Split Second Circuit Narrows Bankruptcy Code’s Settlement Payment Safe Harbor

In his latest article for The Bankruptcy Strategist titled, “Split Second Circuit Narrows Bankruptcy Code’s Settlement Payment Safe Harbor,” Schulte Roth & Zabel of counsel Michael L. Cook details the Second Circuit's split decision in In re Nine West LBO Securities Litigation.

Two streams of payments to shareholders in a leveraged buyout (LBO), totaling $4 million (Certificate Transfers) and $1.101 billion (DTC Transfers), made through a paying agent bank, were “safe harbored under [Bankruptcy Code §546(e), but “Payroll Transfers,” totaling $78 million, made to the debtor’s “directors, officers and employee shareholders through its payroll program … [were] not so shielded,” from fraudulent transfer claims, held the Second Circuit in a split decision. In re Nine West LBO Securities Litigation, 2023 WL 8180356, *4 (2d Cir. Nov. 27, 2023) (2-1). The majority opinion turned on “the scope of the term ‘financial institution’ as defined in [Code] §101(22)(A)” when applied to the paying agent bank and its customer, the debtor here. Id. In the majority’s view, “the definition encompasses bank customers [i.e., the debtor] only in transactions with the bank acting as their agent ….” Id.