Bankruptcy Court Exempts Prepetition Transfer from Avoidance as § 546(e) Settlement Payment
Official Committee of Unsecured Creditors of Quebecor World (USA) Inc. v. American United Life Insurance Co. (In re Quebecor World (USA) Inc.), Bankr. No. 08-10152, Adv. No. 08-01417, 2011 BL 195113 (Bankr. S.D.N.Y. July 27, 2011)
The United States Bankruptcy Court for the Southern District of New York granted summary judgment to a group of institutional noteholder-defendants following a complaint filed by debtors’ official creditors’ committee (“Committee”) seeking to avoid and recover a $376 million prepetition transfer made from debtors to the noteholders in connection with debtors’ early repurchase of certain private notes. In doing so, the bankruptcy court held that as a transfer of cash to a financial institution made to complete a securities transaction, the disputed transfer constituted a “settlement payment” within the meaning of 11 U.S.C. § 546(e) that was exempt from avoidance pursuant to § 546(e)’s “safe harbor” provision.
Issuance of the Notes and the Disputed Transfer
Quebecor World (USA) Inc. (“QWUSA”) and its affiliates (collectively, “Debtors”) were the second largest commercial printing business in North America. In July 2000, Quebecor World Capital Corp. (“QWCC”) raised $371 million by issuing a series of private placement notes (collectively, “Notes”) to a group of institutional insurance company investors (collectively, “Noteholders”) pursuant to a note purchase agreement (“Note Purchase Agreement”). The Note Purchase Agreement permitted QWCC to prepay the Notes at any time for any reason; permitted Debtors to purchase, redeem or prepay the Notes from the Noteholders; provided that any Note paid or prepaid would be surrendered to the company or cancelled; and acknowledged the possibility that a prepayment could be avoided as a preferential transfer.
In 2007, following Debtors’ failed attempt to avoid cross-defaults under their revolving credit agreement and the Note Repurchase Agreement, QWCC sent each Noteholder a notice of redemption designating October 29, 2007 as the date on which it would redeem all outstanding Notes pursuant to the Note Repurchase Agreement. For tax reasons, QWCC assigned its obligation to make the redemption payments to QWUSA, which agreed to repurchase the Notes and surrender them to QWCC for cancellation. Thus, on October 29, 2007, during the ninety day preference period, Debtors transferred $376 million to CIBC Mellon Trust Co. (“CIBC”) as trustee for the Notes (“Disputed Transfer”), CIBC wired each Noteholder its portion of that amount and the Noteholders surrendered their Notes for cancellation.
The Chapter 11 Cases
Subsequently, on January 20, 2008, Debtors filed for chapter 11 bankruptcy protection. Thereafter, the Committee filed a complaint seeking to avoid and recover the Disputed Transfer as a preferential transfer under § 547(b). The Noteholders filed a motion for summary judgment (“Motion”), asserting total immunity from all preference exposure based on § 546(e)’s safe harbor provision exempting from avoidance a “settlement payment” made to a “financial institution” during the preference period. In June 2011, the Second Circuit Court of Appeals issued a precedential decision interpreting § 546(e) in the context of a debtor’s early redemption of public commercial paper. See In re Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 2011 BL 170955 (2d Cir. June 28, 2011).
In its opinion, the bankruptcy court analyzed whether the Disputed Transfer was avoidable as a preference, or whether it qualified as a “settlement payment” exempt from avoidance under § 546(e). Relying on the plain language of § 546(e) and Enron’s uncomplicated definition of the term “settlement payment,” the bankruptcy court observed that because the Disputed Transfer involved a transfer of cash to a financial institution to complete a securities transaction, the transaction was exempt from avoidance as a § 546(e) “settlement payment.” Notably, the bankruptcy court’s analysis reflects the same literal, practical approach that the Enron court applied to the statutory definition of a “settlement payment.” Similarly, the bankruptcy court’s decision demonstrates the benefit of applying a straightforward, consistent meaning to the term “settlement payment,” even if doing so significantly impairs a party’s future ability to avoid and recover any prepetition transfer made to complete a transaction involving a security.
