Bevan et al v. Rushton
Filing
39
MEMORANDUM DECISION granting 22 Motion for Partial Summary Judgment; denying 26 Motion for Partial Summary Judgment. Signed by Judge Clark Waddoups on 1/23/14. (jlw)
IN THE UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, CENTRAL DIVISION
In re: D.E.I. SYSTEMS, INC. aka DELTA
FIBERGLASS, aka DELTA EQUIPMENT
INDUSTRIAL SYSTEMS, INC., aka
DELTA ENVIRONMENTAL, INC.
Debtor.
MEMORANDUM DECISION AND
ORDER
KENNETH A. RUSHTON, in his capacity as
Trustee,
Plaintiff,
Case No. 2:11-cv-00343-CW
Bankr. Case No. 07-24224 (A.P. 09-02082)
Judge Clark Waddoups
vs.
DAVID BEVAN, an individual; and
BENEDICT BICHLER, an individual,
Defendants.
INTRODUCTION
This matter is before the court on defendants David Bevan (“Bevan”) and Benedict
Bichler (“Bichler”) (collectively “Defendants”) Motion for Partial Summary Judgment (Dkt. No.
22). Defendants move to dismiss Plaintiff Kenneth A. Rushton’s (“Plaintiff” or “Trustee”) First
and Second Claims for Relief as asserted in the Amended Complaint filed with the Bankruptcy
Court on January 12, 2012 (Bankr. Court Dkt. No. 106). In response, Plaintiff filed a Motion to
Strike and a Cross Motion for Partial Summary Judgment (Dkt. No. 26). On November 1, 2013
the court heard oral argument on the motions and denied the Motion to Strike. The remaining
two motions were taken under advisement.
For the reasons stated herein, the court now GRANTS Defendants’ Motion for Partial
Summary Judgment and DENIES Plaintiff’s Cross Motion for Partial Summary Judgment.
FACTUAL AND PROCEDURAL BACKGROUND
A. Procedural Background
This case comes to the court via the U.S. Bankruptcy Court.1 In the original Bankruptcy
Court Proceedings, Plaintiff asserted four Claims for Relief. Both Plaintiff and Defendants filed
Motions for Partial Summary Judgment on the First and Second Claims for Relief. The
Bankruptcy Court denied Defendants’ Motion for Partial Summary Judgment and granted
Plaintiff’s Cross Motion for Partial Summary Judgment (Bankr. Court Dkt. Nos. 52-54).
Defendants then sought leave to file an interlocutory appeal of that ruling to the U.S. District
Court (Bankr. Court Dkt. Nos. 58-60). Defendants also subsequently filed a Motion for Partial
Summary Judgment on the Third and Fourth Claims for Relief (Bankr. Court Dkt. No. 65).
Following a hearing on June 23, 2011, the court deferred ruling on Defendants’ Motion
for Interlocutory Appeal, pending the Bankruptcy Court’s decision on partial summary judgment
of the Third and Fourth Claims for Relief (Dkt. No. 9). On November 29, 2011, the Bankruptcy
Court entered an order granting Defendants’ Motion for Partial Summary Judgment on the Third
and Fourth Claims, and dismissing with prejudice claims Three and Four, to the extent they were
based on Utah Code Ann. § 25-6-6 (Bankr. Court Dkt. Nos. 92 and 99). To the extent the claims
were not dependent on state law, the order left them untouched. Following that decision,
Defendants sought withdrawal of the bankruptcy reference and Plaintiff consented. In an order
dated November 21, 2012, the court accepted a complete withdrawal of the reference, agreeing
to hear the case de novo, thereby rendering moot the Motion for Interlocutory Appeal (Dkt. No.
1
The original case number for these proceedings is Bankr. Case No: 07-24224 (A.P. 09-02082). As
explained, infra, reference for the case was withdrawn, and the Bankruptcy Court Docket was filed as Dkt. No. 21 in
this case, on April 22, 2013.
2
16). On April 19, 2013, the withdrawn case was consolidated with the instant matter (No. 2:11cv-00343) and this case was designated the lead case.
