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Delaware Bankruptcy Court Issues Decision on Whether a Debtor Can Be a “Financial Participant”

We have blogged previously about section 546(e), the Bankruptcy Code’s safe harbor for certain transfers otherwise subject to avoidance as preferences or fraudulent transfers.  See 11 U.S.C. § 546(e).  Among the transfers protected by the section 546(e) safe harbor are transfers by or to a “financial participant” made “in connection with a securities contract.”  Id.  The Bankruptcy Code in turn defines “financial participant” to mean an entity that has certain financial agreements or transactions of “total gross dollar value of not less than $1,000,000,000 in notional or actual principal amount outstanding” or “gross mark-to-market positions of not less than $100,000,000 . . . in one or more such agreements or transactions.”  11 U.S.C. § 101(22A)(A).  In both cases, the “agreements or transactions” must be “with the debtor or any other entity.”  Id.  Since an entity cannot engage in an agreement or transaction with itself, does the language providing that such agreements and transactions must be “with the debtor or any other entity” mean that the debtor cannot be a financial participant”?  On December 23, 2020, Judge Brendan Shannon of the United States Bankruptcy Court for the District of Delaware ruled that debtors could be financial participants, disagreeing with a previous decision from the Southern District of New York.

Samson Investment Company and its related entities (“Samson”) was an Oklahoma-based energy company.  In November 2011, Samson was sold in an LBO to Samson Resources Company, f/k/a Tulip Acquisition Corp. (“Samson Tulip”), a newly created entity owned by the purchasers.  As part of the LBO, Samson Investment Company, Samson Tulip, and other Samson entities transferred cash and other assets to the selling shareholders.  In September 2015, Samson Tulip and other Samson entities filed for bankruptcy.  The confirmed plan set up a settlement trust, and in September 2017, the trustee of the settlement trust (the “Trustee”) filed an adversary proceeding seeking to avoid certain transfers to the selling shareholders made in connection with the LBO.  In March 2020, the defendants filed a motion for summary judgment on the ground that the Trustee’s claims were barred by section 546(e).

Defendants argued that Samson Investment Company was a financial participant by virtue of its swap agreements.  The other transferring entities, further, were financial participants because they guaranteed Samson Investment Company’s swap agreements.  Thus, the transfers were made “by” financial participants in connection with a securities contract—the LBO’s stock purchase agreement.  The Trustee responded that the debtor transferors could not be financial participants because the definition of “financial participant” excludes debtors; the transferors, other than Samson Investment Company, could not be financial participants based simply on guaranteeing swap agreements; and certain material disputes of fact precluded granting summary judgment.

The court denied the motion for summary judgment, but rejected the Trustee’s argument that the definition of “financial participant” excludes debtors.  The Trustee argued that if a debtor could be a financial participant, the inclusion of “the debtor” as a potential counterparty in the definition of “financial participant” would be puzzling and superfluous, since a debtor cannot have an agreement or transaction with itself and Congress could have simply specified that the agreements and transactions could be with “any other entity.”  The Trustee’s analysis aligned with In re Tribune Company Fraudulent Conveyance Litigation, 2019 WL 1771786 (S.D.N.Y. Apr. 23, 2019), which similarly held that a debtor could not be a financial participant.  The court rejected this argument, disagreeing with the S.D.N.Y. decision.  The court noted that no express language barred debtors from being financial participants, and while other provisions of the Bankruptcy Code required that particular agreements be with the debtor, the definition of “financial participant” also permitted them to be with “any other entity.”  The court thus concluded that the plain text of the definition does not exclude debtors.  (In a footnote, the court also rejected the Trustee’s argument that this reading was inconsistent with legislative purpose, noting that the legislative purpose of section 546(e) was to avoid the disruption that could be caused by unwinding payments from bankrupt firms participating in the financial markets, and the court’s reading of the definition of “financial participant” comported with that purpose.)

Nonetheless, the court denied summary judgment, finding that there remained genuine disputes as to material facts about the size of Samson Investment Company’s swap agreements and the circumstances of the guarantees of those swap agreements by other Samson entities.