321 © 2010 Thomson Reuters
for “settlement Payments”
by section 546(e)
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arrollGeorge V. Utlik is an attorney in the Bankruptcy and Financial Restructuring Group at Arent Fox LLP. He represents clients in corporate reorganization and liquidation matters. Immediately prior to joining Arent Fox, George served as the law clerk for the Honorable Mary F. Walrath, U.S. Bankruptcy Judge for the District of Delaware, where he gained experience working on some of the largest bankruptcy cases filed under Chapter 11 of the Bankruptcy Code. In 2008, he obtained the LL.M. in Bankruptcy from St. John’s University School of Law. Schuyler G. Carroll is a partner in the Bankruptcy and Financial Restructuring Group at Arent Fox LLP. Mr. Carroll’s practice focuses on complex restructuring, transaction, litigation, and advisory work, protecting and maximizing his client’s position. He has represented a wide variety of debtors, committees, creditors, bondholders, indenture trustees, trustees, landlords, investors, and pur-chasers in Chapters 11 and 7 bankruptcy proceedings, out-of-court workouts and nonjudicial reorganizations, and restructurings in a variety of industries.
I. Introduction
II. The Legislative History
A. The Legislative History and Historical Background of Sec-tion 546(e)
B. Section 546(e)’s Boundaries, Its Traditional Scope and Ap-plication
III. Recent Case Law Developments
A. Application of the Safe Harbor to LBO Transactions 1. Eighth Circuit’s Decision
2. Sixth Circuit’s Decision 3. Third Circuit’s Decision
B. Application of Safe Harbor in Debt Settlement Transactions IV. Practical Considerations
i. introduction
The Bankruptcy Code1 contains several safe harbor provisions that
grant significant benefits to certain participants in financial markets.2
Among the safe harbor provisions is section 546(e), often referred to as “the Safe Harbor,” which limits the power of a trustee or debtor in possession to avoid certain types of transfers made by or to enumerat-ed financial market participants or financial institution(s)3 unless these
transfers were made with “actual intent” to hinder, delay, or defraud creditors.4 The types of transfers that are exempt under the Safe Harbor
are a “margin payment” and a “settlement payment.”5
In recent years, courts have dealt with the Safe Harbor primarily in a leveraged buyout (LBO) context. In 2009, several courts expanded the scope of protection for settlement payments related to certain types of securities transactions covered by the Safe Harbor. The Courts of Ap-peals for the Sixth, Eighth, and Third Circuits held that payments made in connection with an LBO to holders of private company securities are protected by the Safe Harbor.6 Further, the District Court for the
South-ern District of New York joined these courts in expanding the scope of the Safe Harbor by holding that a premature redemption of a debt secu-rity is a “securities transaction” that qualifies for protection as a “settle-ment pay“settle-ment” under the Safe Harbor.7 In applying the Safe Harbor,
these courts considered, among other things, whether the transactions involved a public versus private company and whether a financial institu-tion or an attorney escrow agent was involved, as well as how many par-ties and how much money were implicated. This article will first discuss the historical background of section 546(e), its boundaries, and tradi-tional scope and application. It will next highlight important recent deci-sions helping to define the scope of transactions protected under the Safe Harbor and will also raise a couple of practical questions as to whether the statutory language of the Safe Harbor says what Congress intended.
ii. the legislative History and Historical Background of section 546(e), its Boundaries, and traditional scope and application
a. the legislative History and Historical Background of section 546(e)
Prior to the enactment of the Bankruptcy Code, the Safe Harbor did not exist, and courts did not prohibit a trustee of a bankrupt commod-ity customer from recovering, as a fraudulent conveyance, margin pay-ments that had been made by the debtor to the commodity clearing or-ganization, if the debtor was insolvent when it made the payment or was rendered insolvent by the payment.8
In 1978, the Safe Harbor was first enacted as section 764(c) of the Bankruptcy Code, overruling prior case law on the issue.9 Section
764(c) applied exclusively to margin payments made from commodi-ties clearing organizations and therefore only protected transfers made in “the ordinary course of business in the [commodities] market.”10 In
1982, Congress amended the safe harbor provision, replacing section 764(c) with three provisions, codified at §§ 546(e) and 741(5) and (8), “to clarify and, in some instances, broaden the commodities market pro-tections and expressly extend similar propro-tections to the securities mar-kets.”11 Section 546(e) limits the trustee’s ability to recover fraudulent
or preferential transfers if the transfers are settlement or margin pay-ments as defined in the Bankruptcy Code.12 Congress thus broadened
the Safe Harbor by extending its scope to include the securities markets and by expanding the protection to capture transactions “beyond the or-dinary course of business to include margin and settlement payments to and from brokers, clearing organizations, and financial institutions.”13
The purpose of the Safe Harbor is “to minimize the displacement caused in the commodities and securities markets in the event of a ma-jor bankruptcy affecting those industries.”14 Congress sought to prevent
“the insolvency of one commodity or security firm from spreading to other firms and possibly threatening the collapse of the affected mar-ket.”15 “This broad protection was designed to ensure settlement finality,
and therefore market stability.”16
B. section 546(e)’s Boundaries, its traditional scope, and application
In relevant part, the Safe Harbor provides that a trustee may not avoid a transfer that is a settlement payment, as defined in section 101 or 741 of the Bankruptcy Code, made by or to (or for the benefit of) a financial institution.17 By its terms, the Safe Harbor extends to any avoidance
ac-tion under §§ 544, 545, 547, and 548(a)(1)(B) and (b) of the Bankrupt-cy Code.18 Only a transfer made with intentional fraud under § 548(a)
(1)(A) is not excepted under the Safe Harbor.19
A “settlement payment” is defined in § 741(8) of the Bankruptcy Code tautologically, as “a preliminary settlement payment, a partial set-tlement payment, an interim setset-tlement payment,… or any other similar payment commonly used in the securities trade.”20 According to Norton
Bankruptcy Law and Practice 3d, a “settlement payment” is any transfer made toward completion of the settlement process, whether made on trade date, the scheduled settlement date or any other date within that process.21 Most recently, the District Court for the Southern District of