On May 17, 2013, in the newly consolidated proceedings, Defendants filed a Motion for
Partial Summary Judgment on the First and Second Claims for Relief (Dkt. No. 22). In response,
on June 17, 2013, Plaintiff filed a Motion to Strike and a Cross Motion for Partial Summary
Judgment (Dkt. Nos. 25 and 26). On November, 1, 2013, the court heard oral argument on all
three motions and denied from the bench Plaintiff’s Motion to Strike (Dkt. No. 35). The two
remaining Motions for Partial Summary Judgment are now before the court.
B. Factual Background
Up until May 2004, Defendants owned 100% of the outstanding stock of Delta
Equipment Systems, Inc., a Utah Corporation doing business as DEI Systems, Inc. (“DEI-UT”).
In May 2004, Defendants entered into a “Purchase Agreement,” consisting of a series of
transactions whereby Defendants sold 44.843% of their shares of DEI-UT to Environmental
Services Group (“ESG”) for the purchase price of $4,000,000 and DEI-UT redeemed an
additional 43.946% of Defendants’ shares of DEI-UT for $3,920,000 (“the Redemption
Amount”), with the Redemption Amount to be paid by DEI-UT at closing. Payment was to be
made in cash, by certified check or wire transfer of immediately available funds to the account,
or accounts, designated by Defendants. At closing, Defendants delivered the redeemed shares to
DEI-UT.
To facilitate the Purchase Agreement, ESG made a secured loan2 to DEI-UT in the total
amount of $7,520,000.3 This amount included the $3,920,000 Redemption Amount. ESG wired
2
Defendants dispute the characterization of the disbursement of funds as a “loan” from ESG to DEI-UT,
instead contending that it was “an infusion of capital into DEI-UT by its new majority shareholder, ESG, and the
‘loan’ should be recharacterized as an equity infusion” (Defendants’ Memorandum in Opposition to Trustee’s Cross
Motion for Partial Summary Judgment, Dkt. No. 28 at 3). However, as Defendants note, “the determination whether
3
the $7,520,000 from its Union Bank of California account to a Wells Fargo Bank trust account
belonging to Ray, Quinney & Nebeker, DEI-UT’s attorneys. Under the terms of the Purchase
Agreement, and pursuant to Bichler’s instructions, $2,088,576 of the Redemption Amount funds
was then wired from the Wells Fargo account to Bichler’s account at Barnes Bank. Under the
terms of the Purchase Agreement, and pursuant to instructions from Bevan, a check in the
amount of $1,831,124 (also from the Redemption Amount funds) made payable to Bevan was
drawn on the Wells Fargo Account.
Finally, under the Purchase Agreement, DEI-UT merged into D.E.I. Systems, Inc.,
(“D.E.I.”). More than three years later, on September 7, 2007, D.E.I. filed for Chapter 11
bankruptcy protection. On April 15, 2008, D.E.I. converted its case to a proceeding under
Chapter 7 and Plaintiff (Rushton) was appointed Trustee. On February 25, 2009, Plaintiff
commenced adversary proceedings against Defendants, alleging fraudulent transfer(s) in order to
recover the funds paid to them by DEI-UT, specifically the $2,088,576 paid to Bichler and the
$1,831,124 paid to Bevan.
ANALYSIS
A. Standard of Review
The court shall grant summary judgment if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law. The
court should state on the record the reasons for granting or denying the motion. Fed. R. Civ. P.
56(a), (c)(2).
funds were a ‘loan’ or an equity infusion is not relevant to the Section 546(e) defense, so this dispute between the
parties does not give rise to a material disputed fact” for the purpose of ruling on the motions before the Court (id).
3
The difference between the $7,920,000 total purchase price and the actual transfer amount of $7,520,000
is the result of a $400,000 holdback provided for in the Purchase Agreement (Dkt. No. 22, at IV Note 2).
4
For purposes of this Motion and Cross Motion, the parties do not dispute the facts above,
except as provided at note 2, supra, and note 4, infra (Dkt. No. 22, at iii-x; Dkt. No. 24, at 7-8).4
Because there is no genuine dispute as to any material fact, all that remains for this court to
determine is which of the two parties is entitled to judgment as a matter of law on their
respective motions.
