In Re: Resorts Intl

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit

6-30-1999

In Re: Resorts Intl
Precedential or Non-Precedential:

Docket 98-6037

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Filed June 30, 1999

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 98-6037

IN RE: RESORTS INTERNATIONAL, INC.,
RESORTS INTERNATIONAL FINANCING INC.,
GRIFFIN RESORTS INC., and
GRIFFIN RESORTS HOLD, INC.,
Debtors

FRED LOWENSCHUSS, individually and as
Trustee of FRED LOWENSCHUSS, I.R.A.,
LAURANCE LOWENSCHUSS, I.R.A., and
FRED LOWENSCHUSS ASSOCIATES PENSION PLAN

v.

RESORTS INTERNATIONAL, INC.

Sun International North America, Inc.,
which was formerly known as
Griffin Gaming & Entertainment, Inc.,
which was formerly known as
Resorts International, Inc.,

Appellant

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

(D.C. No. 97-cv-04710)
District Judge: The Honorable Nicholas H. Politan

ARGUED JANUARY 14, 1999

BEFORE: Nygaard, Alito, and Lewis, Circuit Judges.

(Filed June 30, 1999)
 Mitchell A. Karlan, Esq. (Argued)
Gibson, Dunn & Crutcher
200 Park Avenue, 47th Floor
New York, NY 10166-0193
Attorney for Appellant

Michael R. Griffinger, Esq. (Argued)
Gibbons, Del Deo, Dolan, Griffinger
& Vecchione
One Riverfront Plaza
Newark, NJ 07102-5497
Attorney for Appellee

OPINION OF THE COURT

NYGAARD, Circuit Judge:

Resorts International, Inc., now Sun International North
America, Inc., ("Resorts") appeals a District Court order
reversing a Bankruptcy Court order that awarded Resorts
full restitution for losses resulting from a stock transaction.
The Bankruptcy Court found for Resorts on the alternative
grounds of mistake and fraud. We will affirm the District
Court's reversal.

I.

The relevant facts are generally undisputed and we need
only summarize. Fred Lowenschuss was a shareholder of
Resorts stock.1 In 1988, Griffco Acquisition Corporation
_________________________________________________________________

1. Fred Lowenschuss was the original defendant in this case. He held a
total of 105,900 shares of Resorts stock both as an individual and as
trustee for the Fred Lowenschuss IRA, the Laurance Lowenschuss IRA,
and the Fred Lowenschuss Associates Pension Plan (the holder of most
of the shares in question). Before the November 1996 trial, Fred's son,
Laurance Lowenschuss, became the trustee of the Pension Plan, and the
Bankruptcy Court severed the claims against Fred Lowenschuss
individually and as a trustee. Laurance Lowenschuss, the current
trustee of the Pension Plan and of the Laurance Lowenschuss IRA, is
litigating this appeal. For simplicity, we will refer to Appellees simply
as
"Lowenschuss."

2
(owned by Merv Griffin) purchased Resorts in a leveraged
buyout for $36 per share. Resorts sent a proxy statement
to all its shareholders that explained the terms of the
merger and stated that the shareholders had the right to
receive $36 per share or to seek appraisal rights in the
Delaware courts.

Ultimately, the merger was approved by the Delaware
Chancery Court and consummated. Resorts then sent a
"Notice of Merger of Griffco Acquisition Corp. With and Into
Resorts International Inc.," and a "Transmittal Letter" to
shareholders, explaining that they could either tender their
shares and receive $36 per share or obtain an appraisal
under section 262 of the Delaware Corporation Law.
Lowenschuss sent Resorts a letter demanding an appraisal.

He then filed an appraisal action in the Eastern District
of Pennsylvania. One week later, Resorts petitioned for
appraisal in Delaware Chancery Court, identifying
Lowenschuss as a shareholder seeking appraisal. The
federal District Court dismissed Lowenschuss's claim
without prejudice, deferring to the proceedings in Delaware.
See Lowenschuss v. Resorts Int'l, Inc., No. Civ.A.89-1071
(E.D. Pa. June 29, 1989).

