Introduction
In a recent decision, the U.S. Bankruptcy Court for the District of Delaware (Shannon, J.) rejected an argument that the safe harbor provision of section 546(e) of the Bankruptcy Code is not available to debtors because section 101(22A)’s definition of “financial participant” excludes debtors. Instead, the court in Kravitz v. Samson Energy Co., LLC (In re Samson Res. Corp.), No. 15-11934 (BLS), 2020 WL 7700693 (Bankr. D. Del. Dec. 23, 2020) held that the term “financial participant” does not exclude debtors. In reaching its conclusion, the court conducted an in-depth textual analysis of the statute, ultimately settling on a “natural reading” and “plain text” interpretation. The court’s holding—which is contrary to a decision by the U.S. District Court for the Southern District of New York—may serve as useful precedent for debtors seeking to utilize the safe harbor provision of section 546(e) as an affirmative defense against avoidance actions and underscores the importance and effectiveness of arguments based on “plain text” statutory interpretation.
Executive Summary
In 2011, the controlling shareholders of then family-owned Samson Investment Company and its affiliated entities (collectively, “Samson”), an Oklahoma-based oil and gas company, entered into a Stock Purchase Agreement (the “SPA”) to sell the company to a newly formed entity, Samson Resources Corporation, formerly known as Tulip Acquisition Corp. (“Samson Tulip”), via a leveraged buyout (the “LBO”). Approximately four years later, Samson Tulip and its affiliated entities (the “Debtors”) filed voluntary chapter 11 petitions in the United States Bankruptcy Court for the District of Delaware. The court confirmed the Debtors’ joint chapter 11 plan of reorganization (the “Plan”) in 2017, which established the Samson Settlement Trust.
A trustee (the “Settlement Trustee”) was appointed to maximize recoveries for unsecured creditors, who, among other things, filed an adversary proceeding (the “Complaint”) pursuant to sections 544 and 550 of the Bankruptcy Code to avoid allegedly fraudulent transfers made in connection with the LBO. The transfers at issue fell into three buckets: (1) cash transfers from Debtor Samson Investment Company (“Samson Investment”) to certain defendant shareholders of Samson Investment (the “Selling Shareholders”) in partial redemption of their shares (such transfers, the “Redemption Cash Transfers”); (2) cash transfers from Debtor Samson Tulip to the Selling Shareholders in consideration for the remaining shares of Samson Investment (such transfers, the “Purchase Cash Transfers”); and (3) a series of transactions whereby various assets were transferred away from Debtor Samson Investments to the Selling Shareholders in exchange for their discharge of certain subordinated notes (such transfers, the “Asset Transfers”; collectively, with the Redemption Cash Transfers and the Purchase Cash Transfers, the “Transfers”). Kravitz v. Samson Energy Co., LLC (In re Samson Res. Corp.), No. 15-11934 (BLS), 2020 WL 7700693, at *2 (Bankr. D. Del. Dec. 23, 2020).
In response to the Complaint, the Defendants, among other things, raised the safe harbor provision of section 546(e) as an affirmative defense, arguing that the Transfers were not avoidable because they were made by a “financial participant” in connection with a “securities contract.” Id. at *3. Specifically, in their motion for summary judgment, the Defendants argued that: (1) Debtor Samson Investment was a “financial participant,” as defined by section 101(22A) of the Bankruptcy Code, by virtue of its own swap agreements; (2) the other transferors were “financial participants” by virtue of their guarantee of Debtor Samson Investment’s swap agreements; and (3) the transfers were made in connection with the SPA—a securities contract. Id. at *3–*4. In its cross-motion for summary judgment, the Settlement Trustee argued that: (a) Samson Investment and the other debtor transferors could not be “financial participants” because the Bankruptcy Code’s definition of that term does not include debtors; (b) the transferors had not shown that they were “financial participants” on the transfer dates; (c) the transferors, other than Debtor Samson Investment, could not be “financial participants” based on their guarantees of the applicable swap agreements; and (d) an issue of material fact remained as to whether Debtor Samson Investment had the statutorily required amount of qualifying transactions at the relevant time. Id. at *4.
The court first considered whether a debtor can be a “financial participant,” as defined by section 101(22A). Answering this question required the court “to parse the statutory language.” Id. at *5. The court began its textual analysis by breaking down the definition of “financial participant” into the following elements: (1) “an entity”; (2) “who has one or more required agreements”; (3) “in the required amounts”; and (4) “with the debtor or any other entity (other than an affiliate).” Id.
The Settlement Trustee argued that the definition’s language “with the debtor or any other entity” would be redundant or superfluous if the debtor could constitute “an entity” because “Congress only needed to state that the agreements could be ‘with any other entity.’” Id. In contrast, the Defendants argued that interpreting section 101(22A) to exclude debtors would either rewrite the statute “by adding language (i.e., ‘an entity other than the debtor’)” or ignore the plain language that “the entity may have the required agreements ‘with the debtor or any other entity (other than an affiliate.).’” Id. (emphasis in original).
