In re Kaiser Steel Corp.
| Decision Date | 22 January 1990 |
| Docket Number | Civ. A. No. 89-K-1731. |
| Citation | 110 BR 514 |
| Parties | In re KAISER STEEL CORP., et al., Debtor. KAISER STEEL RESOURCES, INC., Plaintiff, v. Irwin L. JACOBS, et al., Defendants. |
| Court | U.S. District Court — District of Colorado |
H. Thomas Coghill, G. Stephen Long, Coghill & Goodspeed, Denver, Colo., and Susan M. Freeman, Lewis & Roca, Phoenix, Ariz., for Kaiser Steel Corp.
Rosalind C. Cohen, Katharine Gresham, Joseph H. Harrington, SEC, Washington, D.C., and Thomas D. Carter, Regional Trial Counsel, SEC, Denver, Colo., for party in interest SEC.
Kenneth L. Baker, Michael H. Berger, Waldbaum, Corn, Koff & Berger, Denver, Colo., for National Finances Service Corp.
Thomas H. Young, Michael J. Guyerson, Rothgerber, Appel, Powers & Johnson, Denver, Colo., for Charles Schwab & Co., Inc.
David I. Blejwas, Rosanne M. Thomas, Hahn & Hessen, New York City, for Bear Stearns and Co., Cowen & Co., Doft & Co., Inc., L.F. Rothschild & Co., Inc., Unterberg Towbin, Shearson Lehman Bros./American Express Inc., Smith, Barney, Harris, Upham & Co., Inc.
Richard S. Vermeire, Thomas H. Keyse, Dwight K. Shellman III, Moye, Giles, O'Keefe, Vermeire and Gorrell, Denver, Colo., for Bear Stearns & Co., Cowen & Co., Doft & Co. Inc., L.F. Rothschild & Co., Inc., Unterberg, Towbin, Shearson Lehman Bros./American Express, Inc., Smith, Barney, Harris, Upham & Co., Inc., Tweedy Brown Clearing Corp., Fahnestock & Co., Edward A. Vinert & Co., First Albany Corp., Tucker, Anthony & R.L. Day, Inc., Thomson McKinnon & Co., Inc., and Kellner, DiLeo & Co., Inc.
Robert A. Zupkus, Zupkus & Ayd, P.C., Denver, Colo., for AmSouth Bank, N.A.
David B. Rosenman, Lewis, D'Amato, Brisbois, Bisgaard, Los Angeles, Cal., for Bank of New England and Bank of New England-West.
William D. Nelson, Asst. Gen. Counsel, Denver, Colo., for Boettcher & Co., Inc.
John B. Moorhead, Theodore Shih, Baker & Hostetler, Denver, Colo., for Drexel Burnham Lambert, Inc.
J. Michael Morgan, Lohf Shaiman & Ross, P.C., Denver, Colo., Sara E. Moss, C. Willima Phillips, Howard, Darby & Levin, New York City, for Brown Brothers Harriman & Co.
James J. Moylan, James J. Moylan & Associates, Chicago, Ill., for Burke, Christensen, & Lewis Securities, Inc.
John S. Lutz, Salie B. O'Malley, Kelly, Stansfiled & O'Donnell, Denver, Colo., for Chicago Corp., Piper, Jaffray & Hopwood, Speak, Leeds & Kellogg and SLK-SEG, and Tweedy Brown Clearing Corp.
Barry L. Wilkie, Charles R. Beach, W. Bruce Thompson, Shaw, Spangler & Roth, Denver, Colo., P. Kevin Casterl, Susan Harkins, Cahill, Gordon & Reindel, New York City, for Dillon, Read & Co. Inc.
Karen Johnson-McKewan, Brobeck, Phleger & Harrison, San Francisco, Cal., for Wells Fargo and Crocker Nat. Bank.
Jeffrey A. Kehl, McGuire & Tierman, New York City, for Kellner, DiLEO & Co., Inc.
Michael H. Du Boff, Salon, Marrow & Dyckman, New York City, for Ernst & Co.
Michael Heitner, Herrick, Feinstein, New York City, for Evans & Co., Inc.
Paul L. Matecki, Boca Raton, Fla., for JW Charles Securities, Inc.
Robert Swanson, Hamilton, Myer, Swanson, Faatz & Clark, Denver, Colo., for Josephthal & Co. Inc. and Herzfeld & Stern, nka JII Securities, Inc.
Jay G. Epstein, Shearman & Sterling, New York City, for Lewco Securities Corp.
Edwin G. Perlmutter, M. Frances Cetrulo, Howard B. Gelt, Berenbaum & Weinshienk, P.C., Denver, Colo., for National Bank of Detroit, May Financial Corp., Manufacturers and Traders Trust Co. and Bankers Trust of New York.
Douglas R. Ferguson, Hopper, Kanouff, Smith, Peryam and Terry, Denver, Colo., for Olde Discount Corp. William C. Roush, Freud, Markus, Slavin & Galgan, Troy, Mich., for Roney & Co.
Luke J. Danielson, Laurie K. Rottersman, Gersh & Danielson, Denver, Colo., for Stifel Nicolaus & Co.
