11 U.S.C. § 546(e) Securities Settlement Transfer Affirmative Defense for Financial Institutions is a Safe Harbor

December 2, 2023


20-3257-cv (L), In re Nine West LBO Sec. Litig.

August Term 2021(Argued:  March 10, 2022

Decided:  November 27, 2023)

Docket Nos. 20-3257-cv (L), 20-3290-cv, 20-3315-cv, 20-3326-cv, 20-3327-cv, 20-3334-cv, 20-3335-cv, 20-3941-cv, 20-3952-cv, 20-3959-cv, 20-3961-cv, 20-3964-cv, 20-3969-cv, 20-3980-cv, 20-3981-cv, 20-3992-cv, 20-3998-cv.

Plaintiffs-appellants Marc Kirschner, as the Litigation Trustee for the Nine West Litigation Trust representing unsecured creditors and Wilmington Savings Fund, FSB, as successor Indenture Trustee for various notes issued by Nine West (together, the “Trustees”), brought seventeen (17) actions in different states against Jones Group’s former directors and officers for unjust enrichment and against its former public shareholders for fraudulent conveyance.   Both the public shareholders and the directors and officers moved to dismiss the claims against them, arguing that payments made to them in connection with the merger are shielded by the Bankruptcy Code’s Section 546(e) safe harbor.   The district court granted both motions to dismiss, holding that the payments were shielded by the safe harbor.  In re Tribune Co. Fraudulent Conv. Litig. (Tribune II), 946 F.3d 66, 72 (2d Cir. 2019), cert. denied sub nom. Deutsche Bank Tr. Co. Americas v. Robert R. McCormick Found., 141 S. Ct. 2552 (2021

Plaintiffs appealed.

Section 546(e) of Chapter 11 of the Bankruptcy Code precludes avoidance of “settlement payment[s] . . . made by or to (or for the benefit of) a . . . financial institution, . . . or . . . transfer[s] made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract . . . .”  11 U.S.C. § 546(e).   The Code defines “financial institution” to include not only banks but also a customer of a bank “when [the bank] is acting as agent or custodian for a customer . . . in connection with a securities contract.”  Id.§ 101(22)(A).

The two leading cases interpreting the safe harbor provision are Merit Management, 138 S. Ct. 883 (2018) and Tribune II, 946 F.3d 66 (2d Cir. 2019).   The Supreme Court held in Merit Management, 138 S. Ct. at 892 and we recognized in Tribune II, 946 F.3d at 77, that § 546(e) does “not protect transfers in which financial institutions served as mere conduits.”  In Tribune II, however, we concluded that an agency relationship provided an “alternative basis for finding that the payments [were] covered.”  946 F.3d at 77; see also11 U.S.C. § 101(22)(A).   511 U.S.C. § 741(7) defines the term “securities contract” broadly.

Section 546(e) has been uniformly recognized as an affirmative defense, though not yet by this Court.   We have, however, held that safe harbors in other statutory schemes are affirmative defenses.  Accordingly, we hold today that 11 U.S.C. § 546(e) is an affirmative defense.

Plaintiffs are under no obligation to plead facts supporting or negating an affirmative defense in the complaint.  See, e.g., Picard v. Citibank N.A. (In re Bernard L. Madoff Inv. Sec. LLC), 12 F.4th 171, 195 (2d Cir. 2021) (first citing Fed. R. Civ. P. 8(c); and then citing Perry v. Merit Sys. Prot. Bd., 137 S. Ct. 1975, 1987 n.9 (2017) (“An affirmative defense to a plaintiff’s claim for relief is not something the plaintiff must anticipate and negate in her pleading.” (cleaned up))), cert. denied sub nom.  Citibank, N.A. v. Picard, 142 S. Ct. 1209 (2022).

The Second Circuit affirmed in part, vacated in part and remanded.  The court explained that Congress enacted Section 546(e) safe harbor to promote finality and certainty for investors by limiting the circumstances under which securities transactions could be unwound by, for example, a successful fraudulent conveyance action.   The court wrote that to further expand the scope of Section 546(e) and Section 101(22)(A) and immunize transactions in which a bank took only purely ministerial action, made no payments and had no discretion would not further Congress’s purpose.   Accordingly, the court vacated the district court’s judgment to the extent it dismissed the Payroll Transfer claims.

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