The Seventh Circuit Court of Appeals recently issued a ruling in Petr v. BMO Harris Bank N.A., affirming a district court decision regarding the application of the Bankruptcy Code’s safe harbor provision under section 546(e). This provision aims to prevent the avoidance of certain securities, commodity, or forward-contract payments in bankruptcy cases. The court’s ruling addressed key issues surrounding the scope and application of the safe harbor, particularly in relation to non-public securities transfers.
The case involved a chapter 7 trustee seeking to avoid a constructively fraudulent transfer made by a debtor shortly after it was acquired in a leveraged buy-out (LBO). The trustee’s claim was based on state law and section 544 of the Bankruptcy Code. The Seventh Circuit affirmed the district court’s decision, which broadly construed the section 546(e) safe harbor to bar the trustee’s claim. The court agreed that the safe harbor is not limited to transactions involving publicly traded securities and that it preempted the trustee’s claim to recover the value of the transfer under section 544 and state law.
Section 546(e) of the Bankruptcy Code imposes limitations on a trustee’s avoidance powers, specifically concerning certain preferential and fraudulent transfers. The provision prevents the avoidance of pre-bankruptcy transfers that are settlement payments made by or to financial institutions or in connection with securities contracts. The safe harbor under section 546(e) bars avoidance claims unless the transfer was made with the actual intent to defraud creditors.
The court’s ruling in Petr v. BMO Harris Bank N.A. clarified several key aspects of the safe harbor provision. It affirmed that the safe harbor applies to transactions involving private securities, not just publicly traded securities. The court also emphasized that the term “securities contract” should be interpreted broadly, encompassing contracts involving privately held securities. Additionally, the ruling confirmed that section 546(e) preempts state law claims seeking recovery of transfers protected under the safe harbor.
Overall, the Seventh Circuit’s decision in Petr v. BMO Harris Bank N.A. provides important insights into the interpretation and application of the section 546(e) safe harbor provision in bankruptcy cases. The ruling sets a precedent for future cases involving similar issues and contributes to the ongoing debate surrounding the scope of the provision. The decision underscores the importance of understanding the nuances of bankruptcy law and the implications of safe harbor provisions in complex financial transactions.