B. Legal Principles
Under 11 U.S.C. § 544, a Trustee has the rights and powers to avoid a broad range of
property transfers made, or obligations incurred, by a debtor. 11 U.S.C. § 546(e) establishes a socalled “safe harbor” exemption, which places certain payments and transactions beyond the
reach of the Trustee. Section 546(e) reads:
Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the
trustee may not avoid a transfer that is a margin payment, as defined in section
101, 741, or 761 of this title, or settlement payment, as defined in section 101 or
741 of this title, made by or to (or for the benefit of) a commodity broker, forward
contract merchant, stockbroker, financial institution, financial participant, or
securities clearing agency, or that is a transfer made by or to (or for the benefit
of) a commodity broker, forward contract merchant, stockbroker, financial
institution, financial participant, or securities clearing agency, in connection with
a securities contract, as defined in section 741(7), commodity contract, as defined
in section 761(4), or forward contract, that is made before the commencement of
the case, except under section 548(a)(1)(A) of this title. 11 U.S.C. § 546(e)
(emphasis added).
In determining whether a transaction falls within the ambit of the “safe harbor,” the Tenth Circuit
has applied the plain language of § 546(e) and construed it broadly. Only when application of the
plain language is absurd or unreasonable may the Court look beyond the plain language of the
statute. Kaiser Steel Corp. v. Pearl Brewing Co. (In re Kaiser Steel Corp.), 952 F.2d 1230, 1240
(10th Cir. 1991), cert denied 505 U.S. 1213 (1992). Not only is the statute as a whole to be
4
Defendants “dispute that DEI-UT was rendered insolvent on May 14, 2004,” as alleged by Plaintiff. (Dkt.
No. 28, at 4). However, as with Defendants’ other disputation of fact, they readily note that whether or not DEI was
insolvent on that date is irrelevant to the proper application and interpretation of § 546(e) and thus is not a genuine
dispute of material fact for the purpose of deciding these motions.
5
understood according to its plain language, but the individual terms contained in the statute
should be interpreted plainly. Id. at 1237 (the term “settlement payment” should be interpreted
“as it is plainly understood within the securities industry”); see also Id. at 1240 (“On its face, the
statute is clear. The statute exempts payments made ‘by or to’ a stockbroker, financial institution,
or clearing agency. Again, unless there is some reason to believe the clear application is absurd
or otherwise unreasonable, we can leave our inquiry at that.”).
Following the plain language of § 546(e), there are at least two types of property transfers
which cannot be avoided. The first type of unavoidable transfer is a payment (either a “margin
payment” or a “settlement payment”) made by or to or for the benefit of one of several specified
entities: a commodity broker, forward contract merchant, stockbroker, financial institution,
financial participant, or securities clearing agency. The second type of unavoidable transfer is
any transfer made by or to or for the benefit of the same specified entities, that is made in
connection with a securities contract, a commodity contract, or a forward contract. 11 U.S.C. §
546(e) (see statutory language with emphasis added, supra).
The term “settlement payment” means “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.” 11
U.S.C. § 741(8). This definition of settlement payment, as applied by the courts, is broad enough
to encompass a wide range of payments and transactions. Kaiser Steel, 952 F.2d at 1237. See
also In re Plassein Int’l Corp., 590 F.3d 252 (3rd Cir. 2009) (even settlement payments which do
not come through the “settlement system” are covered by § 546(e) so payments made by wire
transfer directly to shareholder’s bank accounts fell under safe harbor); Enron Creditors
Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011) (safe harbor has a broad
6
catchall of “any other similar payment”); AP Services LLP v. Silva, 483 B.R. 63 (S.D.N.Y. 2012)
(payments made by wire transfer to defendant’s bank accounts in the context of a securities
transaction fell under the safe harbor, despite the fact that the financial institution was only an
intermediary and took no beneficial interest in the transaction).
The term “financial institution” is defined in 11 U.S.C. § 101(22)(A) as
Federal reserve bank, or an entity that is a commercial or savings bank, industrial
savings bank, savings and loan association, trust company, federally-insured
credit union, or receiver, liquidating agent, or conservator for such entity and,
when any such Federal reserve bank, receiver, liquidating agent, conservator or
entity is acting as agent or custodian for a customer (whether or not a “customer”,
as defined in section 741) in connection with a securities contract (as defined in
section 741).
