S.D.N.Y. Bankruptcy Court Holds that Safe Harbor Protects SunEdison’s Purchase of First Wind Assets

December 11, 2020

Judge Stuart M. Bernstein of the U.S. Bankruptcy Court for the Southern District of New York recently issued a decision that held that the Bankruptcy Code’s safe harbor under section 546(e) (the “Safe Harbor”) barred a fraudulent conveyance claim that sought to unwind a transaction where a special purpose entity (“SPE”) pledged securities to a bank as collateral for repayment of notes issued by the SPE under a purchase and sale agreement.[1] The core of his decision rests on the principle that the Safe Harbor protects integrated transfers.

Judge Bernstein’s decision joins a growing body of recent case law that reaffirms the durability of the Safe Harbor. In 2018, the U.S. Supreme Court decided Merit Management Group, LP v. FTI Consulting, Inc.,[2] concluding that bankruptcy courts must focus on the relevant overarching transfer that is sought to be avoided and cannot isolate a single component of an integrated transfer. Earlier this year, Judge Robert Grossman wrote a decision in Boston Generating,[3] built on and applied Merit, and similarly held that bankruptcy courts must focus on the overall transaction, and not on a single component of a multi-step transfer.

Judge Bernstein’s decision expands the scope of the Safe Harbor defense and, if followed, will protect the finality of securities transactions that are effected through financial institutions. Under the Safe Harbor, the term “financial institution” includes the customers of a financial institution. Judge Bernstein’s decision confirms that the Safe Harbor shields (i) financial institutions operating as clearinghouses and escrow agents, and (ii) investors, investment funds, and similar entities who participate in securities transactions through financial institutions.

Background of SunEdison’s Purchase of First Wind Assets

The Structure of SunEdison’s Purchase of the First Wind Assets

SunEdison Holdings Corporation (“SunEdison Holdings”) was a wholly owned subsidiary of SunEdison, Inc. (“SUNE”), a renewable-energy development company. In November 2014, SunEdison Holdings owned Class B common stock in Terraform Power, Inc. (“TERP”), a company publicly traded on the NASDAQ; and Class B units in TerraForm Operating LLC, one of TERP’s operating subsidiaries (the “Class B Securities”).

In November 2014, SUNE and TerraForm Power, LLC[4] entered into a Purchase and Sale Agreement (the “PSA”) with D. E. Shaw Composite Holdings, L.L.C. and other investors (the “Sellers”) to purchase the Sellers’ equity interests in First Wind Holdings, LLC (“First Wind”), a renewable-energy company.

Under the PSA, SUNY agreed to purchase the equity interests representing First Wind’s assets, including a development platform, pipeline, and other projects (the “First Wind’s Assets”). SunEdison Holdings was not a party to the PSA. SUNY funded the purchase by forming an SPE[5] that issued $350 million of exchangeable notes (“Notes”). The Notes were secured by the Class B Securities that SunEdison Holdings transferred to the SPE. The SPE pledged the Class B Securities to Wilmington Trust, N.A (the “Bank”) to secure the repayment of the Notes.

The sale and funding were completed in January 2015. First, the SPE was formed, received the Class B Securities, and issued the Notes under an indenture (the “Step One Transfer”). Second, the SPE pledged the Class B Securities to the Bank  as collateral for the Notes (the “Step Two Transfer” and together with the Step One Transfer, the “January 2015 Transfer”). Under the pledge agreement, the Bank held a first lien on the Class B Securities and could sell the Class B Securities for the benefit of the Sellers in the event of a default under the Notes.

SunEdison’s Bankruptcy and Constructive Fraudulent Transfer Claims

On April 21, 2016, SUNY and various subsidiaries and affiliates (the “Debtors”) commenced bankruptcy cases under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the “Court”). The SPE was not a debtor. The Debtors’ chapter 11 plan was confirmed on July 28, 2017. Under the plan, the Debtors’ litigation claims were transferred to the SunEdison Litigation Trust (the “Trust”).

On April 20, 2018, the Trust sued the SPE and the Sellers, seeking to unwind, as a constructive fraudulent conveyance, the Step One Transfer under sections 548(a)(1)(B) and 550 of the Bankruptcy Code and sections 272-275, 278 and/or 279 of the N.Y. Debtor Creditor Law.

The defendants moved to dismiss the complaint, arguing that the Safe Harbor barred the Trust’s claims. The Trust contended that the Safe Harbor did not apply because the Bank, a “financial institution,” was not the SPE’s agent in connection with the Step One Transfer and the Bank did not facilitate the transfer of the Class B Securities to the SPE. The Trust urged the Court to ignore the Step Two Transfer (the SPE’s subsequent pledge of the Class B Securities to the Bank). The Trust hoped to remove the Bank from the picture by isolating the Step One Transfer and ignoring the Step Two Transfer. The defendants disagreed, arguing that the Step One Transfer must be considered together with the Step Two Transfer to the Bank, as part of an integrated transaction, because it would not have occurred without the Step Two Transfer.

