Abstract
This is the first scholarly article to analyze the recent jurisprudential expansion of 11 U.S.C. § 546(e), the settlement payment exception to bankruptcy avoidance powers. This provision was originally enacted by Congress to protect the securities market from the ripple effect of bankruptcy of one of the market players. In 2009, the Third, Sixth, and Eighth Circuits broadly interpreted section 546(e) so as to shield from avoidance leveraged buyouts (LBOs) of both public and closely held companies. This Article questions the results reached by these (and other) circuits by exploring the goals of avoidance powers in preventing equity holders from siphoning away funds from a company on the verge of bankruptcy. Because curtailing the applicability of avoidance powers by indiscriminately shielding all LBOs as protected settlement payments is inconsistent with the goal of maximizing the estate for the benefit of the creditors of an entity on the verge of bankruptcy, this Article calls for a legislative amendment that would limit the protection of section 546(e) to public securities. While the market for public securities is extensively regulated, no such regulatory scheme exists with respect to closely held stock. Expanding the settlement payment exception to protect from avoidance closely held stock transactions creates a perverse incentive for irresponsible lending and reckless borrowing – the fatal combination that majorly contributed to the current financial crisis. The proposed amendment would promote a long-term strategic approach in planning LBOs, recognizing that accountability and responsible lending are essential to the recovering financial markets.