The Delaware Chancery Court issued a "Notice of
Entitlement to Appraisal," explaining that shareholders
seeking appraisal must "deliver [their] stock . . . certificates
to the Register in Chancery within sixty (60) days of this
notice [or risk] dismissal of the appraisal proceedings as to
[the] shares." In re Appraisal of Resorts International, Inc.,
No. Civ.A.10626 (Del. Ch. May 31, 1989). Lowenschuss
never delivered his shares. Instead, he filed an amended
complaint in the Eastern District of Pennsylvania against
Resorts and others, moving for reconsideration of his
request for an appraisal of the shares under his control.
The District Court dismissed this action without prejudice,
again because of the Delaware Chancery Court proceedings.

This dispute involves the next moves by Lowenschuss.
First, he filed (again in the Eastern District of Pennsylvania)
a "Petition Requiring Resorts . . . to Pay $36.00 Merger
Price to Plaintiffs Immediately for 105,900 Shares of
Resorts Class A Stock Owned by Plaintiffs and Which Are

3
Hereby Being Tendered and to Complete the Record." In the
Petition, he stated: "Plaintiffs are hereby tendering all of
their Resorts International, Inc. Class A shares totaling One
hundred and Five thousand Nine hundred (105,900) shares
for immediate payment of the merger price of Thirty-six
Dollars ($36.00) per share plus the interest which plaintiffs
may be entitled to."

Then, four days later, Lowenschuss tendered his shares,
which were clearly marked as his, to Merrill Lynch, his
broker, who in turn tendered them to Chase Manhattan
Bank, Resort's Transfer Agent for the merger. As it regularly
did, Chase forwarded a list of the tendering shareholders to
Resorts and asked Resorts to wire funds to the payment
account. Approximately two weeks after the tender, Resort's
treasurer authorized the transfer of funds to Chase. Chase
then delivered a check to Merrill Lynch for $3,805,200.00,
which was paid over to Lowenschuss. Subsequently, the
District Court denied Lowenschuss's Petition. See
Lowenschuss v. Resorts Int'l, Inc., No. Civ.A.89-1071 (E.D.
Pa. Aug. 3, 1989).

When Resorts realized that it had paid Lowenschuss the
merger price, it filed this suit seeking to recover the
payment. Following the initiation of Resort's Chapter 11
reorganization in New Jersey, this case was removed from
the Eastern District of Pennsylvania to the Bankruptcy
Court for the District of New Jersey. Resorts sought
restitution of the transferred funds, claiming that the
payment was (1) the result of a mistake by a Resorts
employee, (2) a product of fraud, (3) contrary to Delaware
corporate law, and (4) an avoidable transfer by a bankrupt
entity under federal and New Jersey law. The Bankruptcy
Court awarded Resorts full restitution on the alternative
grounds of mistake and fraud, and appeared also to rely on
the doctrine of illegal contracts and in pari delicto. See In re:
Resorts International, Nos. 89-10119; 89-10120; 89-10461;
89-10462; Adv. No. 90-1005 (Bankr. D.N.J. Apr. 22, 1997)
(slip opinion, hereinafter "Resorts I").

On appeal, the District Court reversed the Bankruptcy
Court's ruling, concluding, inter alia, that there was no
mistake of fact and that Resorts did not reasonably rely
upon any misrepresentation. See In re: Resorts Int'l, Inc.,

4
No. Civ.A.97-4710 (D.N.J. Mar. 26, 1998) (unpublished
letter opinion, hereinafter "Resorts II"). Resorts now appeals
the District Court's decision, alleging that the court erred
by overturning the Bankruptcy Court's holdings that: (1)
Lowenschuss committed fraud; (2) Resorts made a mistake
of fact; and (3) an illegal contract existed and the parties
were not in pari delicto. Resorts also reasserts that the
transaction is avoidable as a fraudulent conveyance under
federal and state law. Finally, Lowenschuss contends that
the Bankruptcy Court lacked jurisdiction.

We exercise plenary review over the decision of a district
court sitting as an appellate court in a bankruptcy
proceeding. See In re Swedeland Dev. Group, Inc ., 16 F.3d
552, 559 (3d Cir. 1994) (en banc). As a result, our review
is essentially a direct review of the ruling of the Bankruptcy
Court. See Allegheny Int'l Inc. v. Snyder (In re Allegheny Int'l
Inc.), 954 F.2d 167, 172 (3d Cir. 1992). We review the
Bankruptcy Court's findings of fact for clear error and its
conclusions of law de novo. See In re Sharon Steel Corp.,
871 F.2d 1217, 1222-23 (3d Cir. 1989).

II.

Resorts now asserts that it should have prevailed at trial
on three common law theories -- fraud, mistake, and illegal
contract.

