Bankruptcy Bulletin: District Court Holds Transfers Were Part of Integrated Transaction for Safe Harbor Exception Under Section 546(e)

By David Tanabe posted 05-23-2023 12:00 PM



Contributing Author: David M. TanabeWinthrop & Weinstine, P.A.

In Kelley v. Safe Harbor Managed Account 101, Ltd., 2023 WL 1785607 (D. Minn. Feb. 6, 2023), the district court granted the defendant’s motion for summary judgment after remand on the issue of whether transfers were in connection with the note purchase agreement for 11 U.S.C. § 546(e) of the Bankruptcy Code.

The liquidating trustee filed an action against the defendant to recover funds transferred from Arrowhead Capital Management Corp. (“Arrowhead”) to the defendant. The defendant moved for summary judgment on the grounds that the transfers it received from Arrowhead were protected by § 546(e). 

In relevant part here, § 546(e) provides the trustee cannot avoid a transfer made by or to a financial institution “in connection with” a securities contract. 

For § 546(e), the Eighth Circuit affirmed that Arrowhead was the financial institution and the note purchase agreement was the securities contract. Further, the relevant transfers were from MGC Finance to Arrowhead. The Eighth Circuit remanded for the determination of whether the transfers from MGC Finance to Arrowhead were “in connection with” the note purchase agreement for § 546(e). 

In its decision, the Eighth Circuit explained that in the context of § 546(e) a transfer is “in connection with” a securities contract if it is related to or associated with the securities contract and that there is a low bar for the required relationship between the securities contract and the transfer sought to be avoided. 

To read the Bankruptcy Bulletin’s summary of the Eighth Circuit’s prior decision, click here

On remand, the liquidating trustee argued that the transfers were not made in connection with the note purchase agreement, but rather pursuant to a separate credit agreement between MGC Finance and Metro I, LLC (“Metro”). Under the credit agreement, MGC Finance agreed to execute and deliver promissory notes to Metro. For the note purchase agreement, Metro agreed to assign the promissory notes to Arrowhead. When Arrowhead received payment from MGC Finance on the promissory notes, the funds were repaid to investors, including the defendant. 

The district court held that the transfers at issue were part of an integrated transaction “in connection with” the note purchase agreement. Thus, the district court concluded that the transfers were immune under § 546(e). 

To read the full opinion, click here


C.J. Harayda, Stinson LLP
David M. TanabeWinthrop & Weinstine, P.A.

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