New York defined a “settlement payment” as any payment “made in the securities trade to consummate securities transactions.”22
The term “settlement payment” must be interpreted broadly, accord-ing to the Courts of Appeals for the Third, Ninth, and Tenth Circuits.23
“All three appellate courts rejected the argument that a payment could not qualify as a ‘settlement payment’ if it was not made as part of a so-called ‘ordinary course’ securities transaction.”24 A “settlement payment” is
con-strued broadly to include “almost all securities transactions.”25 In the LBO
context, for example, several courts have held that the LBO payments made to shareholders through a financial institution do qualify as “settle-ment pay“settle-ments” and are therefore exempt from avoidance under the Safe Harbor.26 Among these courts is the Court of Appeals for the Tenth Circuit,
holding that the LBO consideration qualified as a “settlement payment” that was made “to” stockbrokers and therefore was exempt from recovery by the debtor from stockbrokers under the Safe Harbor.27
Courts, however, appear to be split as to whether the language of the Safe Harbor is clear. On one hand, the Court of Appeals for the Tenth Circuit found that the language of § 546(e) is “clear.”28 On the other
hand, the Court of Appeals for the Eleventh Circuit and several lower courts found the language of section 546(e) to be “not dispositive.”29
Further, some lower courts appear to have been split as to whether the Safe Harbor applies to LBO transactions involving payments for pri-vately-held shares of a nonpublic corporation. Some courts found that application of § 546(e) is not limited to public LBOs.30 Other courts,
however, declined to extend the Safe Harbor to LBO transactions in-volving privately held shares that do not involve a financial intermedi-ary, concluding that such transactions “do not implicate the kinds of concerns about the stability and integrity of the securities markets that section 546(e) was enacted to protect.”31
iii. recent Case law developments
In 2009, the Courts of Appeals for the Sixth, Eighth, and Third Cir-cuits held that certain payments made through a financial institution in connection with an LBO are protected by the Safe Harbor, whether or not the company involved is publicly traded or privately held.32 Further,
the District Court for the Southern District of New York held that a pre-mature redemption of a debt security is a “securities transaction” that is protected under the Safe Harbor.33
a. application of the safe Harbor to lBo transactions 1. Eighth Circuit’s decision
On April 29, 2009, the Court of Appeals for the Eighth Circuit in
Contemporary Industries Corp. v. Frost34 considered the issue of
exchange for their shares during an LBO of the corporation were ex-empt from avoidance as settlement payments under the Safe Harbor.35
There, the shareholders sold their shares of the privately held corpora-tion to an outside investment group, which obtained significant loans to finance the purchase of the shares and pledged the corporation’s as-sets to the lenders as collateral.36 The distribution of the purchase price
to the shareholders was accomplished through First National Bank of Omaha after the shareholders deposited their shares and the investors deposited the funds that they borrowed with First National.37 Later, the
corporation experienced financial difficulties and filed its voluntary pe-tition under Chapter 11 of the Bankruptcy Code, and the debtor sued the shareholders seeking to recover the payments as avoidable fraudulent transfers.38 The shareholders moved for summary judgment, asserting
that the payments were exempt from avoidance under the Safe Harbor, and the bankruptcy court granted summary judgment to the sharehold-ers, a decision which was affirmed by the district court.39
The Court of Appeals for the Eighth Circuit considered the follow-ing two issues (within the meanfollow-ing of the Safe Harbor): (1) whether the payments to shareholders are “settlement payments” and (2) whether the payments were made “by or to a… financial institution.”40 With
re-spect to the first issue, the court began its analysis by looking to the relevant statutory text and considering (a) whether the text plainly and unambiguously encompasses the transfers and if so, (b) whether the plain language does not lead to an absurd result.41 The court relied
heav-ily on decisions from the Third, Ninth, and Tenth Circuits, holding that “§ 741(8) is ‘extremely broad’ and intended to encompass most pay-ments that can be considered settlement paypay-ments.”42 The court began
and ended its analysis with the statutory text, concluding that “the rel-evant text has a sufficiently plain and unambiguous meaning.”43
“Noth-ing in the relevant statutory language suggests Congress intended to exclude these payments from the statutory definition of ‘settlement payment’ simply because the stock at issue was privately held.”44 Thus
the court concluded that the payments made to the shareholders in ex-change for their privately held shares during the LBO were “settlement payments within the plain meaning of § 546(e) and § 741(8).”45
With respect to the second issue, the Court of Appeals for the Eighth Circuit similarly concluded that “the payments were made ‘by or to a… financial institution’ within the plain meaning of § 546(e).”46 “By its
terms, § 546(e) protects settlement payments ‘made by or to a… finan-cial institution,’ and does not expressly require that the finanfinan-cial institu-tion obtain a beneficial interest in the funds.”47 The court acknowledged
a financial institution must obtain a beneficial interest in the payments to fall under § 546(e)] in refusing to apply § 546(e) to protect simi-lar payments made to selling shareholders in the course of a leveraged buyout.”48 However, the court again agreed with the Third Circuit that
“the holding in [the Eleventh Circuit’s decision in Munford] cannot be squared with § 546(e)’s plain language.”49 The court found that First
National received the payments from the investors and then distributed the payments to the shareholders in exchange for their stock.50 Thus the
court concluded that the payments were made through the financial in-stitution and therefore “[u]nder a literal reading of the relevant statutory language, the payments satisfy both requirements necessary to involve the protections of § 546(e).”51 Further, the court explained that the
ap-plication of the plain language does not lead to an absurd result because the transactions where “so much money is at stake” could affect the markets’ stability.52
Therefore, the Court of Appeals for the Eighth Circuit held that the Safe Harbor protects payments made through a financial institution in connec-tion with an LBO even if the company involved is privately traded.
