In Kravitz v. Samson Energy Co., United States Bankruptcy Court District of Delaware Judge Brendan L. Shannon held that if a debtor qualifies as a financial participant, then transfers by a debtor in connection with a safe harbor-protected securities contract may be protected from avoidance, even if the recipient/transferee does not qualify as a financial participant.

Bankruptcy Code  11 U.S.C. § 546(e) provides that margin payments, settlement payments and transfers by or to (or for the benefit of) a financial institution, financial participant, or another protected party in connection with a securities contract may not be avoided as preferential or constructively fraudulent transfers. Generally, the focus of case law to date has been whether the recipient or beneficiary of the transfer is a qualifying protected party; e.g., a "financial participant" (an entity conducting certain high-value transactions). In Samson, Judge Shannon held that the plain text and structure of the definition of "financial participant" does not exclude debtors, and Section 546(e) may protect transfers by a debtor, if it qualifies as a financial participant, whether or not the recipient/transferee is a financial institution.

The decision rejects an SDNY holding that a debtor does not qualify as a financial participant (see In re Tribune Co. Fraudulent Conveyance Litig., No. 11 MD2296 (DLC), 2019 WL 1771786, at *9 (S.D.N.Y. Apr. 23, 2019)).

Judge Shannon denied summary judgment on the questions of whether the debtors satisfied the Bankruptcy Code requirements to be treated as a financial participant and whether other debtor guarantors/transferors are financial participants. The Court concluded that more facts were required before it could determine whether safe harbor applies.

Commentary The holding in this case is potentially quite significant because a recipient of a transfer who does not qualify as a financial participant nonetheless may benefit from the Bankruptcy Code safe harbor protection against transfer avoidance when it enters into a securities contract with a financial participant.

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