The meaning of the phrase “by or to” in § 546(e) was directly considered by the Tenth
Circuit in Kaiser Steel. There, the Court held that “by or to” means just that – payments made
either by or to a financial institution. The understanding and application of the phrase does not
generally require careful parsing or close semantic scrutiny.5 “On its face, the statute is clear.
The statute exempts payments made ‘by or to’ a stockbroker, financial institution, or clearing
agency. Again, unless there is some reason to believe the clear application is absurd or otherwise
unreasonable, we can leave our inquiry at that.” Kaiser Steel, 952 F.2d at 1240.
The term “securities contract” is defined in 11 U.S.C. § 741(7)(A) to include “a contract
for the purchase, sale, or loan of a security . . . or any other agreement or transaction that is
similar to an agreement or transaction referred to in this subparagraph” (emphasis added).
Finally, as explained, supra, unless the result would be absurd or otherwise
unreasonable, the court applies these statutorily and judicially established definitions to
5
While Kaiser Steel was decided in the context of publicly traded stock and the settlement payments at
issue here are private, there is no reason to conclude that “settlement payments” and “by or to” are unambiguous in
the public securities arena, but somehow ambiguous when dealing with privately traded securities. See, e.g., In re
QSI Holdings, Inc., 571 F.3d 545, 549 (6th Cir. 2009) (rejecting limitations on the definition of “settlement
payments” which would exclude transactions in privately held securities).
7
the facts of the present case. Kaiser Steel, 952 F.2d at 1237. If, using these definitions, a
transaction falls into one of the two types of property transfers identified above, it comes
within the safe harbor exception and may not be avoided by a trustee seeking to exercise
authority under 11 U.S.C. §§ 544, 546(e).
C. Application
Plaintiff, as trustee, is attempting to exercise his authority under § 544 to avoid the nearly
$4 million in payments made to Defendants by DEI-UT. Because the payments fall within the
plain language of the safe harbor exception, the payments may not be avoided. Moreover,
because the application of the plain language of § 546(e) produces a result which is neither
absurd nor unreasonable, the court need not go beyond the language of the statute to make its
determination.
The payments made to Bevan and Bichler qualify for the safe harbor exemption under both
categories of property transfers identified by the court. The payments were settlement payments
made by or to financial institutions. The payments were also transfers made by or to a financial
institution in connection with a securities contract. Therefore, the payments may not be avoided.
The payments to Bevan and Bichler were settlement payments. Under 11 U.S.C. §
741(7)(A) both a “partial settlement payment” and a “final settlement payment” constitute a
“settlement payment.” The payment of $1,831,124 to Bevan and $2,088,576 to Bichler were
partial settlement payments in that they represented a portion of the $7,520,000 total paid to
Defendants in exchange for their shares. In a separate, but related transaction, Defendants also
sold 44.843% of their DEI-UT shares to ESG. Thus, the $3,920,000 in payments from the
Redemption Amount does not represent a complete settlement payment, but plainly constitutes a
“partial settlement payment.” The payments were also final settlement payments, in that they
8
represented the final payment in completion of the Purchase Agreement (the first being the sale
of 44.843% of their shares to ESG). There were no other payments to be made under the
Purchase Agreement, and, therefore, the payments were final. Because the payments were both
partial and final settlement payments, they qualify as payment settlements for the purposes of §
546(e).6
Moreover, in light of the Tenth’s Circuit’s broad reading of “settlement payment” in
Kaiser Steel, as well as other courts’ applications of the term in In re Plassein, and Enron
Creditors Recovery Corp., it is clear that even if the payments did not come through a formal
“settlement system,” they still constitute settlement payments. Likewise, payments of the sort
made to Bevan and Bichler under the Purchase Agreement are not uncommon and easily fall
within the broad catchall of § 546(e) (via 11. U.S.C. § 741(8)).
The payments at issue were made both by and to at least one financial institution.
