The U.S. Court of Appeals for the Second Circuit has upheld the application of the Bankruptcy Code’s Section 546(e) “safe harbor” provision in the In re Boston Generating case. The Court rejected claims that Boston Generating’s cash transfer to its parent was a fraudulent transfer, ruling that the entire recapitalization transaction was safe-harbored as it was “in connection with a securities contract.” This decision emphasizes that even multi-step transactions involving non-securities components may be protected when they form part of a broader securities transaction. The Court reasoned the safe harbor analysis must focus on the overarching transfer rather than analyzing each step in the transaction—in other words, the transaction had to be viewed “end-to-end”.
Recapitalization in bankruptcy refers to a financial restructuring process where a company alters its debt and equity mix, often by repurchasing equity or refinancing debts, to stabilize its financial position. In this case, the recapitalization involved Boston Generating borrowing funds to buy back its parent company’s equity, forming part of a larger transaction protected by law.
*Legal Analysis *the Court’s decision highlights the broad scope of Section 546(e), reaffirming its protection for complex financial transactions. The ruling applies the Supreme Court’s guidance from Merit Management, emphasizing that courts must look at the overall transaction rather than isolating individual steps. In this case, the cash was transferred to the parent, EBG, as part of a recapitalization aimed at repurchasing the parent’s equity securities, effectively stabilizing the company’s financial position. The key security involved was EBG’s equity, which was repurchased using borrowed funds, thus triggering the safe harbor under the Bankruptcy Code.
This decision offers guidance for avoiding fraudulent transfer liability: by ensuring that cash transfers are tied to broader securities transactions and involve financial institutions acting as agents, companies can structure recapitalizations to fall under the safe harbor provision, protecting them from avoidance actions in bankruptcy.
For a deeper understanding of the legal principles and nuances discussed, we suggest reading the full case in its entirety. The content of this blog post is for informational purposes only and does not constitute legal advice. It provides a summary, and the referenced materials should be reviewed for full details. The information may not reflect current legal developments. Please consult with your attorney for legal guidance.
Topics Discussed: Bankruptcy, Bankruptcy Code, Recapitalization, Safe Harbor Provision, Section 546(e), Transfer Liability