2. sixth Circuit’s decision
On July 6, 2009, shortly after Contemporary Indus. was decided, the Court of Appeals for the Sixth Circuit in QSI Holdings, Inc. v. Alford
(In re QSI Holdings, Inc.)53 considered the same issue for the first time:
whether the Safe Harbor applies to privately traded securities.54 There,
pursuant to a merger agreement, a privately held corporation merged with and into another company, and the shareholders received cash and stock in the other company for their respective equity interests in the corporation.55 To effectuate the merger, the parties utilized an exchange
agent, HSBC Bank USA, to collect and to transfer the shares and to collect and to distribute the funds.56 The merger entailed substantial
in-tegration costs that, along with the business expansion, led the merged company to financial difficulties and a subsequent bankruptcy filing under Chapter 11 of the Bankruptcy Code.57 A fraudulent conveyance
action was commenced against the shareholders, and the shareholders moved for summary judgment asserting that the LBO transfers were settlement payments made by a financial institution and thus protected by the Safe Harbor.58 The bankruptcy court granted summary judgment
for the shareholders, and the district court affirmed.
The Court of Appeals for the Sixth Circuit first considered whether the transfers made to purchase the shares of the privately held corpora-tion in conneccorpora-tion with the LBO were exempt as settlement payments under the Safe Harbor.59 The court looked to the statutory text, noted
that other courts have recognized that the term “settlement payment” is “extremely broad,” and agreed with the Eighth Circuit’s recent decision in Contemporary Indus. that the statutory definition of “settlement pay-ment” was intended to include securities that were privately held.60
Fur-ther, the court explained that “[t]he value of the privately held securities at issue is substantial and there is no reason to think that unwinding that settlement would have any less of an impact on financial markets than publicly traded securities.”61 The court also distinguished the instant
case from In re Norstan Apparel Shops, Inc.,62 which, according to the
Court of Appeals for the Sixth Circuit, “involved the two sole share-holders of a closely held Subchapter S corporation, did not implicate public securities markets, and lacked many of the indicia of transactions ‘commonly used in the securities trade.’”63
Second, the Court of Appeals for the Sixth Circuit considered wheth-er the activities of HSBC Bank, the exchange agent, constituted trans-fers “made by or to a… financial institution.”64 The court agreed with
both the Third and Eighth Circuits that the plain language of the Safe Harbor does not require a “financial institution” to have a “beneficial interest” and rejected the argument (adopted by the Eleventh Circuit in
Matter of Munford, Inc.65) that HSBC Bank was a mere conduit
lack-ing dominion or control over the funds.66 The court held that: (1) the
bank’s role was “sufficient to satisfy the requirement” that the transfers were made to a financial institution and (2) therefore the Safe Harbor protected the transfers.67
Thus the Court of Appeals for the Sixth Circuit joined the Court of Appeals for the Eighth Circuit in holding that the Safe Harbor protects payments made to holders of privately traded securities in connection with an LBO.
3. third Circuit’s decision
Most recently, the Court of Appeals for the Third Circuit in Brandt v.