Payments in the amounts of $1,831,124 and $2,088,576, respectively, were made to Bevan and
Bichler’s bank accounts from the total Redemption Amount of $3,920,000. The Redemption
Amount was a portion of the funds which were originally wired from Union Bank of California
to a Wells Fargo Bank trust account. Bichler’s individual payment was then wired from Wells
Fargo Bank to Barnes Bank and a check was drawn on the Wells Fargo Bank account in order to
6
Trustee Rushton objects to such a plain interpretation of the term “settlement payments,” relying heavily
on the Bankruptcy Court’s determination that the payments were not settlement payments because they were not “of
the type commonly used in the securities trade.” The primary reason for this determination was that the payments
were for the private, rather than public sale of securities. As noted at n.5, private security sales have been widely
accepted as “settlement payments” by the courts. Moreover, the additional requirement of “indicia” of commonality
espoused by the Bankruptcy Court are not requirements in any sense, but mere factors which the Sixth Circuit used
to guide its reasoning in ultimately finding that private securities fell within the safe harbor provision. Equally
readily applicable is the guidance from cases such as In re Resorts International, Inc., 181 F.3d 505 (3rd Cir. 1999),
which held that settlement payments include “almost all securities transactions,” and In re Contemporary Industries
Corp., 564 F.3d 981, 986 (8th Cir. 2009), noting that “[n]othing in the relevant statutory language suggests that
Congress intended to exclude these payments from the statutory definition of ‘settlement payment’ simply because
the stock at issue was privately held.” Moreover, there is nothing to suggest that smaller transfers such as these (a
“mere” $3.92 million) are not common in the securities trade. Kaiser Steel suggests, and the plain language nearly
compels, a finding that the payments to Bevan and Bichler constitute “settlement payments” in every sense.
9
pay Bevan. These payments were made both by, and to, at least one financial institution under
11 U.S.C. § 101(22)(A) – Wells Fargo Bank. Because the payments were settlement payments,
made by or to a financial institution, they fall within the safe harbor of § 546(e).
The payments also qualify for the safe harbor because they are transfers made by or to a
financial institution in connection with a securities contract. This application of § 546(e) is even
more plain than the first. Regardless of whether or not the payments made to Bevan and Bichler
were settlement payments, there is no disputing that they were transfers. ESG’s money was
wired from Union Bank of California to Wells Fargo, and then from Wells Fargo to Barnes Bank
and finally, via a check, to Bevan directly. As noted above, these transfers were made both by
and to at least one financial institution: Wells Fargo Bank. Finally, all of these transfers were
made as part of a securities contract – namely the Purchase Agreement – whereby Defendants
transferred roughly 88% of their shares to ESG and DEI-UT in exchange for a total of
$7,520,000. At closing, the payments were made and the shares delivered. This plainly qualifies
as “a contract for the purchase [or] sale…of a security.” At the very least, it is “an agreement or
transaction that is similar to” a contract for the purchase or sale of a security, thus satisfying 11
U.S.C. § 741(7)(A).7 Therefore, because the payments were transfers made both by and to
financial institutions in connection with a securities contract, they cannot be avoided.
Trustee Rushton objects that the payments were not made to, but rather through the
financial institutions, and that because the financial institutions were merely “conduits” for the
7
The Bankruptcy Court also concluded that, because the banks were not “involved with the substance of
the purchase agreement” and because “any bank could have facilitated the payments, because the payments could
have been made in cash, [and] the payments could [even] have been effected without the involvement of any bank”
that the transfers were not made in connection with a securities contract. The Bankruptcy Court feels that “in
connection with” requires more than merely facilitating a payment between two parties. This is little more than a rehashing of the conduit argument discussed infra, and overlooks the fact that the primary role of banks “in connection
with” securities contracts is to facilitate payment. The plain language of the statute does not require that the bank be
“essential to the purchase agreement” as the Bankruptcy Court claims, only that it make, among other alternatives, a
“payment” or “transfer” “in connection with” a securities contract. Wells Fargo has done just that.
10
transaction, the safe harbor exemption should not apply. Rushton attempts to factually
distinguish the cases which reject the “mere conduit” analysis which he proposes. This attempt
fails, and while there is some split authority, Rushton concedes that the Second, Third, Sixth, and
Eighth Circuits all “would apply the safe harbor even if the financial institution is merely a
conduit.”8 Rushton also attempts to distinguish cases which reject the conduit theory based on
the amount of the transaction involved, the transmission of shares along with funds, and
generally arguing that the cases are not binding on this court. They may not be binding, but they
remain persuasive. Given cases such as Enron, which supports an extremely broad interpretation,
and AP Services, which is highly factually analogous, there is ample support for the acceptance
of the rule that, even when a financial institution is a “mere conduit,” payments made by or to it
still qualify as payments made “by or to” it.