The court identified two instances where courts had addressed similar arguments when interpreting the definition of “financial participant” under section 101(22A). In the first instance, the U.S. District Court for the Southern District of New York agreed with an argument similar to the one advanced by the Settlement Trustee, reasoning that “if the term ‘entity’ is meant to include the debtor, then it would be redundant to refer to ‘the debtor,’ distinguishing it from ‘any other entity’ in the second part of the definition.” Id. (quoting In re Tribune Co. Fraudulent Conveyance Litig., 2019 WL 1771786, *9 (S.D.N.Y. Apr. 23, 2019) (“[T]he inclusion of the term ‘debtor’ in the second part [of the definition] would be puzzling [because] [i]t would be unusual if not impossible for the debtor to enter into the covered transactions with itself.”)). In contrast, the U.S. Bankruptcy Court for the Middle District of Florida rejected an argument similar to the one asserted by Settlement Trustee in the context of the safe harbor provision of section 546(g) of the Bankruptcy Code. Id. at *5–*6. There, the bankruptcy court determined that “there is no express language in § 101(22A) indicating the definition [of financial participant] includes only entities other than the debtor … [and] the Court [is being asked] to impute language that does not exist.” Id. at *6 (quoting Luria v. Hicks (In re Taylor, Bean & Whitaker Mtg. Corp.), 2017 WL 4736682, at *6 (Bankr. M.D. Fla. Mar. 14, 2017)).
In evaluating the parties’ differing interpretations of “financial participant” under section 101(22A), the court invoked the longstanding principle that statutory interpretation must begin “with the language of the statute itself” where the text is clear and unambiguous. Id. (quoting In re Denby-Peterson, 941 F.3d 115, 124 (3d Cir. 2019); In re KB Toys Inc., 736 F.3d 247, 251 (3d Cir. 2013)) (quotations omitted). The court explained that although two courts had interpreted the definition of “financial participant” differently, this alone did not render the term ambiguous under Third Circuit precedent. Id. (citing Price v. Delaware State Police Federal Credit Union (In re Price), 370 F.3d 362, 369 (3d Cir. 2004) (superseded by statute on other grounds as stated in In re Miller, 443 B.R. 54 (Bankr. D. Del. 2011))). Instead, “a provision is ambiguous when, despite a studied examination of the statutory context, the natural reading of a provision remains elusive,” as the court further explained. Id. (quoting Price, 370 F.3d at 369) (internal quotations omitted). Accordingly, the court agreed with the Defendants’ argument on the basis that “the argument follows the plain language and context of the statute.” Id. The court reasoned that “Congress has demonstrated repeatedly in the Bankruptcy Code that it knows how to exclude the debtor from defined terms when intended,” citing the definitions of “swap participant” and “repo participant” as examples in support because both definitions “require the participant to have the requisite agreements with the debtor.” Id. (emphasis in original). Because the definition of “financial participant” in section 101(22A) “expands that language to include entities who have requisite agreements ‘with the debtor or any other entity (other than an affiliate),’” the court concluded that a “natural reading” of the statutory language “supports a broad interpretation that allows debtors to be included in the definition.” Id. (citing 11 U.S.C. § 101(22A)) (emphasis in original). Thus, the court held that “the plain text and structure of the Code’s definition of financial participant does not exclude debtors.” Id.
The court then considered the remaining issues: (1) whether Debtor Samson Investment had agreements in the requisite amount to be a financial participant; and (2) whether a guarantor of a swap agreement could be a financial participant. In each instance, the court determined that the factual record was incomplete, and thus declined to grant summary judgment on those issues. The litigation continues.
Takeaways
The court’s holding that the definition of “financial participant” in section 101(22A) does not exclude debtors may serve as useful precedent for debtors seeking to utilize the safe harbor provision of section 546(e) as an affirmative defense against avoidance actions. It will be interesting to see if the use of this affirmative defense will be raised with more regularity by debtors who engaged in prepetition complex financial transactions. Additionally, the court’s reliance on a “natural reading” and the “plain text” of the statute illustrates the importance and effectiveness of those arguments in advocating for a specific interpretation of a statute. Further, because the term “financial participant” is used in multiple provisions in the Bankruptcy Code, the court’s more expansive interpretation of the term has the potential to impact the interpretation of those provisions as well. Given the court’s finding that the statutory text was unambiguous despite two courts reaching differing interpretations of the same language (and notably a difference in interpretation between courts in the District of Delaware and Southern District of New York), it will be interesting to see how jurisprudence develops on this issue.