Bankruptcy Code Section 546 ( e )’ s Not-So-Safe Harbor : Second Influential Bankruptcy Judge Echoes Concerns That Broad Exemption Shelters Pirates
Bankruptcy Code Section 546 ( e )’ s Not-So-Safe Harbor : Second Influential Bankruptcy Judge Echoes Concerns That Broad Exemption Shelters Pirates
By Jason G . Cohen and Robert P . Grattan *
In this article , the authors review a new court decision calling for reforms to Bankruptcy Code Section 546 ( e ).
Delaware Judge Brendan Shannon has joined calls for reforming Section 546 ( e ) of the Bankruptcy Code , echoing concerns that the section ’ s safe harbor from fraudulent transfer liability has allowed investors to “ loot privately held companies to the detriment of their non-insider creditors with effective impunity .” 1
Judge Shannon is the second judge to recently press Congress to narrow Section 546 ( e )’ s safe harbor . In October 2022 , Judge Robert Drain warned , in his final opinion from the bench , that Section 546 ( e )’ s overbroad exemption has enabled private equity companies to siphon billions in debt-funded dividends from the companies they own , often at the expense of other creditors . Judge Drain urged Congress to limit Section 546 ( e ) to public transactions . 2
In Quorum Health , Judge Shannon granted a motion to dismiss fraudulent transfer claims because Section 546 ( e ) “ constrained ” the court , despite plausible allegations that the defendants “ constructed a scheme for the purpose of siphoning funds from the Debtor for the Defendants ’ benefit .”
* Jason G . Cohen , a partner in the Houston office of Bracewell LLP , represents corporate
debtors and senior and junior secured creditors in all phases of corporate debt restructurings , including negotiating out-of-court workouts and litigating in-court Chapter 11 bankruptcy cases with assets ranging from $ 20 million to more than $ 1 billion . Mr . Cohen also advises parties on debt and equity financing , as well as distressed asset sales . Robert P . Grattan , an associate in the firm ’ s Houston office , focuses his practice on all aspects of corporate restructuring , bankruptcy and insolvency proceedings . Mr . Grattan helps advise clients on a range of matters , including acquisitions , out-of-court restructurings and Chapter 11 cases . The authors may be contacted at jason . cohen @ bracewell . com and bob . grattan @ bracewell . com , respectively .
1 In re Quorum Health Corp ., No . 20-10766 ( BLS ) ( Bankr . D . Del . Mar . 16 , 2023 ) ( citing In re Tops Holding II Corp ., 646 B . R . 617 , 688 ( Bankr . S . D . N . Y . 2022 )).
2 See Tops II , 646 B . R . at 617 . In Tops II , Judge Drain addressed allegations that dividends
paid from a grocery store chain served to improperly enrich equity by crippling the underlying business and ultimately “ left the pension plans of thousands of workers and hundreds of creditors holding the bag .”
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