Both Rushton and the previous Bankruptcy Court decision cite one Tenth Circuit case,
Rupp v. Markgraf, for the contention that “the Tenth Circuit has adopted the conduit theory that
banks are not initial transferees where they are simply honoring their contracts with customers.”
Dkt. No. 34 at 7 (citing Rupp v. Markgraf, 95 F.3d 936, 939 (10th Cir. 1996)). Rushton
overstates the importance of Markgraf to the issue presented here. Markgraf is distinguishable.9
The Bankruptcy Court’s analysis would define a “transfer” under Markgraf as “parting with
property or an interest in property.” Bankruptcy Court Opinion at 9. This definition is statutory,
and is applied in Markgraf, but the Bankruptcy Court’s definition of “transferee” – the
requirement of obtaining a beneficial interest in property and the rule that if a party “is not a
8
Rushton alleges that the Court’s main reason for doing so, at least in the Second Circuit, is to maintain
“consistency with its prior decision.” (Dkt. No. 34 at 8) The Court fails to see why this reason is inadequate.
Adhering to one’s own precedent is generally accepted as a sound jurisprudential principle which promotes stability
and predictability in the administration of justice.
9
Among other things, if this were the holding of Markgraf, it would be remarkable because it may be
argued that almost any securities transaction in which a bank engages is done in the course of “simply honoring its
contracts with customers” and all securities at issue would have to pass through the hands of financial institutions,
along with the payments in order for § 546(e) to apply.
11
transferee in a transaction, it cannot be a transferor of the same property” – does not come from
Markgraf. Rather, they come from authority from the Eleventh Circuit and the Massachusetts
Bankruptcy Court. Id. at 9 n.21.10 The fact, then, that Wells Fargo never obtained a “beneficial
interest” as a result of the Purchase Agreement does not mean that it does not qualify as a
financial institution under Tenth Circuit law. Wells Fargo did, however, part with property –
money from the trust account – thereby satisfying the statutory definition of transfer, contrary to
the Bankruptcy Court’s conclusion.11
Moreover, when Congress amended § 546(e) by adding the parenthetical “(or for the
benefit of)” following the phrase “made by or to,”12 standard rules of construction require the
phrase “made by or to” must mean something different than “for the benefit of.”13 Since “for the
10
Markgraf, on the other hand, relies on the principles of dominion and control to define an “initial
transferee.”
11
A closer look at Markgraf reveals several other distinctions. First, Markgraf involves the control and
dominion over funds from a cashier’s check in the context of an alleged fraudulent transfer. It was an attempt to
recover under 11 U.S.C. § 550 from an “initial transferee.” Section 546(e) does not require that a financial
institution be an initial transferee, therefore Markgraf is not directly on point. Moreover, at least for the purposes of
this motion, there is no allegation of a fraudulent transfer made under the guise of a payment to a bank; indeed there
is no evidence of impropriety of any sort in the actual transmission of funds to Defendants. Neither Bevan nor
Bichler nor ESG sent a note with the payment instructing specific disbursements to personal judgment creditors.
Rather, all payments were made in accordance with the Purchase Agreement. The payments here were wire
transfers, originating from one financial institution (Union Bank) to another (Wells Fargo). Finally, Markgraf was
decided in 1996, almost ten years before the broadening of the scope of the safe harbor protections discussed in both
motions and the rule of Markgraf is in tension with the broad interpretation espoused in Kaiser Steel. Given the
extent of the consensus that the terms of § 546(e) should be construed broadly, and despite the disagreement about
the exact breadth, the emerging consensus (indeed, in some cases the explicit conclusion) is that payments made
through financial institutions acting as “mere conduits” still qualify for safe harbor protection.
12
In 2006 Congress amended §546(e) “(A) by inserting the language ‘(or for the benefit of)’ before ‘a
commodity broker’; and (B) by inserting ‘or that is a transfer made by or to (or for the benefit of) a . . . financial
institution . . . in connection with a securities contract . . . after ‘securities clearing agency;’” Financial Netting
Improvements Act of 2006, Pub. L. No. 109-390, § 5(b)(1), 120 Stat. 2692 (2006).
