Contemporary Industries Corp. v. Frost

• Decision Date: 29 April 2009
• Docket Number: No. 08-1325.,08-1325.
• Citation: 564 F.3d 981
• Parties: CONTEMPORARY INDUSTRIES CORPORATION, doing business as Contemporary Industries Mid-America, Inc., doing business as Contemporary Industries Southern, Inc.; Official Committee of Unsecured Creditors of CIC, Appellants, v. Terry G. FROST; M. Sue Schmidt, in her capacity as Trustee of the-Erik N. Frost Irrevocable Trust-Brett R. Frost Irrevocable Trust-Erik N. Frost Irrevocable (QSST) Trust-Brett R. Frost Irrevocable (QSST) Trust; Nancy A. Kuhl; Daniel J. Kuhl; David T. Cap; Susan A. Cap, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

564 F.3d 981

CONTEMPORARY INDUSTRIES CORPORATION, doing business as Contemporary Industries Mid-America, Inc., doing business as Contemporary Industries Southern, Inc.; Official Committee of Unsecured Creditors of CIC, Appellants, v. Terry G. FROST; M. Sue Schmidt, in her capacity as Trustee of the-Erik N. Frost Irrevocable Trust-Brett R. Frost Irrevocable Trust-Erik N. Frost Irrevocable (QSST) Trust-Brett R. Frost Irrevocable (QSST) Trust; Nancy A. Kuhl; Daniel J. Kuhl; David T. Cap; Susan A. Cap, Appellees.

No. 08-1325.

United States Court of Appeals, Eighth Circuit.

Submitted: November 14, 2008.

Filed: April 29, 2009.

Thomas Randall Wright, argued, Omaha, NE, Robert V. Ginn, Omaha, NE, Paul B. Bran, Washington, DC, on the brief, for appellant.

William M. Lamson, Jr., argued, Frank N. Schepers, Craig F. Martin, Omaha, NE, on the brief, for appellee.

Before WOLLMAN, BEAM, and BENTON, Circuit Judges.

BEAM, Circuit Judge.

Contemporary Industries Corporation (individually, "Contemporary Industries") and the Official Committee of Unsecured Creditors of CIC (collectively with Contemporary Industries, "CIC") appeal from a grant of summary judgment in favor of the former shareholders of Contemporary Industries. CIC seeks to avoid payments made to those shareholders in exchange for their Contemporary Industries stock during a leveraged buyout of the corporation. The bankruptcy court¹ concluded, and the district court² agreed, the payments were exempt from avoidance as settlement payments within the meaning of a former version of 11 U.S.C. § 546(e) of the Bankruptcy Code. For the reasons set forth herein, we affirm.

I. BACKGROUND

Put simply, the material facts are as follows: defendants Terry Frost, David and Nancy Kuhl, David and Susan Cap, and various Frost family trusts (collectively, "the Frosts"), are the former shareholders of Contemporary Industries, a privately-held Nevada corporation headquartered in Omaha, Nebraska. By late 1995, Contemporary Industries operated 146 convenience stores throughout the Midwest. In December 1995, the Frosts sold their shares to an outside investment group. To facilitate the acquisition, the investment group set up a new corporation, Contemporary Industries Holding (CIH). The investors then obtained significant loans to cover the purchase price of the shares, and pledged Contemporary Industries' assets to the lenders as collateral. Ultimately, CIH deposited approximately $26.5 million with First National Bank of Omaha (First National), and the Frosts deposited their shares with First National. The parties entered into an escrow agreement regarding the distribution of the purchase price funds to the Frosts.

In February 1998, Contemporary Industries filed a voluntary Chapter 11 bankruptcy petition, which CIC now suggests was a direct consequence of the debt load undertaken by the corporation in the leveraged buyout. In late 1999, CIC instituted this adversary proceeding, seeking to recover the payments the Frosts received in exchange for their stock during the leveraged buyout (hereinafter, "the payments"). The complaint alleged that the payments were fraudulent transfers avoidable under 11 U.S.C. § 544 and certain provisions of the Nebraska Uniform Fraudulent Transfer Act. The complaint also alleged that the Frosts were unjustly enriched by the payments and that the payments amounted to excessive and/or illegal shareholder distributions, in violation of applicable non-bankruptcy law.

The Frosts moved for summary judgment, asserting that the payments were exempt from avoidance under § 546(e), the applicable version of which immunized from avoidance all "transfer[s] that [are] ... settlement payment[s] ... made by or to a ... financial institution." 11 U.S.C. § 546(e) (1999). The bankruptcy court agreed and further concluded CIC's claims for unjust enrichment and illegal/excessive distributions were preempted, inasmuch as those claims sought essentially the same relief as the avoidance claims barred by § 546(e). The bankruptcy court therefore granted summary judgment to the Frosts on all claims. The district court affirmed.