A. Fraud

The Bankruptcy Court concluded that Lowenschuss
defrauded Resorts of the payment for his shares. To
establish a prima facie case for fraud under New Jersey law,2
Resorts was required to prove: (1) that Lowenschuss made
a material misrepresentation of a presently existing or past
fact, (2) which he knew or believed to be false, (3) upon
which he intended Resorts to rely, (4) and upon which
Resorts reasonably did rely, (5) with resulting damages. See
Jewish Ctr. v. Whale, 432 A.2d 521, 524 (N.J. 1981).
Moreover, it had to prove each element by clear and
convincing evidence. See Stochastic Decisions, Inc. v.
_________________________________________________________________

2. The parties agree that New Jersey law governs this issue.

5
DiDomenico, 565 A.2d 1133, 1137 (N.J. Super Ct. App. Div.
1989).

We review the trial court's factual findings related to the
fraud claim for clear error, keeping in mind the heightened
"clear and convincing" standard. See, e.g. , United States v.
Bertoli, 40 F.3d 1384, 1411 (3d Cir. 1994) (some
"speculation [might] survive[ ] scrutiny under the
preponderance of the evidence standard, [but] it certainly
cannot withstand scrutiny under the clear and convincing
evidence standard"); see also E.E.O.C. v. Local 638, 81 F.3d
1162, 1174 (2d Cir. 1996) (the clearly erroneous standard
of review is more stringent when applied to a trial court's
finding that had to meet the "clear and convincing"
standard).

The District Court reversed the Bankruptcy Court,
holding that it had misconstrued the significance of the
various legal filings in question in finding a material
misrepresentation, the facts did not support a finding of
reliance, and, even if Resorts did rely on a
misrepresentation, reliance was not reasonable. We agree
because the evidence simply does not provide "clear and
convincing" proof of reasonable reliance.3

A finding of reliance is subject to review for clear error,
see, e.g., Hong Kong Deposit & Guar. Co. v. Shaheen, 111
B.R. 48, 52 (S.D.N.Y. 1990), and a trial court may infer
reliance from the various facts and circumstances of a case.
See Knop v. McMahan, 872 F.2d 1132, 1142 (3d Cir. 1989).
Again, this element required proof by clear and convincing
evidence.

The Bankruptcy Court considered the testimony of
Resorts' former General Counsel, who stated that he
understood at the time of Lowenschuss's tender that
Lowenschuss had declined the merger price and was
seeking a remedy in court. The General Counsel testified
that it "[n]ever occurred to [him] that anyone would invoke
_________________________________________________________________

3. Although we are not convinced that the District Court erred by holding
that Lowenschuss's filings in this matter did not provide clear and
convincing evidence of material misrepresentations, we need not resolve
the issue because reasonable reliance was clearly lacking.

6
the appraisal rights and seek to be paid." Based solely upon
this testimony, the Bankruptcy Court held that:"Resorts
reliance was both reasonable and justifiable given the
Trustee's numerous misrepresentations . . . that he was
seeking a judicial remedy." Resorts I, at 49.

Although Lowenschuss may have sought judicial relief to
receive the original merger price, this could not signify to
Resorts that he would not also tender his shares to the
company. Because Lowenschuss was seeking to be allowed
to tender his shares for payment of the merger price, it was
certainly plausible that he would attempt to perform any
necessary acts on his part, including tendering his shares.

Courts often impose a stricter standard of reasonable
reliance on sophisticated business persons. See Vanguard
Telecomm., Inc. v. Southern New England Tel. Co., 900 F.2d
645, 655 (3d Cir. 1990). Even absent a stricter standard,
however, Resorts' actions reveal no reliance whatsoever
because they demonstrate that Resorts established a
system that would blindly pay all shareholders, even those
who had sought an appraisal. Thus, Lowenschuss could
have tendered his shares and been paid even if he never
filed either of the claims to which the Bankruptcy Court
referred.

The District Court considered the Bankruptcy Court's
finding that Resorts "failed to exercise reasonable care"
when it authorized payment to Lowenschuss, Resorts II, at
19-22 (quoting Resorts I, at 33), to determine that any
reliance by Resorts was not reasonable. In particular, the
Bankruptcy Court found that

Resorts failed to exercise reasonable care when it
authorized payment to Lowenschuss . . . . Resorts
breached its duty to adequately supervise the
surrender of shares . . . by failing to make even a
cursory investigation as to the identity of the tendering
shareholder and whether that shareholder had
previously sought appraisal rights.

