When a settlement payment is
made under a "forward contract," there almost always exists a safe
harbor defense, found in Bankruptcy Code section 546(e). Accordingly, parties
entering into "forward contacts" should consider the defense in
advance. In this Emerging Issues Analysis, James M. Lawniczak identifies and
discusses cases that have considered the meaning of "forward
contract" and the application of the safe harbor defense.
It isn't good to be a defendant
in a bankruptcy avoidance action. Indeed, the defendant has likely already
suffered a loss because of the bankruptcy filing due to an outstanding
receivable that will be treated as an unsecured claim, paid in many cases at a
fraction of face value. Then, things turn for the worse when the trustee seeks
to make the loss even greater by avoiding and recovering a prepetition
There is, however, an absolute safe harbor defense to almost all avoidance
actions for settlement payments made under "forward contracts."
Parties entering into what might be "forward contracts" should
carefully consider this defense at the time of contract formation. In addition,
attorneys defending avoidance actions must be aware of the defense. This
topical expert commentary identifies and discusses the cases that have
discussed what a "forward contract" is and the circumstances under
which the safe harbor defense applies.
The Bankruptcy Code contains several sections that allow a 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 the most relevant one for purposes of the forward contract
defense is section 547, which provides for the avoidance of payments made to
creditors on antecedent debt within the 90-day preference period prior to the
bankruptcy filing. However, section 546 then provides some limitations on those
Code section 546(e), the focus of this online commentary, provides an absolute
defense to all of the trustee's avoidance powers, except for fraudulent
transfers based on actual fraud. By its terms, section 546(e) excepts from
avoidance recoveries any "settlement payment," made by or to or for
the benefit of "a commodity broker, forward contract merchant, stockbroker,
financial institution, financial participant, or securities clearing
agency," in connection with "a forward contract." [footnote
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