B.A. Capital Co. (In re Plassein Intern. Corp.)68 considered the issue of
whether the Safe Harbor protects payments made to holders of privately traded securities in connection with an LBO.69 Plassein International
Corporation acquired several privately held corporations (with most having only a few shareholders) through LBOs.70 In the process, each
newly acquired corporation pledged its assets as collateral for the loans given to Plassein to finance the purchases.71 “[T]he selling shareholders
delivered their shares to Plassein, which directed its bank (Fleet Bank) to wire funds to the shareholders’ private accounts at their various banks to pay for the shares delivered.”72 The parties did not utilize the
employed in securities transactions.”73 A few months after the LBOs,
Plassein and the acquired companies defaulted on the loans and even-tually filed bankruptcy petitions under Chapter 11 of the Bankruptcy Code, which later were converted to Chapter 7 cases.74 The appointed
Chapter 7 trustee commenced adversary proceedings against the selling shareholders, seeking to recover the payments made in connection with the LBOs as avoidable fraudulent transfers.75 The shareholders filed
motions to dismiss the adversary proceedings, asserting that the pay-ments were “settlement paypay-ments” protected by the Safe Harbor.76 The
bankruptcy court granted the motions to dismiss, relying primarily on
Lowenschuss v. Resorts International, Inc. (In re Resorts Intern., Inc.),77
and the district court affirmed the bankruptcy court’s decision.78
On review, the Court of Appeals for the Third Circuit concluded that its prior decision in Resorts “directly” controlled the instant case’s out-come.79 First, in Resorts, the court had “held that the definition of
‘set-tlement payment’ [is] broad and that in the securities trade, ‘a set‘set-tlement payment is generally the transfer of cash or securities made to complete a transfer payment.’”80 Further, in Resorts, the court had concluded that
“[a] payment for shares during [a leveraged buyout] is obviously a com-mon securities transaction” and therefore had held that such payment “is also a settlement payment” protected under the Safe Harbor.81
More-over, in Resorts, the court had already rejected the Eleventh Circuit’s decision (which required a financial institution to acquire a beneficial interest in the exchanged shares to be protected under the Safe Harbor) and found that the Safe Harbor applied even though “a clearing agency had not been involved in the settlement for [the publicly traded] shares and that the financial institutions acted only as conduits.”82 Therefore,
the Plassein court was left to consider only whether distinguishing pri-vately traded shares from publicly traded shares could lead to a different outcome. The court rejected the trustee’s attempt to distinguish Resorts on that ground.83 “[T]he meaning of ‘settlement payment’ is best
un-derstood by examining how the term is used by those who work in the public securities market.”84 “Resorts expressly rejected the argument
that ‘settlement payments’ must travel through the settlement system.”85
In Resorts, the shares were sold “in a transaction outside of the publicly traded securities settlement system.”86 Looking at the way the shares
in Resorts were “actually traded,” the court could not “ignore the plain language in that case which governs the present dispute.” Thus the
Plas-sein court held that the Safe Harbor shielded the payments made to the
holders of the privately traded securities in connection with the LBO.87
Therefore, the Court of Appeals for the Third Circuit, bound by its decision in Resorts, joined both the Sixth and Eighth Circuits in holding that the Safe Harbor applies to privately traded securities.
B. application of safe Harbor in debt settlement transactions
On November 20, 2009, in AFLA, S.A.B. de C.V. v. Enron Creditors
Recovery Corp. (In re Enron Creditors Recovery Corp.),88 the District
Court for the Southern District of New York held that the Safe Harbor extends to securities transactions in which debt evidenced by commer-cial paper is redeemed by the issuer prior to maturity, using the custom-ary mechanism of the Depository Trust Company (the DTC) for trading in commercial paper.89
Prior to filing its bankruptcy case under Chapter 11 of the Bank-ruptcy Code, Enron Corporation and its affiliates issued commercial paper, which was prohibited from redemption or voluntary prepayment by Enron prior to maturity.90 Notwithstanding the prohibition, Enron
redeemed $1.1 billion of the commercial paper by using the DTC be-tween October 26 and November 6, 2001 and filed its Chapter 11 peti-tion on December 2, 2001.91 Later, an avoidance action was commenced
against the holders of the commercial paper—ING VP Balanced Port-folio, Inc, ING VP Bond PortPort-folio, Inc., and ALFA, S.A.B. de C.V. (col-lectively, the Defendants)—to recover the payments made to them for the redemption of the commercial paper as preferences and fraudulent transfers.92 In response, the Defendants asserted that the payments were
protected by the Safe Harbor.
On a motion for summary judgment, the bankruptcy court held that the premature payment of debt is not a “transaction in securities,” and therefore the transfers were not “settlement payments” protected under the Safe Harbor.93 First, the bankruptcy court concluded that the
pro-cedures that were followed to repay or redeem the commercial paper were not of a type “commonly used in the securities trade,” as required in the definition of “settlement payment.”94 The bankruptcy court noted
that (a) some of the commercial paper was redeemed prior to maturity rather than held until, and paid upon, maturity; and (b) the commercial paper was extinguished as a result of the transfers rather than resold on the secondary market according to the general practice.95 Thus the
bankruptcy court found that the transfers did not fit the definition of “settlement payment.” Second, the bankruptcy court “ruled as a matter of law that a securities transaction had to involve a ‘purchase or sale’ that resulted in the transfer of title-and held, as a matter of ostensibly undisputed fact, that there was neither a purchase nor a sale because En-ron never acquired title to the notes.”96 The bankruptcy court concluded
that “only a securities transaction involving a ‘transfer of ownership’ could be followed by a settlement payment that qualified for” protection under the Safe Harbor.97
In a detailed and well-reasoned decision, the district court reversed the bankruptcy court’s decision and held that “section 741(8) of the Bankruptcy Code does not limit the definition of ‘settlement payment’ to payments ‘commonly used in the securities trade.’”98 The district
court first discussed the legislative history of the Safe Harbor and ju-dicial interpretation and application of the Safe Harbor by the Third, Tenth, Ninth, Sixth, and Eighth Circuits, as well as by several district and bankruptcy courts that declined to extend the Safe Harbor to purely private securities transactions that do not involve a financial intermedi-ary—the case law that is, according to the district court, “either neutral or counsels in favor of interpreting the [Safe Harbor] as reaching trans-actions beyond the ordinary course.”99 Further, based on the
