For the past five years, we have represented B.A. Capital Co. (BACC), an affiliate of Bank of America, in a long-running fraudulent transfer action originally brought in the U.S. Bankruptcy Court for the District of Delaware. In April 2005, BACC was sued by the bankruptcy trustee for Plassein International Corp. (Plassein) who alleged that a $25 million payment made to BACC in exchange for its shares in the leveraged buyout through which Plassein was formed was a fraudulent transfer.

BACC filed a motion to dismiss urging that the transfers at issue were protected from avoidance by 11 U.S.C. 546(e), which precludes the avoidance of "settlement payments" made to or from a financial institution. The trustee argued that payments made to shareholders in an LBO are not protected under section 546(e), which was enacted to protect the stability of the public markets, because LBO payments arguably do not implicate the concerns Congress had in mind. In April 2007, the bankruptcy court granted BACC's motion to dismiss, adhering to the plain meaning of the statute and citing to binding Third Circuit precedent (In re Resorts International, Inc., 181 F.3d 505 (3d Cir. 1999)). The District Court affirmed and the trustee appealed to the Third Circuit.

Yesterday, the Third Circuit affirmed the decisions of the courts below, and in the process issued the latest in a series of important Circuit Court opinions concerning the interpretation of Section 546(e). In particular, the Third Circuit made clear that the plain meaning of Section 546(e) mandates its application to transactions involving privately held securities, even though such transactions may not implicate the public markets. The decision is one of a number of recent opinions, many of which cite to the original Resorts decision, broadly applying Section 546(e).

The Davis Polk litigation team included partner Karen E. Wagner, who argued the appeal, and associates Elliot Moskowitz and Andrew Ditchfield. All members of the Davis Polk team are based in the New York office.