The record further demonstrates that Chase
identified the [Lowenschuss] Pension Plan and I.R.A. as
tendering shareholders in a transfer journal sheet
dated July 26, 1989, some five days before the date

7
 Resorts authorized payment for the shares. Resorts
failed to provide a list of appraisal shareholders to the
employees responsible for payment upon surrender of
the shares, nor did Resorts provide such a list to
Chase. Even after learning of the illegal payment to
Lowenschuss, Resorts failed to issue corrected
instructions to Chase to cease all payments to
appraisal shareholders who failed to obtain the
requisite approvals . . . . Resorts paid other appraisal
shareholders, even after Resorts' counsel notified
Lowenschuss of his intent to recover the funds paid to
Lowenschuss.

Resorts I, at 33-34.

Knowing that Lowenschuss was seeking to be paid the
merger price, Resorts should have, at the very least,
reviewed the lists of tendering shareholders or contacted
the court to determine whether it had custody of the
shares. Nevertheless, Resorts did nothing. As a result, there
simply was no reliance, reasonable or otherwise, by
Resorts. The fraud claim, therefore, was properly rejected
by the District Court.4

B. Mistake

Resorts next asserts that the District Court erred by
reversing the Bankruptcy Court's ruling that Resorts made
a mistake of fact. The Bankruptcy Court discussed Resorts'
assertions that it was mistaken as to both fact and law; the
former from its failure to recognize that it was Lowenschuss
tendering the shares, and the latter from its belief that it
was legally bound to pay Lowenschuss when he tendered.
See Resorts I, at 25-28. Although the court then apparently
concluded that Resorts had made a mistake of fact, its
discussion of the issue relates to the alleged legal mistake.
The Bankruptcy Court stated:

Here the Court finds that Resorts made a mistake of
fact. Resorts' employees including its former treasurer,
Thomas O'Donnell, and its Chief Financial Officer,
Matthew B. Kearney mistakenly believed that Resorts
_________________________________________________________________

4. Because we hold that there was not sufficient evidence of reasonable
reliance, we need not address the remaining elements of the fraud claim.

8
 was obligated to pay $36.00 for all Resorts shares
tendered.

Id. at 28. Later, the Bankruptcy Court appeared to grant
Resorts relief for its mistake: "[Lowenschuss] committed
several wrongs apart from the illegality of the transaction.
Accordingly, as this Court finds that Resorts made the
payment as the result of a mistake, Resorts is entitled to
restitution." Id. at 43. The court's analysis of this claim,
however, included a discussion of the doctrine of illegal
contract and in pari delicto. See Part II.C, infra.

The District Court noted, and Resorts concedes, that if
Resorts made the payment under the misapprehension that
it was legally required to, Resorts made a classic mistake of
law. Not surprisingly, Resorts now reasserts that it made
both a mistake of law and a mistake of fact and that it
should prevail under either theory.

1. Mistake of Law

Notwithstanding the Bankruptcy Court's finding, Resorts'
first assertion on appeal is that it made a unilateral
mistake of law "based on the erroneous belief that the
company was required to accept the tender of shares that
were subject to an appraisal proceeding." Appellants' Br. at
38. However, it is a

settled principle of [New Jersey] law that where an
individual under a mistake of law, but with full
knowledge of the facts, voluntarily pays money on a
demand not legally enforceable against him, he cannot
recover it in the absence of unjust enrichment, fraud,
duress or improper conduct on the part of the payee.

Messner v. County of Union, 167 A.2d 897, 898 (N.J. 1961).
Resorts contends that it may recover under this theory
because the Bankruptcy Court found sufficient"improper
conduct" on Lowenschuss's part to allow for recovery.

We reject this contention because Resorts' action did not
result from ignorance or a mistake of law. Resorts' full
knowledge of the law is evidenced by its response to
Lowenschuss's Petition. In the response, filed over a week
before Resorts authorized the payment for Lowenschuss's
shares, the company argued that the request for payment

9
was "contrary to the controlling Delaware statute." Far from
being mistaken as to any relevant law, Resorts was simply
careless in entering into this contract by paying
Lowenschuss for his shares when it may not have been
obligated to.