conven-tions of statutory construction, i.e., the rule of the last antecedent, the district court concluded that “settlement payment” as defined in section 741(8) of the Bankruptcy Code is not limited to “payments commonly used in the securities transactions.”100 Pursuant to the plain language
of the Bankruptcy Code, the district court concluded that notes are in-cluded in the definition of “security” under section 101(49) and that the payments to redeem the commercial paper were settlement payments, which the district court defined as “payments made in the securities trade to consummate securities transactions.”101
The district court held “that because the redemption of the notes (a security) involved ‘the delivery and receipt of funds and securities,’ it qualifies as a ‘securities transaction’ for safe harbor purposes, regard-less of whether Enron, itself or through an agent, acquired title to the notes.”102 Finally, the district court revived the “five key factors”
(an-nounced by Judge Marrero in Jackson v. Mishkin (In re Adler, Coleman
Clearing Corp.)103 and later cited with approval by Judge Lynch in
Amer-ican Tissue, Inc. v. Donaldson, Lufkin & Jenrette Securities Corp.104) that
“should be considered in determining the applicability of the safe harbor to any particular” transaction.105 These “five key factors” are:
(1) the transactions have long settled by means of actual transfers of consideration, so that subsequent reversal of the trade may result in disruption of the securities industry, creating a potential chain reaction that could threaten collapse of the affected market; (2) consideration was paid out in exchange for the securities or
property interest as part of settlement of the transaction;
(3) the transfer of cash or securities effected contemplates consum-mation of a securities transaction;
(4) the transfers were made to financial intermediaries involved in the national clearance and settlement system;
(5) the transaction implicated participants in the system of interme-diaries and guarantees which characterize the clearing and settle-ment process of public markets and therefore would create the potential for adverse impacts on the functioning of the securities market if any of those guarantees in the chain were invoked.106
Applying these factors, the district court concluded that “all five
Jack-son factors are present in the securities transaction at bar, [and therefore]
there is no policy reason to depart from what appears to this Court to be the plain meaning of the literal language of the Bankruptcy Code.”107
Therefore, the District Court for the Southern District of New York expanded the Safe Harbor by holding that securities transactions involv-ing a premature redemption of a debt security usinvolv-ing a financial institu-tion “fall within the literal language of the statute.”108
iV. Practical Considerations
Since enactment of section 546(e) of the Bankruptcy Code in 1978, the scope of protection under the Safe Harbor has been significantly expanded. Today, the Third, Sixth, and Eighth Circuit Courts of Ap-peals agree that virtually every transfer that concludes or consummates a securities transaction falls within the Safe Harbor. It is perhaps less clear whether the Sixth Circuit’s recent decision is as expansive as those of the other two circuits. Some commentators, for example, noted that considering that the Sixth Circuit distinguished Norstan based on the limited number of the shareholders involved in the LBO transaction, “it may be argued that the Sixth Circuit’s decision does not expand the ap-plication of § 546(e) as broadly as the Eighth Circuit, and is limited to private companies with a substantial number of shareholders.”109
Some commentators suggest that by using a financial institution, in-stead of a law firm, to act as an escrow agent for a sale of nonpublic securities pursuant to an LBO, an otherwise preferential or fraudulent transfer of funds to the selling shareholders may be exempt under the Safe Harbor.110
From a policy point view, the outcomes [of the recent decisions] may not make sense. After all, there is no policy reason why Con-gress would have wanted to permit a shareholder of an insolvent company to extract from the company funds for themselves while saddling the company with debt through an LBO that directly re-sults in the company filing for bankruptcy relief and leaving credi-tors of the company unpaid.111
Similarly, it would be strange that a shareholder can obtain the ben-efits of the Safe Harbor simply by structuring the payments through a financial intermediary instead of an attorney. Evidently, the Court of Appeals for the Eighth Circuit has foreseen such attacks when it noted that “[where] such abuse seems evident, a statutory safety valve ex-ists… [B]y definition, a settlement payment must be commonly used in the securities trade… [and it is] unlikely that a transaction that is a clear abuse of the exemption could be said to be commonly used in [that] trade.”112 The Court of Appeals for the Eighth Circuit, however, did not
expand on that thought and did not provide an indication as to what may be considered “a clear abuse of the exemption.”
V. Conclusion
The recent decisions expanded the Safe Harbor provided by section 546(e) of the Bankruptcy Code by holding that the Safe Harbor ap-plies to privately traded securities and protects securities transactions in which debt evidenced by commercial paper is prematurely redeemed by the issuer through a financial institution. The question, however, is whether such expansion overreached the boundaries established by Congress. If the purpose of enacting the Safe Harbor was protection of financial markets, does protection of payments of insignificant funds made by a privately held corporation to a small number of its share-holders in connection with an LBO that resulted in creditors being un-able to collect from the insolvent company comply with Congressional purpose, or does it fall outside the boundaries established by Congress? While the plain language approach (which is followed by the majority of the courts interpreting the Safe Harbor) is the correct one from the statutory interpretation point of view, perhaps Congress should consid-er whethconsid-er the language in the statute says what it should say or whethconsid-er it is time to redraft the statute.
NotEs
1. The Bankruptcy Code is codified in 11 U.S.C.A. §§ 101 et seq. and is referred to herein as the Bankruptcy Code.
2. See Mark D. Sherrill, Limitations of Market Participants’ Protections Against Fraudulent-Conveyance Actions, 28 Am. Bankr. Inst. J. 28, at 28 (May 2009) (citing 11 U.S.C.A. §§ 362(b)(6), (7), (17), (27); 546(e), (f), (g), and (j); 555 to 556; 559 to 561).
3. “Financial institutions” include commodities brokers, forward contract merchants, stockbrokers, financial participants, and securities clearing agencies. See 11 U.S.C.A. § 546(e).
4. 11 U.S.C.A. § 546(e). 5. 11 U.S.C.A. § 546(e).
