By: Valerie Sokha
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
The derivatives provisions of the 2005 BAPCPA amendments greatly enlarged the scope of the financial contracts that are shielded from traditional bankruptcy limitations such as the automatic stay and the prohibition on ipso facto clauses.  Those exceptions were reaffirmed in a strong anti-debtor opinion in American Home Mortgage, Holdings, Inc. v. Lehman Brothers Inc.[1] Although Lehman may now regret its victory since it is a debtor in its own bankruptcy case, it succeeded in defeating a number of theories that might have limited the scope of the exceptions.  In an opinion relying in part on the market protection policy reflected by the exceptions, the Delaware Bankruptcy Court adopted a liberal definition of “repurchase agreement” that turned mostly on the intention of the parties as stated in the four corners of their agreement.
 

By: Matthew McNamara
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
The Delaware district court has affirmed a bankruptcy court decision extending the settlement payment exception to the trustee’s avoiding powers to insulate from attack a leveraged buyout (“LBO”) involving a non-public company in Brandt v. B.A. Capital LP (In re Plassein International Corporation).[1]  The Plassein trustee sought to avoid transfers to the selling shareholders under Delaware fraudulent transfer law and section 544 of the Bankruptcy Code.[2]  Section 546(e), however, states that a settlement payment falls under an exemption to section 544 and thus the trustee may not void the transfer.[3]  Plassein follows and expands upon a line of cases adopting a broad interpretation of the term “settlement payment”.  The Third Circuit has adopted an extremely broad interpretation of the term, noting that it encompasses “almost all securities transactions”.[4]  Earlier decisions imposed policy based limitations on the section 546(e) settlement payment exemption in order to exclude payments made to shareholders as part of an LBO. [5]  The court in In re Resorts International[6], however, made it clear that “a payment for shares during an LBO is obviously a common securities transaction, and [the court] therefore [held] that it is also a settlement payment for the purposes of section 546(e)”.[7]  The shares in question in In re Resorts, however, were securities of a publicly traded company.  The court failed to specify whether the settlement payment exemption in an LBO was limited to shares of publicly traded companies or might also protect LBO’s involving non-public companies. 

By: Michael Maffei
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In a good news, bad news decision for prime brokers, the District Court in In re Manhattan Investment Fund v. Gredd[1] held that a prime broker is an initial transferee of funds held in a customer’s margin account, but recognized a “robust” good faith defense to transferee liability.  In this appeal from an award of summary judgment,[2] Bear Sterns had receive approximately $141 million to cover margin calls for a hedge fund that, in reality, was a “Ponzi” scheme.  In a holding that spells trouble for prime brokers, the Court rejected the argument that a prime broker is a “mere conduit” and lacks “dominion and control” over the funds in a margin account.  Applying the Second Circuit’s “nuanced” approach, the Court rejects the narrow view that a party must have unfettered control over funds in order to be an initial transferee.[3]  Since Bear Sterns could use the margin funds to protect itself against possible losses, it did not qualify as a mere conduit.  Further, the discretionary authority given it as prime broker to close out positions, which was standard in the industry, was sufficient “control” to trigger transferee status.