Section 546(e): “Safe Harbor” Held Inapplicable to Small Private LBO...

02/13/12

By:  Shlomo Lazar

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re MacMenamin’s Grill Ltd.,[1] the Bankruptcy Court for the Southern District of New York held that 11 U.S.C. section 546(e)’s safe harbor for settlement payments does not apply to private leveraged buyouts (LBOs).[2]  MacMenamin’s, a closely-held corporation, funded a stock purchase agreement in the form of a LBO through a $1.15 million loan from Commerce Bank, N.A., secured by a security interest in substantially all of MacMenamin’s assets.[3] The lender transferred the loan proceeds directly to the bank accounts of three former shareholders that controlled 93% of MacMenamin’s stock.[4] The court held that the LBO payouts were not settlement payments under 546(e) and were, therefore, avoidable as constructively fraudulent.[5]

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