6. See In re QSI Holdings, Inc., 571 F.3d 545, 51 Bankr. Ct. Dec. (CRR) 222, Bankr. L. Rep. (CCH) P 81528 (6th Cir. 2009), cert. denied, 130 S. Ct. 1141 (2010); Contemporary Industries Corp. v. Frost, 564 F.3d 981, 51 Bankr. Ct. Dec. (CRR) 157, Bankr. L. Rep. (CCH) P
81473 (8th Cir. 2009); In re Plassein Intern. Corp., 590 F.3d 252, 52 Bankr. Ct. Dec. (CRR) 145, Bankr. L. Rep. (CCH) P 81653 (3d Cir. 2009), cert. denied, 2010 WL 1180360 (U.S. 2010).
7. See In re Enron Creditors Recovery Corp., 422 B.R. 423 (S.D. N.Y. 2009).
8. See, e.g., Seligson v. New York Produce Exchange, 394 F. Supp. 125, 134-38 (S.D. N.Y. 1975).
9. See S. Rep. 95-989, at 106 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5892 (citing Seligson, 394 F. Supp. 125).
10. Enron Creditors Recovery, 422 B.R. 423 (citing H.R. Rep. 95-595, at 392 (1978), as reprinted in 1978 U.S.C.C.A.N. 5963, 6348).
11. H.R. Rep. 97-420, at 2 (1982), as reprinted in 1982 U.S.C.C.A.N. 583, 583. Section 546(e) of the Bankruptcy Code was amended several times since. In 2005, the section was amended by adding “financial participant” to the listed transferors and transferees and adding section 546(i) concerning master netting agreements to the exceptions from the trustee’s avoidance powers. See Pub. L. No. 109-8, 119 Stat 23, § 907(o) & (e) (Apr. 20, 2005). In 2006, the section was further amended by the Financial Netting Improvements Act, Pub. L. 109-390, 120 Stat. 2692.
12. See 11 U.S.C.A. § 741(5) (defining margin payments) and 741(8) (defining settlement payments). The phrase “settlement payment” can also be found at § 101(51A), as it relates to forward contracts.
13. Kaiser Steel Corp. v. Charles Schwab & Co., Inc., 913 F.2d 846, 849, 20 Bankr. Ct. Dec. (CRR) 1650, 23 Collier Bankr. Cas. 2d (MB) 1403, Bankr. L. Rep. (CCH) P 73620 (10th Cir. 1990).
14. H.R. Rep. 97-420, at 2 (1982), as reprinted in 1982 U.S.C.C.A.N. 583, 583.
15. Jewel Recovery, L.P. v. Gordon, 196 B.R. 348, 352 (N.D. Tex. 1996) (citing H.R. Rep. 97-420, at 2 (1982), as reprinted in 1982 U.S.C.C.A.N. 583, 583).
16. Enron Creditors Recovery, 422 B.R. 423. 17. See 11 U.S.C.A. § 546(e).
18. 11 U.S.C.A. § 546(e). 19. 11 U.S.C.A. § 546(e).
20. 11 U.S.C.A. § 741(8). See also In re Grafton Partners, 321 B.R. 527, 532, 44 Bankr. Ct. Dec. (CRR) 115, 53 Collier Bankr. Cas. 2d (MB) 1589 (B.A.P. 9th Cir. 2005)) (“The difficulty with the definition of ‘settlement payment’ is that it relies on a conclusory laundry list of securities industry terms of art that contain the words ‘settlement payment’ without articulating the elements of a security payment.”).7
21. See Norton Bankruptcy Law and Practice 3d § 87:45. 22. Enron Creditors Recovery, 422 B.R. 423.
23. See Norton Bankruptcy Law and Practice 3d § 87:45. See also Gordon, 196 B.R. at 353 (citing Bevill, Bresler & Schulman Asset Management Corp. v. Spencer Sav. & Loan Ass’n, 878 F.2d 742, 745, 19 Bankr. Ct. Dec. (CRR) 962, 21 Collier Bankr. Cas. 2d (MB) 298, Bankr. L. Rep. (CCH) P 73008 (3d Cir. 1989); In re Kaiser Steel Corp., 952 F.2d 1230, 1239-41, 26 Collier Bankr. Cas. 2d (MB) 443, Bankr. L. Rep. (CCH) P 74387 (10th Cir. 1991); In re Comark, 971 F.2d 322, 324, 23 Bankr. Ct. Dec. (CRR) 385, 27 Collier Bankr. Cas. 2d (MB) 360, Bankr. L. Rep. (CCH) P 74768 (9th Cir. 1992)).
24. Enron Creditors Recovery, 422 B.R. 423.
25. In re Resorts Intern., Inc., 181 F.3d 505, 515, 34 Bankr. Ct. Dec. (CRR) 736, Bankr. L. Rep. (CCH) P 77952 (3d Cir. 1999). See also In re Hechinger Investment Co. of Delaware, 274 B.R. 71, 83-85 (D. Del. 2002).
26. See, e.g., Resorts Intern., 181 F.3d at 515 (agreeing with the Tenth Circuit and adopting a broad approach to the term “settlement payment”); Kaiser Steel, 952 F.2d at 1236.
27. See Kaiser Steel Corp. v. Charles Schwab & Co., Inc., 913 F.2d 846, 850, 20 Bankr. Ct. Dec. (CRR) 1650, 23 Collier Bankr. Cas. 2d (MB) 1403, Bankr. L. Rep. (CCH) P 73620
(10th Cir. 1990) (finding persuasive the Securities and Exchange Commission’s view that the “consummation of an LBO is a ‘settlement payment’ exempted from avoidance”).
