The Bottom Line

In a December 2020 decision, a Delaware Bankruptcy Court, in Kravitz v. Samson Energy Co. (In re Samson Res. Corp.), Nos. 15-11934 (BLS), 17-51524 (BLS), 2020 Bankr. LEXIS 3575, at *6 (Bankr. D. Del. Dec. 23, 2020), held that the term "financial participant" as used in the safe harbor provision of Section 546(e) of the Bankruptcy Code does not necessarily exclude debtors. The Delaware Bankruptcy Court's holding split from a 2019 S.D.N.Y. decision.1

What Happened?

Statutory Background

Section 546(e) of the Bankruptcy Code, known as the "safe harbor" provision, shields specified types of payments from a bankruptcy trustee's avoidance powers, including certain transfers "made by" a "financial participant" in connection with a "securities contract." The scope of Section 546(e) has been the subject of extensive debate.2 In re Samson Resources Corp. presented the specific question of whether a debtor can be considered a "financial participant" for the purposes of Section 546(e). In short, a "financial participant" is defined by Bankruptcy Code § 101(22A) as (A) an entity, (B) who has one or more required agreements, (C) in the required amounts, (D) with "the debtor or any other entity (other than an affiliate)."3

Case Background

In 2011, Samson Investment Company and its related entities entered into a stock purchase agreement to sell the company via a leveraged buyout (the LBO). Samson Resources Corporation (Samson) was formed. Four years later, Samson and its related entities filed petitions under Chapter 11 of the Bankruptcy Code. In 2017, the Bankruptcy Court confirmed Samson's Chapter 11 plan, which established a settlement trust. Peter Kravitz was appointed settlement trustee (the Trustee) and tasked with maximizing recoveries for unsecured creditors asserting more than $3 billion of substantially unpaid claims. In September 2017, the Trustee filed the adversary proceeding at hand, seeking to avoid fraudulent transfers made in connection with the LBO under Bankruptcy Code Sections 544 and 550. The Samson defendants filed their answer in 2018, which included the affirmative defense that some or all of the transfers sought to be avoided by the Trustee were protected from avoidance under 11 U.S.C. § 546(e). In March 2020, the Samson defendants filed a summary judgment motion. The Trustee filed a cross-motion, arguing that the safe harbor defense is not available to debtors. In December 2020, the Bankruptcy Court for the District of Delaware issued its opinion on the matter.

Delaware Bankruptcy Court Decision

Judge Brendan Shannon sided with the Samson defendants in concluding that the definition of "financial participant" as used in Section 546(e) does not exclude debtors.

The Trustee had argued that the definition of "financial participant" cannot include the debtor itself, since the term is defined as "an entity" that holds requisite contracts in requisite amounts with "the debtor or any other entity." 11 U.S.C. § 101(22A) (emphasis added). If a debtor could be considered a "financial participant," the "with the debtor" language in Bankruptcy Code § 101(22A) would be redundant or superfluous because Congress only needed to state that the agreements could be "with any other entity." In contrast, the Samson defendants had argued that reading § 101(22A) to exclude debtors seeks to rewrite the definition by adding language (i.e., "an entity other than the debtor") or ignores the plain language that the entity may have the required agreements "with the debtor or any other entity (other than an affiliate)."

A bankruptcy court in the Southern District of New York previously agreed with an argument similar to the Trustee's, noting that (i) "[i]f the 'entity' described in the first part of the definition could include the 'debtor,' the inclusion of the term 'debtor' in the second part would be puzzling" and (ii) "if the term 'entity' is meant to include the debtor, then it would be redundant to refer to 'the debtor,' distinguishing it from 'any other entity' in the second part of the definition."4 Conversely, a bankruptcy court in the Middle District of Florida rejected an argument that the definition of "financial participant" in the context of Section 546(g) excludes debtors, writing that "there is no express language in § 101(22A) indicating the definition includes only entities other than the debtor."5

The Delaware Bankruptcy Court, following its view of the plain language of the statute, sided with the latter view. The Court explained that other defined terms in the Bankruptcy Code clearly exclude the debtor. For example, "swap participant" and "repo participant" both require the participant to have requisite agreements with the debtor,6 but the definition of "financial participant" expands that language to include entities who have requisite agreement "with the debtor or any other entity." Based on this, the Delaware Bankruptcy Court determined that the "plain text and structure of the Code's definition of financial participate does not exclude debtors."

Why This Case Is Interesting

The scope of the Section 546(e) safe harbor will continue to be the subject of noteworthy debate. In 2018, the Supreme Court addressed a different aspect of Section 546(e), holding that the safe harbor does not apply merely because the challenged transfer is completed through a financial institution.7 Now, bankruptcy courts in Delaware and the Southern District of New York disagree about the correct interpretation of the definition of "financial participant." As neither opinion is precedential, it remains to be seen how this dispute will unfold.


1.In re Tribune Co. Fraudulent Conveyance Litig., No. 11md2296 (DLC), 2019 U.S. Dist. LEXIS 69081, at *23 (S.D.N.Y. Apr. 23, 2019)

2 Click here and here to view prior Kramer Levin posts discussing the scope of Section 546(e).

3. The Bankruptcy Code's definition of a financial participant in section 101(22A) is:

"(A) an entity that, at the time it enters into a securities contract, commodity contract, swap agreement, repurchase agreement, or forward contract, or at the time of the date of the filing of the petition, has one or more agreements or transactions described in paragraph (1), (2), (3), (4), (5), or (6) of section 561(a) with the debtor or any other entity (other than an affiliate) of a total gross dollar value of not less than $1,000,000,000 in notional or actual principal amount outstanding (aggregated across counterparties) at such time or on any day during the 15-month period preceding the date of the filing of the petition, or has gross mark-to-market positions of not less than $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) at such time or on any day during the 15-month period preceding the date of the filing of the petition; or

"(B) a clearing organization (as defined in section 402 of the Federal Deposit Insurance Corporation Improvement Act of 1991)."

4 In re Tribune Co. Fraudulent Conveyance Litig., No. 11md2296 (DLC), 2019 U.S. Dist. LEXIS 69081, at *23.

5 Luria. v. Hicks (In re Taylor Bean & Whitaker Mtg. Corp.), 2017 WL 4736682, *6 (Bankr. M.D. Fla. Mar. 14, 2017) (citing Puerto Rico v. Franklin California Tax-Free Trust, 136 S.Ct. 1938, 1949 (2016)).

6 11 U.S.C. § 101(53C) ("The term "swap participant" means an entity that, at any time before the filing of the petition, has an outstanding swap agreement with the debtor."); 33 11 U.S.C. § 101(46) ("The term 'repo participant' means an entity that, at any time before the filing of the petition, has an outstanding repurchase agreement with the debtor.").

7 Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018).

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