Contemporary Industries Corp. v. Frost, 564 F.3d 981 (8th Cir. 2009)

 In Contemporary Industries Corp. v. Frost, the debtor, Contemporary Industries Corporation, and the official committee of unsecured creditors sought to avoid payments made to members of the Frost family, the debtor’s former shareholders. The payments were made as part of a leveraged buyout in December 1995 in which the Frosts sold their shares to Contemporary Industries Holding (CIH), a holding corporation created to acquire the debtor. The transaction was consummated when CIH deposited approximately $26.5 million with First National Bank of Omaha (First National) to be disbursed to the Frosts, and the Frosts deposited their shares with First National.

 In February 1998, Contemporary Industries Corporation filed for bankruptcy under chapter 11 of the Bankruptcy Code. The plaintiffs alleged that the payments to the Frosts were fraudulent transfers and avoidable under applicable state law. The Frosts moved for summary judgment, asserting that the payments were exempt from avoidance under Bankruptcy Code section 546(e) (1999), which immunizes from avoidance all “transfer[s] that [are] … settlement payment[s] … made by or to a … financial institution.” The bankruptcy court agreed and granted summary judgment in favor of the Frosts, which the district court affirmed.

 The plaintiffs appealed, arguing that the payments were not settlement section 546(e), because the securities that were transferred were privately held and section 546(e) only applied to the settlement of the transfers in connection with public securities. The plaintiffs argued that the legislative history of section 546(e) indicates that it was enacted to protect the stability of the public financial markets and, thus, the transfer in question was beyond the scope of section 546(e)’s protection. The plaintiffs also argued that section 546 was not applicable because the payments were not “made by or to a … financial institution,” since First National never obtained a beneficial interest in the funds.

 The Court rejected the plaintiffs’ arguments and ruled that the settlement in question was indeed within the scope of settlements exempt from avoidance under section 546(e). In its analysis, the Court relied on Bankruptcy Code section 741(8)’s definition of “settlement payment,” which includes “a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade.” The Court noted that while it had not previously considered whether payments for privately-held securities fell within that definition, three other circuits (the Third, Ninth and Tenth) concluded that section 741(8) is “extremely broad.” The Court further stated that notwithstanding section 546(e)’s legislative history, “where statutory language is plain and does not lead to an absurd result, we must enforce it as written.”  The Court found that nothing in the statutory language indicated that section 546(e) exclusively protects settlements in connection with publicly held securities, and, therefore, section 546(e) applies to payments for privately held securities as well.

 The Court then addressed the plaintiffs’ second basis for appeal: that First National did not constitute a “financial institution” because it did not receive a beneficial interest in the funds. The court noted a split among circuits, with the Eleventh Circuit requiring that that the financial institution receive some beneficial interest in the transferred funds in order for the settlement to be protected from avoidance under section 506(e). The Court, however, agreed with the Third Circuit that the plain language of the statute contemplates no such condition. Thus, the Court affirmed the lower courts’ holdings.

 Commentary: The holding in Contemporary Industries is consistent with recent opinions rejecting avoidance in the face of an argument that the transfer in questions did not directly impact financial markets. For example, in Hutson v. E.I du Pont de Nemours and Co., Inc. (In re National Gas Distributors, LLC), 556 F.3d 247 (4th Cir. 2009), which was reported in the March 2009 issue of the Avoidance Action Report, the court ruled that an ordinary supply contract could be a “commodity forward agreement,” which is exempt from avoidance, notwithstanding that the supply contract did not pertain to publicly traded commodities.