28. Kaiser Steel, 952 F.2d at 1240:
On its face the statute is clear…. Certainly, we cannot say that the clear application is absurd, given the fact that disruption in the securities industry—an inevitable result if leveraged buyouts can freely be unwound years after they occurred—is also a harm the status was designed to avoid.
29. Matter of Munford, Inc., 98 F.3d 604, 36 Collier Bankr. Cas. 2d (MB) 1673 (11th Cir. 1996) (rejected by, In re QSI Holdings, Inc., 571 F.3d 545, 51 Bankr. Ct. Dec. (CRR) 222, Bankr. L. Rep. (CCH) P 81528 (6th Cir. 2009)) (stating that section 546(e) “does not bar the trustee in bankruptcy from avoiding payments the debtor corporation made to its shareholders in a leveraged buy-out”); Wieboldt Stores, Inc. By and Through Raleigh v. Schottenstein, 131 B.R. 655, 663 (N.D. Ill. 1991) (rejected by, Matter of Munford, Inc., 98 F.3d 604, 36 Collier Bankr. Cas. 2d (MB) 1673 (11th Cir. 1996)) (examining legislative history of section 546(e) and finding that recovering LBO payments to shareholders “poses no significant threat to those in the clearance and settlement chain”).
30. See In re Plassein Intern. Corp., 366 B.R. 318, 48 Bankr. Ct. Dec. (CRR) 62, 28 A.L.R. Fed. 2d 829 (Bankr. D. Del. 2007), aff’d, 388 B.R. 46 (D. Del. 2008), order aff’d, 590 F.3d 252, 52 Bankr. Ct. Dec. (CRR) 145, Bankr. L. Rep. (CCH) P 81653 (3d Cir. 2009), cert. denied, 2010 WL 1180360 (U.S. 2010) (holding that term “settlement payment” is not restricted in its application only to payments made in connection with publicly traded securities); In Matter of Contemporary Industries Corp., 2007 WL 5256918 (Bankr. D. Neb. 2007), subsequently aff’d, 564 F.3d 981, 51 Bankr. Ct. Dec. (CRR) 157, Bankr. L. Rep. (CCH) P 81473 (8th Cir. 2009).
31. Enron Creditors Recovery, 422 B.R. 423 (S.D. N.Y. 2009) (citing In re Bankest Capital Corp., 374 B.R. 333, 345-46 (Bankr. S.D. Fla. 2007); In re Norstan Apparel Shops, Inc., 367 B.R. 68, 77, 48 Bankr. Ct. Dec. (CRR) 9 (Bankr. E.D. N.Y. 2007) (“If the term “settlement payment”… is construed to encompass any payment made for securities, whether or not involving a public securities market, then any leveraged buyout… would fall within § 546(e)’s safe harbor”); Zahn v. Yucaipa Capital Fund, 218 B.R. 656, 675-76 (D.R.I. 1998); Gordon, 196 B.R. at 353; Schottenstein, 131 B.R. at 664-65 (refusing to apply the 546(e) exemption to payments of LBO consideration made by a depositary to the selling shareholders in an LBO)). See also Grafton Partners, 321 B.R. at 539 (“The boundary that emerges from such decisions approximates the line between public transactions that involve the clearance and settlement process and non-public transactions that do not involve that process” (emphasis in original)).
32. See QSI Holdings, 571 F.3d 545; Contemporary Indus., 564 F.3d 981; Plassein Intern., 590 F.3d 252.
33. See Enron Creditors Recovery, 422 B.R. 423. 34. Contemporary Indus., 564 F.3d 981. 35. Contemporary Indus., 564 F.3d at 984. 36. Contemporary Indus., 564 F.3d at 983. 37. Contemporary Indus., 564 F.3d at 983. 38. Contemporary Indus., 564 F.3d at 983-84. 39. Contemporary Indus., 564 F.3d at 984.
40. Contemporary Indus., 564 F.3d at 985-86 & 986-87. 41. Contemporary Indus., 564 F.3d at 985-87.
42. Contemporary Indus., 564 F.3d at 985 (citing Resorts Intern., 181 F.3d at 515; Comark, 971 F.2d at 326; Kaiser Steel, 913 F.2d at 849.
43. Contemporary Indus., 564 F.3d at 986. 44. Contemporary Indus., 564 F.3d at 986.
45. Contemporary Indus., 564 F.3d at 986 (citing QSI Holdings, Inc. v. Alford, 382 B.R. 731, 741-42 (W.D. Mich. 2007), judgment aff’d, 571 F.3d 545, 51 Bankr. Ct. Dec. (CRR) 222,
Bankr. L. Rep. (CCH) P 81528 (6th Cir. 2009), cert. denied, 130 S. Ct. 1141 (2010) (concluding that similar payments made to selling shareholders in exchange for privately held stock were settlement payments within the plain meaning of those sections)).
46. Contemporary Indus., 564 F.3d at 986. 47. Contemporary Indus., 564 F.3d at 986.
48. Contemporary Indus., 564 F.3d at 986. (citing Munford, 98 F.3d at 610). 49. Contemporary Indus., 564 F.3d at 986-87.
50. Contemporary Indus., 564 F.3d at 987. 51. Contemporary Indus., 564 F.3d at 987. 52. Contemporary Indus., 564 F.3d at 987.
53. In re QSI Holdings, Inc., 571 F.3d 545, 51 Bankr. Ct. Dec. (CRR) 222, Bankr. L. Rep. (CCH) P 81528 (6th Cir. 2009), cert. denied, 130 S. Ct. 1141 (2010).
