Kaiser Steel Corp. v. Charles Schwab & Co., Inc., SLK-SEG

Citation913 F.2d 846
Decision Date07 September 1990
Docket NumberSLK-SEG,No. 90-1078,90-1078
Parties, 23 Collier Bankr.Cas.2d 1403, 20 Bankr.Ct.Dec. 1650, Bankr. L. Rep. P 73,620 KAISER STEEL CORPORATION, Plaintiff-Appellant, v. CHARLES SCHWAB & CO., INC.; Securities and Exchange Commission, Appellees, and National Financial Services Inc.; Unterberg, Towbin, Shearson Lehman Brothers/American Express Inc.; Amsouth Bank, N.A.; Bank of New England; Bank of New England-West; Boettcher & Company, Inc.; Drexel, Burnham & Lambert, Inc.; Brown Brothers Investment Company, Brown Brothers Harriman & Co.; Burke, Christensen & Lewis Securities, Inc.; Piper, Jaffray & Hopwood, Incorporated; Sspeak, Leeds & Kellogg; The Chicago Corporation;; Tweedy Brown Clearing Corporation; Dillon, Read & Co.; Edward D. Jones & Co.; Fahnestock & Co.; Edward A. Viner & Co.; First Albany Corp.; Tucker, Anthony & R.L. Day, Inc.; Thompson, McKinnon & Co., Inc.; Wells Fargo; Crocker National Bank; Kellner, Dileo & Co., Inc.; Mabon, Nugent & Co.; Ernst & Company; Evans & Co., Inc.; JW Charles Securities, Inc.; Josephthal & Co., Inc.; Herzfeld & Stern, n/k/a JII Securities, Inc.; Lewco Securities Corp.; National Bank of Detroit; May Financial Corporation; Manufacturers and Traders Trust Co.; Bankers Trust of New York; Olde Discount Corporation; Roney & Co.; Stifel Nicolous & Company; United States Trust Company of New York; Pacific & Co.; Securities Settlement Corporation; Stephens, Inc.; Chemical Bank; Morgan Guaranty Trust Company of New York; Millikin National Bank of Decatur, Defendants, and Bear Stearns & Co., Inc.; Cowen & Co.; Doft & Co., Inc.; L.F. Rothschild & Co., Inc.; Smith, Barney, Harris, Upham & Co., Inc.; Herzog, Heine & Geduld, Inc.; M.H. Davidson & Co. Inc.; Cascade Fund, Defendants-Intervenors.
CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)

Susan M. Freeman, Lewis and Roca, Phoenix, Ariz. (Marty Harper, Lewis and Roca, Phoenix, Ariz., G. Stephen Long, and David J. Richman, Coghill & Goodspeed, Denver, Colo., with her, on briefs), for plaintiff-appellant.

Thomas H. Young (Michael J. Guyerson, with him, on brief), Rothgerber, Appel, Powers & Johnson, Denver, Colo., for defendant-appellee, Charles Schwab & Co., Inc.

Katharine Gresham, Asst. Gen. Counsel (Paul Gonson, Sol., of counsel, James R. Doty, Gen. Counsel, Jacob H. Stillman, Associate Gen. Counsel, and Joseph H. Harrington, with her, on brief), S.E.C., Washington, D.C., for defendant-appellee, Securities and Exchange Com'n.

David I. Blejwas, Hahn & Hessen, New York City, for defendants-intervenors.

Before HOLLOWAY, Chief Judge, and ANDERSON and TACHA, Circuit Judges.

STEPHEN H. ANDERSON, Circuit Judge.

Debtor-in-possession Kaiser Steel Resources, Inc. ("Kaiser"), formerly known as Kaiser Steel Corporation ("Kaiser Steel"), appeals from the district court's reversal of the bankruptcy court's order denying defendant Charles Schwab & Company, Inc. ("Schwab") summary judgment. We affirm.

In late 1983, the board of directors of Kaiser Steel, a publicly-traded corporation, agreed to a leveraged buyout ("LBO") by a group of outside investors ("the acquisition group"). Under the plan, a new entity owned by the acquisition group would purchase all outstanding Kaiser Steel common stock and merge with Kaiser Steel. Each share of Kaiser Steel common stock would be converted into the right to receive twenty-two dollars and two shares of preferred stock 1 in the surviving entity. The money, which amounted to $162 million, was to come from Kaiser Steel's cash reserves and a $100 million loan from Citibank secured by the corporation's assets. R.Vol. I, Tab 10 at 3-4, Ex. 17 at 27-37.

The shareholders approved the LBO on January 18, 1984. As of the effective date of the merger, February 29, 1984, holders of Kaiser Steel common stock were required to tender their shares to Kaiser's disbursing agent, Bank of America, which distributed the cash and preferred stock. R.Vol. I, Tab 10 at 4. The New York Stock Exchange delisted the stock the following day. R.Vol. II, Tab 46, Ex. 1 at 1.

