SECTION 546 ( e )’ S NOT-SO-SAFE HARBOR
Judge Shannon then cited to Judge Drain ’ s final opinion before leaving the bench , In re Tops Holding II Corp ., in which Judge Drain calls for the Section 546 ( e ) exemption to be limited to public transactions . He concluded : “ The undersigned agrees with Judge Drain ’ s concerns and sentiments .”
THE SECTION
Section 546 ( e ) of the Bankruptcy Code protects transfers made to financial participants in connection with a sale of securities from being unwound as fraudulent transfers . The section was created to ensure certainty in financial markets but , according to some of the nation ’ s premier bankruptcy judges , its broad wording means it may be applied to situations where there is little risk that the transfers could undermine financial certainty .
Judge Shannon ’ s Quorum Health opinion arose from the April 7 , 2020 , bankruptcy filing of Quorum Health Corp . and 134 of its related entities . The Delaware bankruptcy court confirmed the Quorum debtors ’ joint prepackaged plan of restructuring on June 30 , 2020 . That plan established the QHC Litigation Trust at the request of certain senior note holders , which was tasked with investigating the debtors ’ causes of action .
On October 25 , 2021 , the trustee of the QHC Litigation Trust filed a complaint against Community Health Systems , Inc . ( CHS ) and other defendants . The complaint attacked the 2016 spinoff that carved Quorum from CHS on several grounds , including allegations that the transaction was a fraudulent transfer and included an illegal dividend under state law . The CHS defendants filed a motion to dismiss several of these counts , and the trustee opposed the motion .
According to the allegations in the complaint , the Quorum Health bankruptcy was a direct result of the 2016 spinoff . That spinoff established Quorum and contributed assets into it including 38 CHS hospitals primarily located in rural areas . The terms of the spinoff were governed by the Separation and Distribution Agreement ( the SDA ), which transferred equity in the hospitals from CHS to Quorum .
As part of the transaction , Quorum used its newly transferred assets to incur more than $ 1.2 billion in debt , including $ 400 million in unsecured senior notes , $ 880 million of senior term loan credit facilities , a revolving credit facility of up to an aggregate of $ 100 million , and an asset-based revolving credit facility providing up to $ 125 million . According to the pleadings , the proceeds of this debt were then sent back up to parent CHS as a dividend ( the Spin-Off Dividend ). The dividend was paid to CHS ’ s wholly owned indirect subsidiary BridgeCo , which then merged into CHS-2 , which is also owned by
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