In his final opinion, Judge Robert D. Drain of the United States Bankruptcy Court for the Southern District of New York held that dividends paid from proceeds of safe-harbored transactions under section 546(e) of the Bankruptcy Code are not safe-harbored.
While only approximately 15 pages of Judge Drain’s 109-page final opus are dedicated to consideration of the section 546(e) issue, the relevant analysis ends with a pressing question to Congress and an appeal to modify section 546(e) to “restrict to public transactions its currently overly broad free pass . . . that has informed the playbook of private loan and equity participants to loot privately held companies to the detriment of their non-insider creditors with effective impunity.”[1] The logic of the opinion poses a clear hurdle to private equity participants looking to protect their dividends by arguing that such dividends are part of an integrated transaction that is otherwise safe-harbored under section 546(e).