Among the holders of Kaiser Steel common stock were customers of Schwab, a securities broker. Most of the certificates were in the possession of the Depository Trust Company ("DTC"), a securities clearinghouse. DTC tendered the shares to Bank of America, and received the cash and preferred stock in the surviving entity. DTC transferred the money to Schwab through the National Securities Clearing Corporation, which sponsors Schwab's participation in DTC. R.Vol. I, Tab 9 at 1, 4-6. Some of the transfers were made directly between Schwab and Bank of America because DTC stopped handling Kaiser stock. Id. at 6-7; R.Vol. II, Tab 12, Ex. A at 2. Schwab credited its customers' accounts within a few days of receiving the funds. R.Vol. II, Tab 12, Ex. B at 2-3. All told, Schwab handled approximately $450,000. R.Vol. I, Tab 9 at 8.

In 1987, Kaiser filed for bankruptcy. The debtor-in-possession commenced this fraudulent conveyance action against a number of defendants, seeking to avoid the LBO and recover the $162 million. Schwab moved for summary judgment on two grounds: that it was not liable because it was a "mere conduit" rather than a transferee, see 11 U.S.C. Sec. 550(a), and that the LBO payments were exempt from avoidance as settlement payments, see 11 U.S.C. Sec. 546(e). 2 The bankruptcy court denied the motion. In re Kaiser Steel Corp. (Kaiser Steel Corp. v. Jacobs ), 105 B.R. 639 (Bankr.D.Colo.1989). The district court accepted an interlocutory appeal and reversed the bankruptcy court on both issues. In re Kaiser Steel Corp. (Kaiser Steel Resources, Inc. v. Jacobs ), 110 B.R. 514 (D.Colo.1990). The district court then entered a final judgment in the matter pursuant to Rule 54(b) of the Federal Rules of Civil Procedure. Because we affirm on the settlement issue, we do not reach the conduit question.

A trustee or debtor-in-possession may not avoid

a transfer that is a margin payment, as defined in section 741(5) or 761(15) of this title, or a settlement payment, as defined in section 741(8) of this title, made by or to a commodity broker, forward contract merchant, stockbroker, financial institution or securities clearing agency, that is made before the commencement of the case, except under section 548(a)(1) 3 of this title."

11 U.S.C. Sec. 546(e). Section 741(8) defines settlement payment as "a preliminary settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade." 11 U.S.C. Sec. 741(8). We agree with the district court that the transfer of the consideration in the LBO was a settlement payment.

The definition in section 741(8), while somewhat circular, is "extremely broad," In re Bevill, Bresler & Schulman Asset Management Corp. (Bevill, Bresler & Schulman Asset Management Corp. v. Spencer Savings & Loan Ass'n ), 878 F.2d 742, 751 (3d Cir.1989), in that it clearly includes anything which may be considered a settlement payment. See In re Blanton (Blanton v. Prudential-Bache Securities, Inc.), 105 B.R. 321, 347 (Bankr.E.D.Va.1989) (because margin and settlement payment are "very broadly defined by the Bankruptcy Code," court accepts the argument that "any payment by [the debtor] which was used to reduce a deficiency in his margin account constituted either a margin or settlement payment for purposes of the exception under Sec. 546(e)"); see also In re Bevill, Bresler & Schulman Asset Management Corp. (Cohen v. Savings Building & Loan Co.), 896 F.2d 54, 61 (3d Cir.1990) (holding that transferring securities to a safekeeping account for a purchaser is a settlement payment; apparently overruling In re Bevill, Bresler & Schulman, Inc. (Hill v. Spencer Savings & Loan Ass'n ), 94 B.R. 817, 828-29 (D.N.J.1989)). But cf. In re Edelsberg (Edelsberg v. Thompson McKinnon Securities, Inc.), 101 B.R. 386, 389 (Bankr.S.D.Fla.1989) (execution of judgment on debt for settlement payment is not itself a settlement payment).

Such an interpretation "is consistent with the legislative intent behind Sec. 546 to protect the nation's financial markets from the instability caused by the reversal of settled securities transactions." Kaiser Steel Resources, Inc. v. Jacobs, 110 B.R. at 522.

Section 546 was first enacted in 1978, and applied only to commodities markets. See 11 U.S.C. Sec. 764(c) (repealed 1982). 4 "Settlement payment" was not defined. Congress sought to "promote customer confidence in commodity markets generally" via "the protection of commodity market stability." S.Rep. No. 989, 95th Cong., 2d Sess. 8 (1978), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5794. However, because the provision only applied to margin payments to brokers and settlement payments from clearing organizations, it could be said only to "protect[ ] the ordinary course of business in the market." H.R.Rep. No. 595, 95th Cong., 2d Sess. 392 (1978), reprinted in 1978 U.S.Code Cong. & Admin.News 5963, 6348. But see 124 Cong.Rec. 17,433 (1978) (the section "protect[s] all margin payments in the customer-broker-clearinghouse chain") (statement of Sen. Mathias).

In 1982, "Congress was concerned about the volatile nature of the commodities and securities markets ...," Bevill, Bresler & Schulman Asset Management Corp. v. Spencer Savings & Loan Ass'n, 878 F.2d at 747, so former section 764(c) was replaced by sections 546(e) and 741(5) and (8) "to clarify and, in some instances, broaden the commodities market protections and expressly extend similar protections to the securities market." H.R.Rep. No. 420, 97th Cong., 2d Sess. 2 (1982), reprinted in 1982 U.S.Code Cong. & Admin.News 583, 583. The protection was expanded beyond the ordinary course of business to include margin and settlement payments to and from brokers, clearing organizations, and financial institutions. 5 Again, Congress's purpose was "to minimize...

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