2. Mistake of fact

For similar reasons, Resorts cannot recover by
contending that it was operating under a mistake of fact as
to the identity of the tenderer (Lowenschuss). Wefirst note
that a "unilateral mistake of a fact unknown to the other
party is not ordinarily grounds for avoidance of a contract,"
and that, in order to grant rescission in the case of a
factual mistake, "the mistake must have occurred
notwithstanding the exercise of reasonable care by the
party making the mistake." Intertech v. City of Paterson,
604 A.2d 628, 632 (N.J. Super. Ct. App. Div. 1992).

The Bankruptcy Court and District Court both found that
Resorts failed to act with reasonable care. We agree.
Resorts' ignorance was self-imposed. It could easily have
determined that Lowenschuss was tendering the shares
because a list of tendering shareholders with his name on
it was forwarded to Resorts before it authorized the
payments. Nevertheless, the company chose not to review
the list. As a result, Resorts' failure to realize that
Lowenschuss had tendered his shares was of its own doing,
and it cannot recover under this theory.

C. Illegal contract

As noted, the Bankruptcy Court interwove its discussion
of mistake with a discussion of illegal contract and the
doctrine of in pari delicto. In addition to the mistake
analysis, the court appeared to find for Resorts under the
illegal contract doctrine, holding that it deserved restitution
because it was not in pari delicto with Lowenschuss.

The doctrine of in pari delicto normally applies as a
common law defense against a party seeking to enforce an
illegal contract. "In pari delicto potior est conditio
defendentis" means that "[i]n a case of equal or mutual
fault . . . the position of the [defending] party . . . is the
better one." Black's Law Dictionary 791 (6th ed. 1990).

10
Here, Resorts seeks to use the doctrine to gain restitution
for its payment to Lowenschuss.

Resorts' argument runs counter to New Jersey's law, that
courts will leave the parties to an executed illegal contract
as they are. See, e.g., Marx v. Jaffe, 222 A.2d 519, 521
(N.J. Sup. Ct. App. Div. 1966); Paley v. Barton Sav. & Loan
Ass'n, 196 A.2d 682, 685 (N.J. Super. Ct. App. Div. 1964).
Courts on occasion, however, apply an equitable exception
to this general rule when the parties are not in pari delicto.
See, e.g., Singleton v. Foreman, 435 F.2d 962, 969 (5th Cir.
1970) (recognizing such an exception in Florida law). New
Jersey courts give "a traditional construction to the
defense," McAdam v. Dean Witter Reynolds, Inc., 896 F.2d
750, 757 (3d Cir. 1990) (citing Pendleton v. Gondolf, 96 A.
47 (N.J. Ch. Ct. 1915)), and have found a party to an illegal
agreement deserving of equitable relief because he was not
in pari delicto with the other party to the agreement. See
Appel v. Reiner, 195 A.2d 310, 317-18 (N.J. Super Ct. Ch.
Div. 1963), rev'd on other grounds, 204 A.2d 146 (N.J.
1964). The Bankruptcy Court treated the doctrine as part of
New Jersey law and applied it here.

In its pre-trial ruling on the cross-motions for summary
judgment, the Bankruptcy Court held that the transaction
by which Lowenschuss tendered his shares and Resorts
paid him for them constituted an illegal contract because
the tender of the shares was contrary to Delaware
Corporation Law S 262.5 The court held open the possibility
_________________________________________________________________

5. Section 262 sets forth the rights and obligations of shareholders
seeking an appraisal in lieu of payment for their shares following a
merger. Lowenschuss voted against the merger and timely requested an
appraisal, thereby securing the right to an appraisal. See Del. Code Ann.
tit. 8, S 262(d). Subsection (e) allows the withdrawal of an appraisal
demand and acceptance of the merger terms "at any time within 60 days
after the effective date of the merger." Id., S 262(e). Lowenschuss,
however, did not withdraw his request for appraisal within 60 days of
the merger.

The statute also provides for withdrawals that occur more than sixty
days after the merger:

(k) From and after the effective date of the merger or
consolidation,
no stockholder who has demanded his appraisal rights as provided

11
that it might later find that the parties were not in pari
delicto, and award Resorts the equitable remedy of
restitution on this basis.

Following trial, the court found that Lowenschuss's
misrepresentations, apart from the illegal transaction,
prevented him from being in pari delicto with Resorts and
ordered restitution in the amount of the transaction on this
basis. See Resorts I, at 37-43. If the relative guilt of the
parties is a primarily factual determination, then a trial
court's finding of such is reviewed for clear error. See
Rothberg v. Rosenbloom, 808 F.2d 252, 260 (3d Cir. 1986)
(Seitz, J., concurring).

