By Todd Zerega and Luke Sizemore


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.


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 ventures for Debtor’s owners. Throughout this process, Debtor paid Broker commissions and margin interest in connection with the brokerage accounts.

After the Ponzi scheme collapsed and Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code, which was subsequently converted to a case under chapter 7, Plaintiff filed suit against Broker to avoid and recover certain commissions and margin interest payments as fraudulent transfers under sections 544 and 548 of the Bankruptcy Code. The bankruptcy court granted summary judgment for Broker, determining that the commissions and margin interest payments were protected from avoidance and recovery by section 546(e) of the Bankruptcy Code— known as the "stockbroker defense." The district court affirmed the bankruptcy court’s decision, and Plaintiff appealed.


On appeal, Plaintiff argued that section 546(e) of the Bankruptcy Code does not protect commissions or margin interest payments. Section 546(e) provides, in relevant part, that a trustee may not avoid a transfer that is a margin payment or a settlement payment made by or to a stockbroker, financial institution, financial participant, or securities clearing agency.

The Court first analyzed whether commissions are "settlement payments" protected by section 546(e). Noting that the definition of "settlement payment" was "extremely broad" and includes any "payment commonly used in the securities trade," the Court looked to standard practices in the securities industry to inform the definition of "settlement payment." After citing several industry texts suggesting that "settlement payment" means the transfer of funds paid in connection with completing a securities transaction, the Court held that "commissions shown to be reasonable and customary parts of settling stock sales come within the stockbroker defense as ‘settlement payments.’" The Court cautioned that not all payments labeled as commissions fall within this rubric. As an example, the Court explained that commissions that are not part of the settlement of securities transactions, such as commissions paid for the solicitation of investors, are not protected.

Next, the Court turned to whether margin interest payments could be protected from avoidance as "margin payments" under section 546(e). Acknowledging that courts have interpreted the term "margin payment" broadly, the Court agreed with the parties and the bankruptcy court that the pertinent question in determining whether a margin interest payment is a margin payment is whether the margin interest payment reduces a deficiency in a margin account. The Court affirmed the bankruptcy court’s determination that because accrued interest increases the total debt owed, margin interest payments reduce the deficiency in a margin account. Consequently, margin interest payments qualify as "margin payments" under section 546(e) and cannot be avoided.

The case may be found here