relevant definitions in the sections of the Bankruptcy Code cited by the Trustee contained nothing about when the timing of a transaction should be measured.
The Court found Defendants’ reading more persuasive, noting that Defendants’ expert statements (using methods of both Defendants’ experts and the Trustee) showed that SIC had gross mark-to-market positions in commodity swaps and commodity options with had a value in excess of $100 million as of the filing date and as of August 31, 2015 (within the 15 months prior) making SIC a financial participant for purposes of Section 101(22A) and in compliance with Section 546(e) of the Bankruptcy Code. Accordingly, the court granted defendants’ motion for summary judgment with respect to the repayment transaction.
In the Court’s view, parties who pre-assess the avoidance of large transfers have another possible defense in their toolbox (in addition to the traditional arguments relating to the solvency of the transferor or the receipt of reasonably equivalent value). A party is not entitled to the protection of Section 546(e) of the Bankruptcy Act if it never meets the definition of a “financial participant”. However, parties need not be considered financial participants at the time of the transfer. Parties that fall within and outside the relevant financial participant qualification thresholds may have peace of mind that non-qualification at the time of transfer may render the transfer non-appealable if the parties are able to obtain financial participant status at either the application date or the 15 months before.
1. The Court’s Memorandum Opinion additionally grants and denies in part various other summary judgment motions filed by other defendants relating to whether those defendants were (a) released under the Plan, (b) direct or are indirect recipients of avoidable transfers, or (c) named as defendants solely in their capacity as trustees of other released defendant trusts. This article focuses only on the Court’s analysis and position on the Safe Harbor Summary Judgment motion.
2. Kravitz v Samson Energy Co., LLCAdv. Case #17-51524 (BLS) (Bankr. D. Del. 15 Sep 2017).
3. Prior to the Court’s immediate memorandum opinion, on December 23, 2020, the Court issued an opinion noting that while the plaintext of Section 546(e) does not per se preclude SIC from being classified as a financial participant, the Trustee does one should be authorized to complete the determination to demonstrate whether SIC had the arrangements or transactions necessary to meet the definition of a financial participant under Section 101(22A) of the Bankruptcy Act. Defendants subsequently narrowed the scope of their summary judgment to focus solely on SIC’s status as a financial participant in connection with the redemption transaction.
4. The Trustee has similarly compared the timing issue in the Court to determining whether a communication to an attorney is privileged – ie a communication cannot retrospectively be privileged if spoken to someone who later becomes an attorney .
5. Section 101(22A)(A) defines a “financial participant” as “an entity which, at the time of entering into a securities contract, commodity contract, swap agreement, repurchase agreement or futures contract, or at the date of filing the application, has one or more Arrangements or transactions described in Section (1), (2), (3), (4), (5) or (6) of Section 561(a) of the debtor or any other entity (other than an affiliate). ) with an aggregate gross dollar value of not less than US$1,000,000,000 in principal or principal outstanding (aggregated across counterparties) at that time or on any day during the 15 month period prior to the date of filing of the Application; or has gross mark-to-market positions of not less than US$100,000,000 (aggregated across counterparties) in one or more such agreements or transactions with the Debtor or any other entity (other than an Affiliate). time or any day during the 15-month period prior to the date the petition was submitted.”