In re D.E.I. System, Inc., 996 F. Supp. 1142 (D. Utah 2014).
In May 2004, David Bevan (“Bevan”) and Benedict Bichler (“Bichler”) entered into a purchase agreement (the “Purchase Agreement”), consisting of a series of transactions whereby they sold 44.843% of their shares of Delta Equipment Systems, Inc. (“DEI-UT”) to Environmental Services Group (“ESG”) for the purchase price of $4,000,000 and DEI-UT redeemed an additional 43.946% of their shares of DEI-UT for $3,920,000 (the “Redemption Amount”), with the Redemption Amount to be paid by DEI-UT at closing.
To facilitate the Purchase Agreement, ESG made a secured loan to DEI-UTI in the total amount of $7,520,000, which included the Redemption Amount. ESG wired the $7,520,000 from its Union Bank account to a Wells Fargo trust account belonging to DEI-UT’s attorneys. Under the terms of the Purchase Agreement, and pursuant to Bichler’s and Bevan’s instructions, the Redemption Amount funds were then transferred to Bichler’s and Bevan’s accounts.
Finally, under the Purchase Agreement, DEI-UT merged into D.E.I. Systems, Inc. (“D.E.I.”). More than three years later, D.E.I. filed for Chapter 11 bankruptcy protection. Subsequently, D.E.I. converted its case to a proceeding under Chapter 7, and Kenneth A. Rushton was appointed trustee (the “Trustee”). On February 25, 2009, the Trustee commenced adversary proceedings against Bichler and Bevan, alleging fraudulent transfer(s) in order to recover the funds paid to them by DEI-UT, specifically the $2,088,576 paid to Bichler and the $1,831,124 paid to Bevan.
Under Bankruptcy Code § 544, a Trustee has the rights and powers to avoid a broad range of property transfers made, or obligations incurred, by a debtor. However, Bankruptcy Code § 546(e) establishes a so-called “safe harbor” exemption, which places certain payments and transactions beyond the reach of the trustee. Following the plain language of § 546(e), there are at least two types of property transfers which cannot be avoided. The first type of unavoidable transfer is a payment (either a “margin payment” or a “settlement payment”) made by or to or for the benefit of one of several specified entities: a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency. The second type of unavoidable transfer is any transfer made by or to or for the benefit of the same specified entities, that is made in connection with a securities contract, a commodity contract, or a forward contract.
The district court found that an application of the plain statutory language revealed that the challenged payments: (1) qualified as “settlement payments” under the safe harbor exemption because they were “partial settlement payments” representing a portion of the total paid to the defendants in exchange for their shares; (2) fell within the safe harbor exemption as settlement payments made “by or to” a “financial institution” since the payments were made both by and to at least one financial institution (Wells Fargo Bank); and (3) qualified for the safe harbor exemption as transfers made by or to a financial institution in connection with a “securities contract” because the transaction plainly qualified as “a contract for the purchase [or] sale … of a security.”
Additionally, because such an application of the plain language of § 546(e) did not produce an absurd or unreasonable result, the district court did not look beyond the face of the statute in making its decision. The district court rejected the lower bankruptcy court’s findings that the safe harbors did not apply because the bankruptcy court had relied on other circuit court precedent which the district court did not find persuasive. Therefore, the district court granted Bichler’s and Bevan’s Motion for Partial Summary Judgment and denied the Trustee’s Cross Motion for Partial Summary Judgment.