13
In 1879 the Supreme Court noted, “as early as Bacon’s Abridgement, sect. 2, it was said that ‘a statute
ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be
superfluous, void, or insignificant.” Market Co. v. Hoffman, 101 U.S. 112, 115, 25 L.Ed. 782 (1879). If “made by or
to” were understood to require that the financial institution have a beneficial interest in the transfer, it would render
the language “or for the benefit of” superfluous, void and insignificant. See also Williams v. Taylor, 529 U.S. 362,
404 (2000) (this is a “cardinal principle of statutory construction”); United States v. Menasche, 348 U.S. 528, 538539 (1955) (It is the duty of the court to give effect to every clause and word of a statute); Duncan v. Walker, 533
U.S. 167, 174 (2001). For the recent application of this rule in the Tenth Circuit see, e.g., Rajala v. Gardner, 709
F.3d 1031, 1038 (10th Cir. 2013) (“cardinal principle” of statutory construction that no clause or sentence or word
shall be superfluous, void or insignificant); see also Lockheed Martin Corp. v. Admin. Review Bd., U.S. Dept. of
12
benefit of” embraces a beneficial interest in the securities, “made by or to” cannot be read to
include that requirement. Thus, the section must be read to mean that Congress rejected the
argument that the bank must have some beneficial interest at stake, not merely be honoring a
contractual obligation to its account holder.
Finally, applying the plain language of § 546(e) to the facts in this case does not produce
an absurd result. At most, the protection afforded transactions by a plain application of the
statute may be deemed broad, but there is nothing unreasonable or absurd about broad
protections for financial transactions.14 While it is not the place of the court to determine public
policy, there are several immediately cognizable reasons supporting a conclusion that Congress
intended such a policy. First, such a policy promotes stability in the financial and securities
market, and encourages the use of legitimate financial channels. It promotes open and honest
accounting and discourages “off the books” dealing. If legitimate settlement payments could be
undone because the financial institutions involved were “mere conduits” then consumer
confidence in the finality of securities sales would be undermined, with a ripple effect on global
markets. Additionally, calling this result absurd ignores the fact that there is an exception to §
546(e) for truly fraudulent transfers, “made with actual intent to hinder, delay or defraud.” 11
U.S.C. § 548(a)(1)(A). These fraudulent transactions would not be put beyond reach simply
because they were made through a financial institution. In sum, applying the plain language of
this section does not produce a result so absurd as to set aside Kaiser Steel’s interpretive
Labor, 717 F.3d 1121, 1130 (it is “rudimentary” that statutory language should be read so as to give each provision
or phrase separate and distinct meaning).
14
The Bankruptcy Court reasoned that applying the plain language of “by or to” a financial institution
would produce an absurd result, because “no settlement payment or transfer in connection with a securities contract
may be avoided if the payment is effected with the assistance of the banking industry.” As noted, there are several
legitimate policy reasons why such a result is not so bizarre that Congress could not have intended it. Indeed, the
fraudulent transfer exception embedded in § 546(e) suggest that Congress contemplated a broad, over-arching
protection, and took steps to prevent its abuse.
13
standard. Therefore, the court need not go beyond the face of the statute in determining whether
the safe harbor exemption applies.
In sum, because an application of the plain statutory language reveals that the payments
made to Bevan and Bichler were both settlement payments made by or to a financial institution
and transfers made by or to a financial institution in connection with a securities contract, the
payments fall within the safe harbor provision of 11 U.S.C. § 546(e). Additionally, because such
an application does not produce an absurd or unreasonable result, the court need not look beyond
the face of the statute in making its decision in this case.
CONCLUSION
For the reasons stated above, Defendant’s Motion for Partial Summary Judgment (Dkt.
No. 22.) is GRANTED and Plaintiff’s Cross Motion for Partial Summary Judgment (Dkt. No.
26) is DENIED.
SO ORDERED this 23rd day of January, 2014.
BY THE COURT:
_________________________________
Clark Waddoups
United States District Judge
14
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