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II. THE TRUSTEE HAS NO POWER TO AVOID PAYMENTS TO INNOCENT CUSTOMERS The Trustee and SIPC contend that fraudulent transfer law supports their “cashin/cash-out” approach to “net equity.” 15 The argument has no basis in the text of the statute, which alone determines a customer’s “net equity.” In any event, the Trustee has no power to avoid any prior payments that BLMIS made to innocent customers (hereinafter, the “Transfers”). First, Section 546(e) of the Bankruptcy Code precludes avoidance of any Transfers made in connection with a securities contract, unless the Transfer was made both (a) with actual fraudulent intent and (b) within two years of the filing date. 11 U.S.C. §§ 546(e), 548(a)(1)(A). Second, because the Transfers discharged antecedent debts that BLMIS owed to its customers, they cannot be avoided as fraudulent. A. Bankruptcy Code Section 546(e) Limits the Trustee’s Avoidance Power to Section 548(a)(1)(A) As a matter of law, the Trustee may not avoid any Transfer made prior to December 11, 2006. Section 546(e) of the Bankruptcy Code provides, in relevant part: “Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may not avoid a transfer . . . that is a transfer made by or to . . . [a] stockbroker [or] financial institution, . . . in connection with a securities contract, as defined in section 741(7), . . . that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.” 16 11 U.S.C. § 546(e). 15 Because the Trustee and SIPC have raised avoidance arguments (Tr. Br. at 46-49; SIPC Br. 34- 37; Letter from David J. Sheehan, Esq., to the Court, dated Nov. 9, 2009), the Customers must respond. 16 Section 548(a)(1)(A) governs intentional fraudulent transfers. See Point II.B. infra. 14
A “securities contract” is defined broadly in Section 741(7) to include “a contract for the purchase, sale or loan of a security . . . or option on any of the foregoing, including an option to purchase or sell any such security.” 11 U.S.C. § 741(7)(A)(i). A “securities contract” also includes “any other agreement or transaction that is similar to an agreement or transaction” listed in Section 741(7)(A)(i)-(vi). 11 U.S.C. § 741(7)(A)(vii). In Section 546, which provides exceptions from the fraudulent conveyance and stay provisions of the Bankruptcy Code for particular types of financial transactions and instruments, Congress struck a balance between protection of the financial and securities markets, on the one hand, and the avoidance of fraudulent transfers in bankruptcy, on the other. See Bevill Bresler & Schulman Asset Mgmt. Corp. v. Spencer Savings & Loan Ass’n, 878 F.2d 742, 751 (3rd Cir. 1989) (noting that Section 546 is at the intersection of “two important national legislative policies [bankruptcy and securities law] . . . on a collision course”). This Court must enforce Section 546(e) “according to its terms.” Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000); see In re Resorts Int’l, Inc., 181 F.3d 505, 516 (3rd Cir. 1999) (plain language of Section 546(e) controls and prohibits avoidance of payments to shareholders in leveraged buyout transaction); Contemporary Indus. Corp. v. Frost, 564 F.3d 981, 986-87 (8th Cir. 2009) (same); In re QSI Holdings, Inc., 571 F.3d 545, 550 (6th Cir. 2009) (same). 17 17 These cases interpreted a previous version of Section 546(e), which protected “margin payments” and “settlement payments” from a trustee’s avoidance powers. In December 2006, Congress broadened the protection of Section 546(e) to include, in addition to “margin payments” and “settlement payments,” any “transfer” made by or to a stockbroker or financial institution “in connection with a securities contract.” 11 U.S.C. § 546(e). 15
Page 1 and 2: Davis Polk & Wardwell LLP 450 Lexin
Page 3 and 4: TABLE OF AUTHORITIES CASES ii PAGE
Page 5 and 6: In re Moore, 39 B.R. 571 (Bankr. M.
Page 7 and 8: 11 U.S.C. § 546(e) ...............
Page 9 and 10: PRELIMINARY STATEMENT Pursuant to t
Page 11 and 12: BLMIS owed the customers as of the
Page 13 and 14: e valued according to the amount of
Page 15 and 16: First, customers’ “net equity
Page 17 and 18: therefore has no bearing on the int
Page 19 and 20: outcome. “[E]quity in the law is
Page 21: cases concluding that lenders are n
Page 25 and 26: [fraudulent transfer law].” Richa
Page 27 and 28: of any security’ [under Rule 10b-
Page 29 and 30: 2. No Intentional Fraud Can Be Alle
Page 31 and 32: ed. 1940)). Fraudulent transfer law
Page 33 and 34: 2002 WL 32500567, at *8 (W.D.N.Y. J
Page 35 and 36: injustice to those statutes and hav

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