Bankruptcy Court’s Decision

Judge Bernstein began his decision with a review of the language of Section 546(e), the legal standard for the application of the Safe Harbor, and the U.S. Supreme Court’s decision in Merit.

The Legal Standard for Application of the Safe Harbor

Section 546(e) of the Bankruptcy Code provides that the trustee “may not avoid . . . a [prepetition] transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract.”[6] The Safe Harbor applies if two requirements are met: (1) there is a qualifying transaction (i.e., a transfer made in connection with a securities contract)); and (2) there is a qualifying participant (i.e., the transfer is made by, to, or for the benefit of, a financial institution).

Identifying the Relevant Transfer – the January 2015 Transfer

In Merit, the U.S. Supreme Court held that the relevant transfer is the “overarching transfer” that is sought to be avoided. The U.S. Supreme Court concluded that the Safe Harbor does not apply where a qualifying participant serves as a mere conduit or intermediary in connection with the overarching transfer between non-qualifying participants.

Judge Bernstein identified the relevant transfer as the “overarching transfer” of the Class B Securities from SunEdison Holdings through the SPE to Wilmington Trust to secure the repayment of the Notes under the PSA. The Court explained that Merit does not allow the Trust to avoid an intermediate transfer between non-qualifying participants (SunEdison Holdings and the SPE) and to sue the qualifying participants of the true overarching transfer (the Bank) as subsequent transferees. As support for his decision, the Court cited Judge Grossman’s decision in Boston Generating. The Court found that the transaction was protected under the Safe Harbor because it viewed the Step One Transfer and the Step Two Transfer as elements of one qualifying transaction.

Determining whether the January 2015 Transfer Was Made to a Qualifying Participant

The Safe Harbor’s second requirement is that transfers are made “in connection with a securities contract” to a qualifying participant. To determine whether the January 2015 Transfer was qualified, the Court applied a two-step analysis: (1) whether the PSA was a “securities contract” and (2) whether the transfer was made “in connection with” the securities contract.

The Court found that the PSA was a securities contract under section 741(7)(A) of the Bankruptcy Code because the PSA was a contract to purchase the First Wind’s membership interests, which are securities. The Court next found that the January 2015 Transfer of the Class B Securities was made “in connection with” the PSA because it was the means of effecting the payment of the purchase price under the PSA. Finally, the Court found that the January 2015 Transfer was made to the Bank, a financial institution, and was protected under the Safe Harbor. As a result, the Court dismissed the Trust’s complaint.[7]

Implications: Practical Lessons regarding Courts’ Application of the 546(e) Safe Harbor 

  • The starting point of a bankruptcy court’s analysis of the Safe Harbor defense is the U.S. Supreme Court’s decision in Merit, which requires bankruptcy courts to identify the relevant overarching transfer, including a two-step integrated transaction to acquire assets.
  • The Safe Harbor bars the trustee from suing to unwind intermediate steps in an integrated transaction. In other words, a trustee cannot cherry-pick and avoid an intermediate transfer between non-qualifying participants and sue the qualifying participants of the overarching transfer as subsequent transferees. Bankruptcy courts cannot limit their inquiry to a single component of a two-step overarching transfer to complete a securities transaction in connection with a securities contract. SunEdison therefore joins the reasoning of Boston Generating and Merit and strengthens the availability of the Safe Harbor.
  • The Safe Harbor analyses often arise from complicated facts, and the cases are necessarily fact-dependent. If you have questions about the availability of the Safe Harbor in any situation, we encourage you to contact the Herrick team for assistance with your particular situation.

For more information on this alert or other restructuring & bankruptcy matters please contact:

Stephen Selbst at +1 212 592 1405 or [email protected]
George V. Utlik at +1 212 592 1515 or [email protected]


[1] SunEdison Litigation Trust v. Seller Note, LLC, 620 B.R. 505, 513-17 (Bankr. S.D.N.Y. 2020).

[2] 138 S.Ct. 883, 892-93 (2018) (focusing on the “end-to-end transfer” that the trustee seeks to avoid, rather than any “component parts of the overarching transfer,” and holding that section 546(e) does not protect alleged fraudulent transfers “in which financial institutions served as mere conduits.”).

[3] In re Boston Generating LLC, 617 B.R. 442, 483, 492 (Bankr. S.D.N.Y. 2020) (following the Supreme Court’s Merit decision, Judge Grossman concluded that bankruptcy courts “must examine the overarching transaction” without limiting its inquiry to the step one component).

[4] TerraForm Power, LLC agreed to purchase equity interests representing First Wind’s operating portfolio, which included wind and solar power generation assets. TerraForm’s purchase is not relevant for purposes of this article.

[5] The SPE is Seller Note, LLC, an indirect, wholly owned subsidiary of SunEdison Holdings.

[6] 11 U.S.C. § 546(e).

[7] On December 1, 2020, the Trust appealed Judge Bernstein’s order granting the motion to dismiss.