Jacques A. Machol, Jr., Jacques A. Machol, III, Randall D. Johnson, Machol & Machol, P.C., Denver, Colo., for U.S. Trust Co. of New York.
Dennis C. Brown, Munger, Tolles & Olson, Los Angeles, Cal., Robert F. Hill, Karen A. Tomb, Hill & Robbins, Denver, Colo., for Pacific & Co.
Martin P. Unger, Gaston & Snow, New York City, James A. Shpall, Wolf & Slatkin, P.C., Denver, Colo., for Securities Settlement Corp.
Mark Grobmyer, Arnold, Grobmyer & Haley, Little Rock, Ark., Harold A. Feder, Feder, Morris, Tamblyn & Goldstein, Denver, Colo., for Stephens, Inc.
This is an appeal from the bankruptcy court's September 25, 1989, ruling denying the motion of Charles Schwab & Co., Inc. for summary judgment in the Jacobs1 action. There were no disputed issues of fact. Schwab argued that it was entitled to summary judgment because it was a mere conduit in the stock redemption transactions which occurred as part of the 1984 leveraged buyout of Kaiser. Other parties joining in the motion argued that the payments Schwab received were "settlement payments" exempt from recovery under 11 U.S.C. § 546(e). The bankruptcy court denied the motion, finding that Schwab could be held liable under common-law agency principles and holding § 546(e) inapplicable. On October 25, 1989, I granted leave to appeal this interlocutory ruling. After examining the briefs and listening to oral argument, I reverse the bankruptcy court's ruling.
There are three issues raised by this appeal. First, can Schwab be required to turnover proceeds from an allegedly fraudulent conveyance as an "initial transferee" under 11 U.S.C. § 550(a)(1)? Second, even if Schwab can be considered initial transferee, is it nevertheless protected by 11 U.S.C. § 546(e), which exempts "settlement payments" made to brokers from recovery as a fraudulent conveyance? Third, in the absence of a clear interpretation of §§ 550(a)(1) and 546(e), do common-law agency principles require that Schwab be held liable for these transactions?2 These issues are discussed below.
In 1984, the Kaiser Steel Corporation entered into a merger agreement with the Kaiser Acquisition Corporation (KAC), a Delaware corporation owned by Equivest Associates, a partnership. Under the merger agreement, the KAC acquired ownership of all of the outstanding common stock of Kaiser. In exchange, the stockholders of Kaiser received $22.00 per share of common stock, plus one share of Series A and one share of Series B preferred stock.
Kaiser prepared a prospectus and proxy statement outlining the terms of the proposed merger. At a shareholders meeting on January 18, 1984, the Kaiser shareholders approved the merger. Upon the filing of the merger agreement with the Delaware Secretary of State on February 29, 1984, the merger became effective. Kaiser Steel Corporation merged with KAC and became a Delaware corporation.
Kaiser contracted with the Bank of America to act as its disbursing agent to effect the redemption of Kaiser stock during the LBO/merger. Bank of America was authorized to receive the redeemed stock and to distribute the cash payments and newly issued preferred stock to shareholders. At the time of the redemption, Kaiser did not know who owned its common stock.
Some of the Kaiser's stock was owned by customers of Schwab. Schwab used the services of the Depository Trust Company (DTC) to effect the redemption of its customers' stock. DTC is a settlement and clearing agency for stock transactions registered under the Securities Exchange Act of 1934. DTC and other securities clearinghouses enable financial organizations such as Schwab to transfer and pledge securities on behalf of their customers by means of computerized bookkeeping records without physically transferring the securities. DTC also retains physical custody of stock certificates on behalf of its clients. Certificates for registered securities deposited with DTC are held in the name of Cede & Co., DTC's holding company.
As a participant in DTC, Schwab registers its customers' securities in a nominee name, or "street name," in this case in the name of Schwab & Co., Inc. Use of the nominee or street name registration permits DTC to record the transfer of stock between participants' customers by book entry, without the need to change the registration on the issuer's books in order to transfer the securities. Instead, the transferor's account with DTC is simply debited and the transferee's is credited.
For the redemption of its customers' Kaiser stock, Schwab instructed DTC to surrender the Kaiser shares held for Schwab's customers in the name of Cede & Co. to the Bank of America.3 Upon receipt of the proper documentation, Bank of America distributed the cash and preferred stock to DTC. DTC then credited the funds to the National Securities Clearing Corporation (NSCC), Schwab's sponsor in DTC.4 Schwab then credited its customers' accounts.
It is undisputed that, at the time of the merger, Schwab held no Kaiser stock for its own benefit. It is likewise undisputed that Schwab provides no investment advice to its customers, that it did not advise its customers on the merits of the LBO, and that it received no compensation for any services relating to the redemption. Schwab followed the instructions of its customers concerning the voting of their shares with respect to the approval of the LBO; some were voted for the transaction, and some against it. Schwab's form agreements with its customers provide that all securities and money held in Schwab accounts are subject to a lien for the discharge of customer indebtedness to Schwab. Some types of account agreements permit Schwab to pledge securities in Schwab's possession to secure amounts due from customers.
Kaiser filed the Jacobs action in February of 1987. Jacobs is a fraudulent conveyance action under the "strong arm" clause of § 544(b) of the Bankruptcy Code. That section provides:
The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a...
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