Cadwalader Client & Friends Memo: S.D.N.Y. Bankruptcy Court Continues to Construe Bankruptcy Code’s Safe Harbor Provisions Narrowly

In two recent decisions, the United States Bankruptcy Court for the Southern District of New York has interpreted narrowly certain of the Bankruptcy Code's safe harbor provisions.

Last month, Judge James M. Peck ruled that a payment subordination provision in a swap agreement triggered by a bankruptcy constituted an unenforceable ipso facto clause and was not protected by the safe harbors. This resolved uncertainty related to a similar 2010 decision. See Lehman Brothers Special Financing Inc. v. Ballyrock ABS CDO 2007-1 Ltd. (In re Lehman Brothers Holdings Inc.), Adv. Pro. No. 09-01032, 2011 WL 1831779 (Bankr. S.D.N.Y. May 12, 2011).

Several weeks earlier, Judge Robert D. Drain ruled that the safe harbor provided by section 546(e) of the Bankruptcy Code, which insulates certain "settlement payments" from avoidance actions, does not apply to transfers made or obligations incurred in the context of a leveraged buyout of a privately-held company. The Court, in applying its holding, voided both the payments made to the company's former shareholders in exchange for their equity interests and the obligations incurred by the company on account of the loan that financed the LBO. See Geltzer v. Mooney (In re MacMenamin's Grill Ltd.), 2011 WL 1549056 (Bankr. S.D.N.Y. April 21, 2011).

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