## Facts

- Kaiser Steel agreed to a leveraged buyout in which all outstanding common stock would be acquired and converted into the right to receive $22 in cash plus two shares of preferred stock in the surviving entity.
- The cash portion (about $162 million) was funded by Kaiser’s cash reserves and a $100 million secured loan; after the merger, the acquisition group owned all common stock of the surviving entity.
- Shareholders approved the transaction on January 18, 1984; the merger became effective February 29, 1984.
- Former common shareholders were required to tender their shares to a disbursing agent, which distributed cash and preferred stock; the common stock was then delisted.
- Schwab, a securities broker, held Kaiser shares for customers and delivered shares into the transaction, receiving the merger consideration through customary securities-processing channels.
- Kaiser later entered Chapter 11 (1987) and, as debtor in possession, sued Schwab and other securities intermediaries to avoid and recover LBO-related payments as fraudulent transfers, including a payment of roughly $450,000 made to Schwab in connection with customers’ tendered shares.

## Issues

1. Whether payments made to complete the exchange of publicly held shares for cash and preferred stock in an LBO are “settlement payments” within the meaning of 11 U.S.C. § 546(e).
2. Whether § 546(e) bars a debtor in possession from avoiding such LBO-related transfers as fraudulent conveyances when the transfers were made by or to a stockbroker or similar protected intermediary.
3. Whether § 546(e) applies to an LBO cash-out transaction involving public shareholders and the clearance and settlement system, rather than a routine market trade.

## Decision

- The Tenth Circuit affirmed the district court’s summary judgment for Schwab.
- The court held that the challenged LBO-related transfers to Schwab were “settlement payments” under § 546(e).
- Because Schwab was a “stockbroker” and the transfers were settlement payments, § 546(e) barred Kaiser’s fraudulent transfer avoidance and recovery claims against Schwab based on those transfers.

## Legal Principles

- “Settlement payment” in § 546(e) is defined broadly to include transfers of cash or securities that complete a securities transaction.
- Section 546(e) prevents avoidance of settlement payments made by or to protected market participants (including stockbrokers), reflecting a congressional policy favoring finality in securities clearance and settlement.
- Courts applying § 546(e) focus on the mechanics of completing the securities exchange through the settlement system, not solely on the transaction’s corporate-finance label (such as “leveraged buyout”).
- Absent an applicable statutory exception, § 546(e) operates as a categorical bar to avoidance of covered settlement payments, even when the debtor alleges constructive fraudulent transfer.

## Conclusion

The court treated the LBO cash-out exchanges of publicly traded shares, processed through a broker and related settlement mechanisms, as protected settlement payments under § 546(e), thereby preventing the debtor in possession from unwinding those transfers through fraudulent transfer litigation against the broker intermediary.


Kaiser Steel Corp. v. Charles Schwab & Co., 913 F.2d 846 (10th Cir. 1990)