The Bankruptcy Court, however, was construing
Lowenschuss's legal maneuvers to conclude that
Lowenschuss was not in pari delicto with Resorts. The court
noted: (1) that Lowenschuss tendered the shares knowing
that they were subject to the appraisal action in Delaware;
and (2) that after he tendered his shares, Lowenschuss
_________________________________________________________________

in subsection (d) of this section shall be entitled to vote such
stock
for any purpose or to receive payment of dividends or other
distributions on the stock . . . ; provided, however, that . . . if
such
stockholder shall deliver to the surviving or resulting corporation
a
written withdrawal of his demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days
after the effective date of the merger . . . as provided in
subsection
(e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal
shall
cease. Notwithstanding the foregoing, no appraisal proceeding in
the
Court of Chancery shall be dismissed as to any stockholder without
the approval of the Court, and such approval may be conditioned
upon such terms as the Court deems just.

Id., S 262(e), (k) (emphasis added). Thus, section 262 requires a
shareholder who has sought appraisal to get the corporation's written
approval and the court's approval in order to withdraw his demand for
appraisal more than 60 days after the date of the merger. The merger
closed on November 15, 1988, and Lowenschuss did not tender his
shares until July 17, 1989. Lowenschuss did not obtain Resorts' written
approval of his withdrawal demand before tendering his shares.
Therefore, his tender was contrary to the statute and, at least arguably,
created an illegal contract.
12
failed to notify Resorts or the Pennsylvania District Court of
the tender. See Resorts I, at 40-41. Although Lowenschuss
may well have known that his tender was questionable, we
agree with the District Court's conclusion that he was not
more responsible for the mistaken payment than Resorts.

Resorts' Notice of Merger and Letter of Transmittal
indicated that it would pay the merger price to shareholders
who had previously requested appraisal. Although the
Bankruptcy Court did not credit Lowenschuss's testimony
that he relied on the Letter of Transmittal in tendering his
shares, see Resorts I, at 37, the notice indicates that
Resorts, like Lowenschuss, was acting inconsistently with
section 262. In sum, Lowenschuss and Resorts were both
to blame for the resulting transaction and were in pari
delicto. The District Court correctly rejected this doctrine as
a basis for recovery.

III.

Resorts next asserts that the transaction is avoidable as
a fraudulent conveyance under 11 U.S.C. S 548(a)(1)(B).6

A. Section 548(a)(1)(B) avoidable transfers

Section 548(a)(1)(B) allows bankruptcy debtors to avoid
some transactions completed before the bankruptcyfiling.
It states:

The trustee may avoid any transfer of an interest of the
debtor in property . . . that was made or incurred on
or within one year before the date of the filing of the
petition, if the debtor voluntarily or involuntarily. . .
received less than a reasonably equivalent value in
exchange for such transfer or obligation; and . . . was
insolvent on the date that such transfer was made.
_________________________________________________________________

6. The briefs refer to 11 U.S.C. S 548(a)(2); however, under the current
code, the relevant section is 548(a)(1)(B). Section 548 was amended in
1998, and subsection 548(a)(2) now refers to transfers of charitable
contributions.

Resorts also asserted a similar claim under N.J. Stat. Ann. SS 25:2-
25(b)(1) and 25:2-27(a). It now states, and we accept, that the analysis
of the federal and state laws is practically identical, and therefore
separate analysis of the state claim is not necessary.

13
11 U.S.C. S 548(a)(1)(B). It is not disputed that the
transaction took place less than a year before Resorts'
bankruptcy filing. Thus, if Resorts received less than a
reasonably equivalent value to the $3,800,000 it paid and
was insolvent on the date of the transfer to Lowenschuss,
then section 548 would allow the trustee to avoid the
transfer.7

B. The section 546(e) exception

Section 546(e) provides an exception to the rule of section
548(a)(1)(B), preventing its operation when the payment in
question was a securities "settlement payment." Section
546(e) states:

Notwithstanding section[ ] . . . 548(a)(1)(B) . . . of this
title, the trustee may not avoid a transfer that is a . . .
settlement payment, as defined in section 101 or 741
of this title, made by or to a commodity broker, forward
contract merchant, stockbroker, financial institution,
or securities clearing agency, that is made before the
commencement of the case . . . .

