## Facts

- Quality Stores, Inc., a privately held company, was acquired in a 1999 leveraged buyout.
- Approximately $111.5 million was paid to former shareholders in exchange for their stock.
- The purchase price was funded with borrowed money and the payments to shareholders were routed through a financial intermediary qualifying as a financial institution.
- In 2001, Quality filed for Chapter 11 bankruptcy protection.
- The debtor entities brought an adversary proceeding seeking to avoid and recover the LBO payments as constructively fraudulent transfers under the Bankruptcy Code and state law, alleging insolvency and lack of reasonably equivalent value.
- The shareholder-defendants asserted that the payments were protected by the Bankruptcy Code’s safe harbor for certain securities-related transfers, 11 U.S.C. § 546(e).

## Issues

1. Whether LBO payments made to purchase shares of a privately held company can qualify as protected “settlement payments” or securities-contract transfers under 11 U.S.C. § 546(e).
2. Whether routing the LBO consideration through a financial institution satisfies § 546(e)’s requirement that the transfer be made “by or to (or for the benefit of)” a covered financial-market participant, even if the ultimate recipients are non-financial-institution shareholders.
3. Whether policy concerns about protecting public securities markets justify limiting § 546(e) to publicly traded securities absent such a limitation in the statutory text.

## Decision

- The Sixth Circuit affirmed judgment for the shareholder-defendants.
- The court held that § 546(e) is not limited to publicly traded securities and can apply to transactions involving privately held shares.
- The court concluded the LBO payments fell within § 546(e) because they were settlement payments (or qualifying securities-contract transfers) made by or to (or for the benefit of) a financial institution.
- As a result, the debtor’s constructive fraudulent-transfer claims seeking to unwind the LBO payments were barred by the safe harbor.

## Legal Principles

- Section 546(e) broadly limits avoidance of covered “settlement payments” and certain transfers made in connection with securities contracts when made by, to, or for the benefit of specified entities, including financial institutions.
- Courts apply the statutory text as written; where § 546(e) contains no public/private securities distinction, courts will not add one based on asserted legislative purpose.
- The statutory term “settlement payment,” as defined in § 741(8), is construed broadly and can encompass payments completing a securities purchase, including LBO consideration paid to selling shareholders through a financial intermediary.
- The “by or to (or for the benefit of)” language can be satisfied by the involvement of a financial institution in effecting the transfer, even if the ultimate transferees are not themselves protected entities.
- Congress expressly preserved avoidance for actual intent fraudulent transfers, but constructive fraudulent-transfer theories are barred when the safe harbor applies.

## Conclusion

The Sixth Circuit held that § 546(e)’s safe harbor can shield leveraged-buyout payments for privately held stock from constructive fraudulent-transfer avoidance when the payments qualify as settlement payments (or related securities-contract transfers) made through a financial institution, and it refused to impose a public-markets limitation not found in the statute.


QSI Holdings, Inc. v. Alford, 571 F.3d 545 (6th Cir. 2009)