Fourth Circuit Concludes That Certain Commissions And Margin Interest Payments Are Protected From Avoidance By "Stockbroker Defense"

CASE SNAPSHOT

In a case of first impression, the Fourth Circuit determined that broker commissions shown to be reasonable and customary parts of settling stock sales constitute "settlement payments" and that the payment of margin interest constitutes "margin payments" under section 546(e) of the Bankruptcy Code such that these types of payments are immune from avoidance and recovery by a bankruptcy trustee.

FACTUAL AND PROCEDURAL BACKGROUND

Debtor operated an alleged Ponzi scheme whereby Debtor's customers transferred stocks into brokerage accounts at a registered broker-dealer ("Broker") in Debtor's name in exchange for three-year non-recourse loans worth ninety percent of the stocks' market value. Although Debtor's customers were told that Debtor would hedge their collateral using a confidential formula, Debtor directed Broker to immediately liquidate the stocks. Debtor used the proceeds from the stock sales to fund customers' loans and various start-up