Id. S 546(e).8

The issue is whether the Bankruptcy Court erred by
holding that Resorts' payment to Lowenschuss was a
"settlement payment," and that section 546, therefore,
barred the application of section 548(a)(1)(B). Section 741
defines "settlement payment" as "a preliminary settlement
payment, a partial settlement payment, an interim
_________________________________________________________________

7. The Bankruptcy Court recited evidence that Resorts was insolvent
when it paid Lowenschuss (including the fact that prior to making the
payment, Lowenschuss had encouraged a group of Resorts shareholders
to put the company into bankruptcy). See Resorts I, at 18-22. The court
did not, however, make factual findings on this issue or the issue of
reasonably equivalent value. Instead, the court assumed the existence of
these elements and applied section 546(e) of the code. Because we
determine that section 546(e) controls the outcome here, we need not
address these factors.

8. The exception does not apply to transfers that are avoidable under
section 548(a)(1)(A), which requires, inter alia, a showing that a
transfer
was made with the intent to defraud creditors. That is clearly not the
case here.

14
settlement payment, a settlement payment on account, a
final settlement payment, or any other similar payment
commonly used in the securities trade." Id. S 741(8)
(emphasis added). Section 101 provides a similar definition,
but limits it to payments used in the forward contracts
trade. See id. S 101(51A).

In Bevill, Bresler & Shulman Asset Management Corp. v.
Spencer Savings & Loan Ass'n, 878 F.2d 742 (3d Cir. 1989),
we addressed the meaning of "settlement payment" under
section 546(f) in a securities transfer under "repo"
agreements. Section 546(f) is similar to section 546(e)
except that it applies specifically to settlement payments
made "by or to a repo participant in connection with a
repurchase agreement." 11 U.S.C. S 546(f). In Bevill, we
noted that section 546 is at the intersection of"two
important national legislative policies . . . on a collision
course" -- the policies of bankruptcy and securities law.
878 F.2d at 751. We stated that the "extremely broad," id.,
statutory definition of "settlement payment" is consistent
with Congress's intent:

that a "settlement payment" may be the deposit of cash
by the purchaser or the deposit or transfer of the
securities by the dealer, and that it includes transfers
which are normally regarded as part of the settlement
process, whether they occur on the trade date, the
scheduled settlement day, or any other date in the
settlement process for the particular type of
transaction at hand.

Id. at 752. Our prior recognition that the definition is
extremely broad indicates that it is likely to encompass the
instant transaction. Bevill, however, did not consider
payments made pursuant to a leveraged buyout ("LBO"),
and therefore does not definitively determine the outcome
here.

We begin every statutory interpretation by looking to the
plain language of the statute. See Idahoan Fresh v.
Advantage Produce, Inc., 157 F.3d 197, 202 (3d Cir. 1998).
When the language is clear, no further inquiry is necessary
unless applying the plain language leads to an absurd
result. See id.

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In the securities industry, a settlement payment is
generally the transfer of cash or securities made to
complete a securities transaction. See Kaiser Steel Corp. v.
Charles Schwab & Co., 913 F.2d 846, 849 (10th Cir. 1990)
(citing various securities industry texts). Here, the
securities passed from Lowenschuss's broker, Merrill
Lynch, to the transfer bank, Chase Manhattan. Resorts
wired funds to Chase which Chase then forwarded them to
Merrill Lynch who paid Lowenschuss. Although no clearing
agency was involved in this transfer, two financial
institutions -- Merrill Lynch and Chase -- were. Under a
literal reading of section 546, therefore, this was a
settlement payment "made by . . . a financial institution."
11 U.S.C. S 546(e).

A number of district courts have held that the term
"settlement payment" does not include payments made for
shares by a corporation as part of an LBO. See, e.g., Zahn
v. Yucaipa Capital Fund, 218 B.R. 656, 675 (D.R.I. 1998);
Wiebolt Stores, Inc. v. Schottenstein, 131 B.R. 655, 664-65
(N.D. Ill. 1991). The reasoning of these courts is essentially
that "the system of intermediaries and guarantees" that
normal securities transactions involve is not in play in an
LBO. See Zahn, 218 B.R. at 676.

