Section 546(e) of the Bankruptcy Code provides an absolute defense to most of the avoidance powers granted by the Code. It excepts from recovery certain payments made in connection with securities contracts or commodities or forward contracts. James M. Lawniczak looks at four recent decisions treating this "safe harbor" expansively. In defending an avoidance action, it is critical for counsel to careful examine the defense's applicability.
Excerpt: Statutory AnalysisTitle 11 of the United States Code-the Bankruptcy Code-contains several sections that allow the trustee to avoid certain transactions and then recover the property or its value for the benefit of the estate. These avoidance powers are contained in chapter 5 of the Bankruptcy Code and include the following: (1) section 544(b), which gives the trustee power to avoid actions under applicable state laws, such as the Uniform Fraudulent Transfer Act; (2) section 545, which allows avoidance of statutory liens; (3) section 547, which provides for the avoidance of payments made to creditors on antecedent debt; and (4) section 548, which covers fraudulent transfers both where actual fraud is involved and constructive fraudulent transfers, when there are legitimate transfers for less than fair equivalent value. Section 546 then provides some limitations on those avoidance powers.
The Avalanche to Broader Interpretation-the 2009 Private Leveraged Buyout CasesIn 2009, the dam burst on the idea that because Congress intended to protect only public securities markets when enacting section 546(e), its exception did not apply to transactions outside the public markets. Three courts of appeals relied on the plain language of the statute to hold, contrary to the holding in the Munford case, that payments to existing shareholders in a private company leveraged buyout were exempt from avoidance actions under section 546(e) when made by a broker or financial institution. Brandt v. B.A. Capital Co. LP (In re Plassein Int'l Corp.), 590 F.3d 252 (3d Cir. 2009); QSI Holdings, Inc. v. Alford (In re QSI Holdings, Inc.), 571 F.3d 545 (6th Cir. 2009); Contemporary Indus. Corp. v. Frost, 564 F.3d 981 (8th Cir. 2009) (collectively the "2009 Private Leveraged Buyout cases"); see "James M. Lawniczak on Immunity of "Settlement Payments" from Fraudulent Transfer Suits," LexisNexis Emerging Issues Analysis, 2010 Emerging Issues 4890 (Feb. 2010).The Second Circuit Continues the Avalanche to Broader Interpretation in the Enron Case
In the ensuing appeal in Enron, the Second Circuit agreed with the district court. The court first noted the circular definition of "settlement payment" in Code section 741(8). 651 F.3d at 334. Notwithstanding the circularity of the definition, the Second Circuit went on in Enron to agree with the 2009 Private Leveraged Buyout cases that the definition of a settlement payment is "extremely broad."Id.The Second Circuit acknowledged that no court of appeals had yet ruled on whether the early redemption of commercial paper fell within the safe harbor exemption of section 546(e). Id. Immediately thereafter, the court accepted the main argument of the defendants that the payments fell within the plain meaning of the exception because "they completed a transaction involving the exchange of money for securities." 651 F.3d at 334-35.
A Limit on the Breadth of the Section 546(e) Exception-the Qimonda CaseIn one recent case, the section 546(e) defense was rejected and the broad breadth of the exemption contained therein did not apply. In EPLGI, LLC v. Citibank, N.A. (In re Qimonda Richmond, LLC), 467 B.R. 318 (Bankr. D. Del. 2012), the court held that payments to a bank to collateralize a letter of credit issued in connection with industrial revenue bonds were not covered by the safe harbor of section 546(e). This was because the collateralization of the letter of credit was "separate and discrete from any payment of the Bonds." 467B.R. at 323. A letter of credit is specifically excluded from the definition of a "security" under Code section 101(49)(B)(i). 467 B.R. at 322.
Practical PointersThe importance of the section 546(e) safe harbor exemption cannot be overstated. Millions to billions of dollars can be at stake depending on whether it is available to a defendant. Therefore, it is critical that the defense be examined by attorneys at both stages of the process: first, when a potentially avoidable transfer is about to be made and second, when defending an avoidance action.Perhaps both debtors making payments and creditors receiving them will be examining the applicability of the defense at the planning stage. If the debtor is focusing on a possible bankruptcy filing, it may try to avoid the defense by appropriate structuring. The recipient of the payment will surely do its best to ensure an appropriate transaction structure to implicate the defense.Finally, it is critical for counsel defending an avoidance case to carefully examine the defense's applicability. With the series of recent cases discussing the breadth of the exception, the plain language of the statute should be reviewed to determine if the exception is applicable.
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Lexis.com subscribers may access the enhanced versions of Brandt v. B.A. Capital Co. LP (In re Plassein Int'l Corp.), 590 F.3d 252 (3d Cir. Del. 2009), QSI Holdings, Inc. v. Alford (In re QSI Holdings, Inc.), 571 F.3d 545 (6th Cir. Mich. 2009), Contemporary Indus. Corp. v. Frost, 564 F.3d 981 (8th Cir. 2009), and EPLG I, LLC v. Citibank, N.A. (In re Qimonda Richmond, LLC), 467 B.R. 318 (Bankr. D. Del. 2012)
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