'Safe Harbor' In The Bankruptcy Storm: The Unavoidability Of Securities Transactions Utilizing Financial Intermediaries

The Second Circuit recently issued a decision addressing the reach of 11 U.S.C. § 546(e), the Bankruptcy Code's "safe harbor" from avoidance of preferential or fraudulent transfers.1 Aligning itself with three of the four other Courts of Appeal that have considered the issue,2 the Second Circuit held that Section 546(e) prohibits the avoidance of transfers to a financial intermediary made in connection with a securities contract even if those transfers are conduit payments, i.e., payments that merely flow through the intermediary en route to the ultimate recipients. This decision expands upon the Second Circuit's 2011 decision in In reEnron Creditors Recovery Corp.3 - holding that payments made to redeem commercial paper were "settlement payments" within the meaning of Section 546(e) - and provides further comfort to market participants that securities transactions will not be avoided in the event of a counter-party's bankruptcy filing.

Background

In 2000, Quebecor World Capital Corp. ("QWCC") raised $371 million though a private placement of notes (the "Notes") pursuant to two Note Purchase Agreements (the "NPAs") guaranteed by Quebecor World (USA) Inc. ("QWUSA"). The NPAs prohibited any affiliate of the issuer from repurchasing the Notes except in compliance with the prepayment provisions of the NPAs. In October 2007, QWUSA purchased the Notes by transferring $376 million (the "Purchase Price"), which included the principal amount outstanding, accrued interest and the prepayment premium required by the NPAs, to CIBC Mellon Trust Co. ("CIBC Mellon") as trustee for the Noteholders in exchange for the surrender of the Notes which QWUSA then surrendered to QWCC for redemption. CIBC Mellon then distributed the Purchase Price to the Noteholders.

Less than 90 days later, QWUSA filed for bankruptcy. The Unsecured Creditors' Committee (the "Committee") sought to avoid and recover the Purchase Price from the Noteholders. The Noteholders argued that the transfer could not be avoided because it fell within safe harbor provided by Section 546(e). The bankruptcy court and district court ruled in favor of the Noteholders finding the transfer was protected from avoidance as a transfer in connection with a securities transaction.4 The Committee appealed.

Law

The Bankruptcy Code allows debtors to "avoid", i.e. unwind and recover, certain transfers made within 90 days of the filing of the bankruptcy petition that have the effect of preferring certain...