II. DISCUSSION

A. Standard of Review

We review the bankruptcy court's grant of summary judgment de novo, applying the same standards as the district court. Tudor Oaks Ltd. P'ship v. Cochrane (In re Cochrane), 124 F.3d 978, 981 (8th Cir.1997). Thus, we will affirm if, after giving the non-moving party the benefit of all reasonable inferences, "there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Id.

B. The § 546(e) Exemption

Section 546(e) of the Bankruptcy Code provides an exception to various other Code provisions that allow a trustee or debtor-in-possession to avoid certain transfers made by the debtor before the bankruptcy case is filed. When this action was commenced in late 1999, that section stated, in pertinent part:

Notwithstanding section[] 544 ... of this title, the trustee may not avoid a transfer that is a ... settlement payment, as defined in section ... 741 of this title, made by or to a ... financial institution, ... that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.[³]

11 U.S.C. § 546(e) (1999)⁴ (emphases added). The Frosts contend on appeal, and the bankruptcy and district courts held, that the payments they received in exchange for their privately-held Contemporary Industries stock are exempt from avoidance within the plain meaning of the italicized language. CIC contends, however, that the payments are not settlement payments within the meaning of § 546(e), because that section was enacted to protect the stability of the financial markets and only protects payments made to settle public securities transactions. CIC also contends the payments were not "made by or to a ... financial institution" within the meaning of § 546(e), because First National never obtained a beneficial interest in the funds.

To resolve these questions of statutory interpretation, we begin, as always, by looking to the relevant statutory text. Lamie v. United States Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004). Where statutory language is plain, "the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms." Id. (quotation omitted). Thus, if the relevant text is not reasonably susceptible to more than one interpretation, we will not look beyond it unless application of the plain language "will produce a result demonstrably at odds with the intentions of its drafters." United States v. Ron Pair Enters., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (quotation omitted).

With those principles in mind, we first consider whether the payments at issue are settlement payments within the meaning of § 546(e). A "settlement payment," for these purposes, is defined as "a preliminary settlement payment, a partial 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. § 741(8). We have not had an occasion to consider whether payments for privately-held securities fall within that definition. Three of our sister circuits have concluded, however, that § 741(8) is "extremely broad" and intended to encompass most payments that can be considered settlement payments. Kaiser Steel Corp. v. Charles Schwab & Co., 913 F.2d 846, 848 (10th Cir.1990) (quotation omitted). Accord Lowenschuss v. Resorts Int'l, Inc. (In re Resorts, Int'l, Inc.), 181 F.3d 505, 514-15 (3d Cir.1999); Jonas v. Resolution Trust Corp. (In re Comark), 971 F.2d 322, 326 (9th Cir.1992). And as the concluding phrase in § 741(8) suggests, that term is one of art in the securities trade and should be given its established meaning in that industry. See McDermott Int'l, Inc. v. Wilander, 498 U.S. 337, 342-46, 111 S.Ct. 807, 112 L.Ed.2d 866 (1991). Specifically, "settlement" refers to "the completion of a securities transaction," Kaiser Steel Corp., 913 F.2d at 849 (quotation omitted) (citing various securities industry reference materials), and a "settlement payment is generally the transfer of cash or securities made to complete [the] securities transaction." In re Resorts, Int'l, Inc., 181 F.3d at 515 (citing Kaiser Steel Corp., 913 F.2d at 849).

After construing § 741(8) broadly, both the Third and Tenth Circuits have concluded payments made to selling shareholders in the course of a leveraged buyout qualify as settlement payments within the plain meaning of § 546(e). Id. at 515-16; Kaiser Steel Corp. v. Pearl Brewing Co. (In re Kaiser Steel Corp.), 952 F.2d 1230, 1238-40 (10th Cir.1991). CIC would distinguish Resorts and Kaiser on the ground that both involved publicly traded securities and points out that several courts have concluded the statutory definition of settlement payment does not encompass payments for privately held securities. See, e.g., Official Comm. of Unsecured Creditors v. Lattman (In re Norstan Apparel Shops, Inc.), 367 B.R. 68, 76-77 (Bankr. E.D.N.Y.2007); Official Comm. of Unsecured Creditors v. Asea Brown Boveri, Inc. (In re Grand Eagle Co.), 288 B.R. 484, 494 (Bankr.N.D.Ohio 2003); see also Kipperman v. Circle Trust F.B.O. (In re Grafton Partners, L.P.), 321 B.R. 527, 539-40 (B.A.P. 9th Cir.2005). The general rationale behind those holdings, which rely in part on legislative history, is that § 546(e) was enacted to protect the nation's financial markets against instability caused by the reversal of settled securities transactions, that undoing private transactions does not implicate those concerns, and therefore, that Congress did not intend for payments like the ones at issue to fall within the purview of the exemption. See, e.g., In re Norstan Apparel Shops, Inc., 367 B.R. at 76 (concluding that "in the context of the...