On May 2, 2023, the U.S. District Court for the Southern District of Indiana reversed a bankruptcy court, finding that Section 546(e) of the Bankruptcy Code preempts state law fraudulent transfer claims and that the definition of securities contracts under Section 546(e)’s safe harbor is not limited solely to contracts involving publicly held securities. Sun Capital Partners, VI, L.P. entered into a stock purchase agreement to acquire all of the stock of BWGS, LLC, a garden product distributor. BMO Harris Bank provided a bridge loan to help fund the purchase, and Sun Capital guaranteed the loan. BWGS repaid the bridge loan with a cash payment and proceeds from additional loans it obtained. After BWGS later filed for Chapter 7 bankruptcy, its trustee sued BMO and Sun Capital, claiming that BWGS’s repayment benefitted the guarantors by relieving them of their “credit enhancement commitments,” constituting avoidable fraudulent transfers under the Bankruptcy Code and state law. BMO and Sun Capital moved to dismiss, arguing that Section 546(e) preempted state law claims, and it provides a safe harbor because the transfers were made in connection with securities contracts.
The Bankruptcy Court denied the motions, concluding Section 546(e) did not preempt state law claims and its safe harbor did not apply to transactions involving private securities. On appeal, the district court held that the language of Section 546(e) is not limited to publicly-held securities. Therefore, the stock purchase agreement, bridge loan, and guaranty were securities contracts falling within Section 546(e)’s safe harbor. The district court also found, as a matter of first impression, that Section 546(e) preempts state law claims such that, even if the safe harbor would not apply under state law, it does under the Code.
The case is BMO Harris Bank v. PETR, No. 1:22-cv-01742 (S.D. Ind. May 2, 2023). BMO and Sun Capital are represented by Taft Stettinius & Hollister LLP and Baker & McKenzie LLP. The trustee is represented by Kilpatrick Townsend & Stockton LLP and Rubin & Levin, P.C. The opinion is available here.
