On November 27, 2023, the U.S. Court of Appeals for the Second Circuit revived some of a bankruptcy litigation trustee’s fraudulent transfer claims stemming from the leveraged buyout of apparel retailer Nine West. The lawsuit grew out of the 2014 merger of apparel brand holding company Nine West Holdings, Inc. (formerly Jones Group, Inc.) with an affiliate of private equity firm Sycamore Partners. After Nine West filed for bankruptcy, the trustee, representing unsecured creditors, sued Nine West’s former officers, directors, and shareholders for, among other claims, fraudulent transfers, arguing that the merger was structured to strip the best assets from Nine West to keep them out of the hands of its creditors. The Trustees sought recovery of $1.05 billion deposited with Wells Fargo to pay checks and wire transfers to shareholders and $78 million paid to Nine West’s officers, directors, and employee shareholders through its payroll program.
In seeking to dismiss the case, the directors, officers, and paid shareholders argued that the transactions were protected by Section 546(e) of Bankruptcy Code, which generally limits a chapter 11 trustee’s power to avoid securities contract settlement payments made to or for the benefit of a financial institution. The defendants pointed out that under Bankruptcy Code section 101(22)(A), a financial institution includes not just a bank, “but also a customer of a bank ‘when [the bank] is acting as agent or custodian for a customer . . . in connection with a securities contract.” They argued that because Wells Fargo was the depository and disbursing bank for the $1.05 billion of shareholder payments, and because it performed the ministerial task of canceling shares of the old company, Nine West qualified as a “financial institution” and the section 546(e) safe harbor warranted dismissal. Relying on the Second Circuit’s decision In re Tribune Co. Fraudulent Conveyance Litigation, 946 F.3d. 66 (2d Cir. 2019), the district court agreed with the defendants on this point and dismissed the plaintiffs’ fraudulent conveyance and unjust enrichment claims.
The Second Circuit reversed in part, holding that a “financial institution” under Section 546(e) includes bank customers only for transactions where the bank is acting as the customer’s agent. The $1.05 billion in payments to shareholders fell within this safe harbor because Wells Fargo accepted the deposits and made payments in connection with the merger, a securities contract. However, the $78 million in payments to officers, directors and employees did not use Wells Fargo as an agent of Nine West, but its payroll administrator. The Second Circuit held that, because Wells Fargo did not remain subject to Nine West’s control in the case of the payroll payments to directors, officers, and shareholders, so the payroll payments fell outside the scope of Section 546(e)’s safe harbor protection.
The case is Kirschner v. Robeco Capital Growth Funds, No. 20-3257 (2d Cir. Nov. 27, 2023). The plaintiffs are represented by Friedman Kaplan Seiler & Adelman LLP and Diamond McCarthy LLP. The defendants are represented by Ropes & Gray LLP, Morrison Cohen LLP, Norton Rose Fulbright US LLP, and Peckar & Abramson, P.C. The opinion is available here.
