Kelley v. Safe Harbor Managed Account 101, Ltd.

Background

Douglas A. Kelley, acting as trustee of the PCI Liquidating Trust, sued Safe Harbor Managed Account 101, Ltd. to recover $6,898,923.39 transferred from Arrowhead Capital Management Corp. to Safe Harbor. The transfers followed investments by Safe Harbor in Arrowhead and Safe Harbor’s later redemption of that investment. The action arose from transfers connected to the multi-billion-dollar Ponzi scheme orchestrated by Tom Petters and entities associated with Petters Company, Inc.

Section 546(e) of the Bankruptcy Code protects certain transfers from being avoided, or recovered for the benefit of a bankruptcy estate, when they involve a financial institution and are made in connection with a securities contract. The court had previously ruled that Safe Harbor was protected under Section 546(e), finding that Arrowhead was a financial institution, Wells Fargo acted as its custodian, and the Note Purchase Agreement was a securities contract.

Remand and Issue

The Eighth Circuit affirmed those findings but remanded because the court had treated Metro I, LLC and MGC Finance, Inc. as the same entity. The relevant transfers were made by MGC Finance to Arrowhead, while Metro—not MGC Finance—was a party to the Note Purchase Agreement. The remand required the court to decide whether the transfers made by MGC Finance were nevertheless “in connection with” the Note Purchase Agreement.

Analysis

The court explained that, under the Eighth Circuit’s interpretation of Section 546(e), a transfer is “in connection with” a securities contract if it is related to or associated with that contract. The required relationship is a low bar. Kelley argued that the transfers were made under a separate Credit Agreement and promissory notes and that those documents were not securities contracts. The court did not decide whether the Credit Agreement and promissory notes themselves were securities contracts because that determination was unnecessary.

The court found that the Credit Agreement and the Note Purchase Agreement were part of an integrated transaction. Multiple related agreements were created at about the same time, and the record showed that the transfers would not have occurred without the Note Purchase Agreement. The court also noted testimony from Kelley’s expert stating that it was fair to assume the transfers were made in connection with the Note Purchase Agreement.

Because Kelley offered no facts supporting a different reason for the transfers, the court concluded that no reasonable jury could find that the transfers were unrelated to the Note Purchase Agreement. The court therefore held that the later transfers to Safe Harbor were protected under Section 546(e).

Disposition

The court granted Safe Harbor’s motion for summary judgment and ordered that judgment be entered accordingly. Judge John R. Tunheim’s order resolved the narrow issue sent back by the Eighth Circuit; it did not decide whether the Credit Agreement and promissory notes were themselves securities contracts.