## Facts

- Contemporary Industries Corporation (the debtor) was acquired in a leveraged buyout by an investor group using a newly formed acquisition entity.
- Former shareholders (the Frosts) sold all of their shares and received about $26 million.
- Contemporary transferred funds to a bank acting as escrow agent, and the bank distributed the purchase price to the Frosts in exchange for their stock.
- After the transaction, Contemporary was highly leveraged, later experienced financial distress, and filed for bankruptcy.
- The bankruptcy estate and unsecured creditors sued to avoid and recover the $26 million as fraudulent transfers and asserted related state-law theories (including unjust enrichment and illegal shareholder distributions).
- The bankruptcy court granted summary judgment to the Frosts based on the Bankruptcy Code § 546(e) safe harbor for “settlement payments”; the district court affirmed.

## Issues

1. Whether payments to selling shareholders in a private leveraged buyout, made in exchange for stock, qualify as “settlement payments” protected by Bankruptcy Code § 546(e).
2. Whether § 546(e) applies to private transactions involving closely held stock or is limited to publicly traded securities transactions.
3. Whether routing the payments through a bank escrow agent satisfies § 546(e)’s requirement that the transfer be made “by or to (or for the benefit of)” a “financial institution.”
4. Whether § 546(e) bars state-law theories asserted through the bankruptcy estate’s avoidance and recovery powers when they seek to unwind protected settlement payments.

## Decision

- The Eighth Circuit affirmed summary judgment for the Frosts.
- The LBO payments made in exchange for stock were “settlement payments” within § 546(e).
- The safe harbor is not limited to publicly traded securities and can apply to private LBOs involving privately held stock.
- The bank’s participation as escrow agent was sufficient to meet the “by or to” a financial institution requirement, even if the bank held no beneficial interest in the funds.
- Because § 546(e) applied, the estate could not avoid or recover the $26 million transfers, including under recharacterized state-law theories seeking the same result.

## Legal Principles

- “Settlement payment” in § 546(e) is construed broadly to include transfers that complete the exchange of securities for payment.
- Section 546(e) is not textually confined to public-market transactions; privately held securities transactions can fall within the safe harbor.
- Intermediary involvement of a qualifying “financial institution,” including as an escrow agent or conduit, can satisfy § 546(e)’s “by or to” requirement.
- Section 546(e) bars avoidance and recovery efforts aimed at protected settlement payments, regardless of whether the claims are styled as federal fraudulent transfer actions or state-law causes pursued through the estate’s avoiding powers.

## Conclusion

The court held that the $26 million paid to selling shareholders in a private leveraged buyout, routed through a bank escrow, was protected from avoidance as a § 546(e) settlement payment, foreclosing both federal and state-law avoidance-based recovery theories targeting the same transfers.


Contemporary Industries Corp. v. Frost, 564 F.3d 981 (8th Cir. 2009)