In Delaware, Debtors are “Financial Participants”
12.28.20
On December 23, 2020, the United States Bankruptcy Court for the District of Delaware (the Delaware Bankruptcy Court) issued an opinion in in re Samson Resources Corp., LLC, et al. (Samson) holding that the term “financial participant,” as it is defined in the Bankruptcy Code, includes the debtors. Samson, Adv. Pro. No. 17-51524 (BLS), slip op., page 13 (Bankr. D. Del. Dec. 23, 2020).
This holding draws the Delaware Bankruptcy Court in direct conflict with the United States District Court for the Southern District of New York (SDNY), which, in in re Tribune Company Fraudulent Conveyance Litigation (Tribune), held that a debtor cannot be a “financial participant” as defined under the Bankruptcy Code. Tribune, No. 11MD2296 (DLC), 2019 WL 1771786, at *9 (S.D.N.Y. Apr. 23, 2019).
Section 101(22A) of the Bankruptcy Code defines a “financial participant” as “an entity that [entered into a qualifying contract] with the debtor or any other entity (other than an affiliate) [for a certain qualifying amount].” 11 U.S.C. § 101(22A) (emphasis added).
In Tribune, SDNY determined that the better interpretation of section 101(22A) excludes the debtor as “an entity” that entered into a contract “with the debtor or any other entity (other than an affiliate)” because such interpretation would render the inclusion of the term “debtor” in the second part of the definition “puzzling.” Tribune, at *9. SDNY’s ratio decidendi was that in interpreting statutes, a court is to give effect to all of the statute’s provisions so that no provision is inoperative or superfluous, void or insignificant. Id. In applying this canon of construction, SDNY explained that, “if the term ‘entity’ is meant to include the debtor, then it would be redundant to refer to ‘the debtor,’ distinguishing it from ‘any other entity’ in the second part of the definition.” Id. At bottom, according to SDNY, a debtor cannot be a financial participant under the Bankruptcy Code.
The Delaware Bankruptcy Court interprets section 101(22A) differently. In Samson, the Delaware Bankruptcy Court concluded that a debtor may be a financial participant because the plain text of the section provides that a financial participant is “an entity,” and that such entity must enter into a requisite agreement “with the debtor or any other entity (other than an affiliate).” Samson, at pages 12–13 (quoting 11 U.S.C. § 101(22A) (emphasis added)). In reaching its conclusion, the Delaware Bankruptcy Court reasoned that Congress knows how to exclude the debtor from defined terms in the Bankruptcy Code when it intends for the debtor to be excluded. Id., at page 12. Specifically, the Delaware Bankruptcy Court references the definitions of “swap participant” and “repo participant,” found at sections 101(53C) and 101(46) of the Bankruptcy Code, respectively. Id. Congress defined a swap participant as “an entity that, at any time before the filing of the petition, has an outstanding swap agreement with the debtor.” 11 U.S.C. § 101(53C) (emphasis added). A repo participant is likewise defined as “an entity that, at any time before the filing of the petition, has an outstanding repurchase agreement with the debtor.” 11 U.S.C. § 101(46) (emphasis added). In each instance, as the Delaware Bankruptcy Court points out, Congress omitted the addition of “or any other entity” following “with the debtor.” Samson, at page 12. In defining a financial participant, however, Congress included the addition of “or any other entity.” 11 U.S.C. § 101(22A). Relying on this difference, the Delaware Bankruptcy Court refused to treat the addition of “or any other entity” in section 101(22A) as meaningless or superfluous. As a result, Debtors may be financial participants in Delaware.
Although very few other courts have considered this issue, the United States Bankruptcy Court for the Middle District of Florida issued an opinion in 2017 that aligns with the Delaware Bankruptcy Court’s interpretation of section 101(22A) in Samson. See In re Taylor, Bean & Whitaker Mortgage Corporation, No. 3:09-BK-07047-JAF, 2017 WL 4736682, at *6 (Bankr. M.D. Fla. Mar. 14, 2017) (“Put directly, a ‘financial participant’ is ‘an entity’ that has sufficient qualifying transactions ‘with the debtor or any other entity.’ [The debtor] meets this definition.”) (internal citations omitted). I suspect that—absent a change to section 101(22A) of the Bankruptcy Code—more courts will come to agree with the Delaware Bankruptcy Court’s interpretation of section 101(22A) over time because it is truer to the canon of surplusage, giving meaning and effect to the inclusion of “or any other entity.”