54. QSI Holdings, 571 F.3d at 547. 55. QSI Holdings, 571 F.3d at 547-48. 56. QSI Holdings, 571 F.3d at 548. 57. QSI Holdings, 571 F.3d at 548. 58. QSI Holdings, 571 F.3d at 548. 59. QSI Holdings, 571 F.3d at 549. 60. QSI Holdings, 571 F.3d at 549-50. 61. QSI Holdings, 571 F.3d at 550.
62. In re Norstan Apparel Shops, Inc., 367 B.R. 68, 48 Bankr. Ct. Dec. (CRR) 9 (Bankr. E.D. N.Y. 2007).
63. QSI Holdings, 571 F.3d at 550 (citing Norstan, 367 B.R. at 73). 64. QSI Holdings, 571 F.3d at 550. 65. Munford, 98 F.3d at 610. 66. QSI Holdings, 571 F.3d at 550-51. 67. QSI Holdings, 571 F.3d at 550-51. 68. Plassein Intern., 590 F.3d 252. 69. Plassein Intern., 590 F.3d 252. 70. Plassein Intern., 590 F.3d 252. 71. Plassein Intern., 590 F.3d 252. 72. Plassein Intern., 590 F.3d 252. 73. Plassein Intern., 590 F.3d 252. 74. Plassein Intern., 590 F.3d 252 75. Plassein Intern., 590 F.3d 252. 76. Plassein Intern., 590 F.3d 252.
77. Resorts Intern., 181 F.3d at 509 (analyzing section 546(e) and concluding that challenged transfer could not be avoided).
78. Plassein Intern., 590 F.3d 252. 79. Plassein Intern., 590 F.3d 252.
80. Plassein Intern., 590 F.3d 252 (citing Resorts Intern., 181 F.3d at 515). 81. Plassein Intern., 590 F.3d 252 (citing Resorts Intern., 181 F.3d at 516). 82. Plassein Intern., 590 F.3d 252.
83. Plassein Intern., 590 F.3d 252.
84. Plassein Intern., 590 F.3d 252 (restating the court’s conclusion in Resorts). 85. Plassein Intern., 590 F.3d 252.
87. Plassein Intern., 590 F.3d 252.
88. Enron Creditors Recovery, 422 B.R. 423.
89. Enron Creditors Recovery, 422 B.R. 423 (reversing “the holding of the Bankruptcy Court insofar as it limited the definition of settlement payment—and restricted the availability of Section 546(e)’s safe harbor from avoidance—to payments ‘commonly made’ in the securities trade (i.e., made in connection with ordinary course securities transactions)”).
90. Enron Creditors Recovery, 422 B.R. 423. 91. Enron Creditors Recovery, 422 B.R. 423. 92. Enron Creditors Recovery, 422 B.R. 423. 93. Enron Creditors Recovery, 422 B.R. 423.
94. Enron Creditors Recovery, 422 B.R. 423 (citing In re Enron Creditors Recovery Corp., 407 B.R. 17, 37-41, 51 Bankr. Ct. Dec. (CRR) 240 (Bankr. S.D. N.Y. 2009), motion to certify appeal granted, 2009 WL 3349471 (S.D. N.Y. 2009) and rev’d, 422 B.R. 423 (S.D. N.Y. 2009) (Enron II)).
95. Enron Creditors Recovery, 422 B.R. 423. 96. Enron Creditors Recovery, 422 B.R. 423.
97. Enron Creditors Recovery, 422 B.R. 423 (citing Enron II, 407 B.R. at 39). 98. Enron Creditors Recovery, 422 B.R. 423 (citing 11 U.S.C.A. § 741(8)). 99. Enron Creditors Recovery, 422 B.R. 423.
100. Enron Creditors Recovery, 422 B.R. 423 (citing 11 U.S.C.A. § 741(8)). 101. Enron Creditors Recovery, 422 B.R. 423.
102. Enron Creditors Recovery, 422 B.R. 423 (citing Kaiser Steel, 913 F.2d at 850 (quoting National Securities Clearing Corp., 42 Fed. Reg. 3916, 3920 n.56 (1977)).
103. In re Adler, Coleman Clearing Corp., 263 B.R. 406, 479-80, 44 U.C.C. Rep. Serv. 2d 1125 (S.D. N.Y. 2001).
104. American Tissue, Inc. v. Donaldson, Lufkin & Jenrette Securities Corp., 351 F. Supp. 2d 79, 107 (S.D. N.Y. 2004).
105. Enron Creditors Recovery, 422 B.R. 423 (citing Jackson v. Mishkin (In re Adler, Coleman Clearing Corp.), 263 B.R. 406, 479-80 (S.D.N.Y. 2001)).
106. Enron Creditors Recovery, 422 B.R. 423. 107. Enron Creditors Recovery, 422 B.R. 423. 108. Enron Creditors Recovery, 422 B.R. 423.
109. Irving E. Walker and G. David Dean, Structuring a Sale of Privately Held Stock to Reduce Fraudulent-Transfer Claims Risk, 28 Am. Bankr. Inst. J. 16, 20 (Sept. 2009).
110. See Walker and Dean, 28 Am. Bankr. Inst. J. at 20 (assuming that there is no intentional fraud and that a subsequent bankruptcy case is filed in the jurisdiction that affords protection to privately-held securities under section 546(e) of the Bankruptcy Code).
111. Walker and Dean, 28 Am. Bankr. Inst. J. at 21.
112. Contemporary Indus., 564 F.3d at 988 n.5 (quoting QSI Holdings, 382 B.R. at 743 (internal citations omitted)).