The only other court of appeals to directly address this
question, however, followed a Bevill analysis and held that
payments to shareholders as part of an LBO were
"settlement payments" under the statute. See Kaiser Steel
Corp. v. Pearl Brewing Co., 952 F.2d 1230, 1239-40 (10th
Cir. 1991);9 see also In re Comark, 971 F.2d 322, 325 (9th
Cir. 1992) (citing Kaiser approvingly for the proposition that
"a settlement is `the completion of a securities
transaction' "). The general thrust of Kaiser Steel, Bevill and
In re Comark is that the term "settlement payment" is a
broad one that includes almost all securities transactions.
Including payments made during LBOs within the scope of
the definition is consistent with the broad meaning these
_________________________________________________________________

9. Resorts argues that Kaiser Steel is inapposite because the
transactions therein involved a clearing agency; however, some of the
transactions also were made through a financial institution. See Kaiser
Steel, 952 F.2d at 1240.

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cases discern. A payment for shares during an LBO is
obviously a common securities transaction, and we
therefore hold that it is also a settlement payment for the
purposes of section 546(e).10

Resorts alternatively encourages us to follow Munford v.
Valuation Research Corp., 98 F.3d 604, 610 (11th Cir.
1996), in which the Eleventh Circuit Court of Appeals
considered the application of section 546 to similar
payments made to shareholders in an LBO. The two judges
in the majority found it unnecessary to determine whether
the payments were settlement payments under section 546,
holding that even if they were,

section 546(e) is not applicable unless the transfer (or
settlement payment) was "made by or to a commodity
broker, forward contract merchant, stockbroker,
financial institution, or securities clearing agency." 11
U.S.C. S 546(e). . . .

True, a section 546(e) financial institution was
presumptively involved in this transaction. But the
bank here was nothing more than an intermediary or
conduit. Funds were deposited with the bank and when
the bank received the shares from the selling
shareholders, it sent funds to them in exchange. The
bank never acquired a beneficial interest in either the
funds or the shares.

Munford, 98 F.3d at 610 (emphasis added).

The court went on to hold that trustees may only avoid
transfers to a "transferee," and that the bank was not such
a transferee because it never acquired a beneficial interest
in the funds. See id. (citing In re Chase & Sanborn Corp.,
848 F.2d 1196, 1200 (11th Cir. 1988)). It concluded that
"the shareholders were the only `transferees' of the funds
[and that] section 546(e) offers no protection from the
trustee's avoiding powers to shareholders; rather, section
_________________________________________________________________

10. Despite this logical conclusion, a number of commentators have
criticized Kaiser Steel for applying section 546 to a transaction that did
not implicate the concerns that Congress had in creating the law. See,
e.g., Frank R. Kennedy & Gerald K. Smith, Fraudulent Transfers and
Obligations: Issues of Current Interest, 43 S.C. L. Rev. 709 (1992).

17
546(e) protects only commodity brokers, forward contract
merchants, stockbrokers, financial institutions, and
securities clearing agencies." Id. The court therefore held
section 546(e) inapplicable because the transaction did not
involve a transfer to "one of the listed protected entities." Id.

We, however, are more persuaded by the dissent which
relied, as we do, on the plain language of the statute. See
id. at 613 (Hatchett, C.J., concurring in part and dissenting
in part). Section 546(e) protects from trustee's avoidance
powers settlement payments made "by . . . a financial
institution." The majority in Munford seems to have read
into section 546(e) the requirement that the "commodity
brokers, forward contract merchants, stockbrokers,
financial institutions, and securities clearing agencies"
obtain a "beneficial interest" in the funds they handle for
the section to be applicable. This requirement is not explicit
in section 546.11

Despite the fact that payments to shareholders in an LBO
are not the most common securities transaction, we see no
absurd result from the application of the statute's plain
language and will not disregard it. We hold, therefore, that
section 546 applies to the transaction and prevents its
avoidance under section 548(a)(1)(B).12

IV.

We conclude that Resorts does not deserve restitution
under the state law claims; that Resorts may not avoid the
transfer of funds to Lowenschuss by way of the bankruptcy
statute; and that jurisdiction was proper in the Bankruptcy
Court. We will affirm.
_________________________________________________________________

11. Nor does it logically follow from the application of section 550,
which
allows trustees to recover property that was the subject of an avoided
transfer from the transferee, see 11 U.S.C.S 550, as the Munford
majority seemed to indicate. See Munford, 98 F.3d at 610.

12. Lowenschuss contends that the Pension Plan was improperly added
as a party and that the Bankruptcy Court lacked jurisdiction because
the removal to the Bankruptcy Court from the District Court for the
Eastern District of Pennsylvania was invalid. We decline to discuss these
claims, noting instead that they are without merit.

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A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

19