Section 546(e) of the Bankruptcy Code
Beginning its analysis, the bankruptcy court explained that while preferential transfers are generally avoidable in bankruptcy, § 546(e) carves out a limited exception by exempting from avoidance a prepetition transfer that is a “settlement payment,” as defined in § 741(8), made by or to or for the benefit of a financial institution. The bankruptcy court noted that Congress enacted this safe harbor provision to reduce systemic risk in the financial markets by shielding prepetition transfers involving the securities markets from preference exposure. See In re Norstan Apparel Shops, Inc., 367 B.R. 68, 76 (Bankr. E.D.N.Y. 2007). Thus, in determining whether the Disputed Transfer qualified for § 546(e)’s exemption, the bankruptcy court examined whether it fit § 546(e)’s statutory definition of a “settlement payment.”
Enron Clarified the Meaning of “Settlement Payment” under §546(e)
Next, the bankruptcy court indicated that its determination as to whether the Disputed Transfer qualified as a “settlement payment” for purposes of §546(e) turned on the Enron decision. The bankruptcy court reviewed that in Enron, the Second Circuit held that prepetition payments made by debtors to redeem public commercial paper prior to its maturity were not avoidable as preferential transfers because they qualified as “settlement payments” protected by § 546(e). Limiting its analysis to the plain language of the Bankruptcy Code, the Enron court declared that redemption payments are not excluded from § 741(8)’s definition of a “settlement payment,” that a “settlement payment” is not restricted to payments made in connection with a purchase or sale and that a payment may qualify for safe harbor protection even if it is not cleared through a financial intermediary. Enron, 2011 BL 170955 at 6-9. Further, the bankruptcy court pointed out that Enron broadened and simplified the definition of the term “settlement payment” within the private placement sector of the securities industry, by focusing on the applicable statutory language rather than the specific procedures involved in a particular securities transaction. In that regard, the bankruptcy court noted that for purposes of § 546(e), Enron now defines a “settlement payment” simply as a transfer of cash, made to a financial institution to complete a securities transaction. Id. at 9.
Notably, the bankruptcy court indicated that Enron’s clear and consistent definition of a “settlement payment” eliminates the need for an examination of § 546(e)’s legislative history or an analysis of any distinguishing circumstances related to the different settlement procedures used in the securities industry. Instead, given Enron’s reliance on the literal language of § 546(e)’s statutory exemption, the bankruptcy court observed that such differences are no longer meaningful. As a result, the bankruptcy court reasoned that an open market redemption of public commercial paper and a repurchase of private placement notes are now indistinguishable for purposes of § 546(e), as both transactions involve transfers made to complete a securities transaction. Additionally, observing that the practical effect of Enron is to diminish a plaintiff’s ability to avoid any prepetition transfer made to complete a transaction involving a security, the bankruptcy court predicted that Enron’s impact on avoidance actions will be far reaching.
The Disputed Transfer was Exempt as a “Settlement Payment” under § 546(e)
Applying Enron’s simple formula, the bankruptcy court concluded that the Disputed Transfer qualified for exemption under § 546(e) because the transaction involved: (i) the transfer by QWUSA of cash (ii) to CIBC, a financial institution that acted as agent for the Noteholders (iii) made to repurchase the Notes, which constitute securities under § 101(49)(A)(i), in order to complete Debtors’ transaction to cancel its outstanding securities. Importantly, the bankruptcy court clarified that notwithstanding Congress’s policy of protecting the securities markets from avoidance risks, an actual impact on those markets is unnecessary in applying Enron’s definition. Nevertheless, the bankruptcy court remarked that as opposed to a small, relatively inconsequential private transfer, the Disputed Transfer’s systemic significance on the securities markets could be demonstrated, if necessary, based on the sheer scale of Debtors’ repurchase of the Notes from financial institutions active in the secondary market for private placement notes.
Bankruptcy Court Grants Motion
In sum, holding that the Disputed Transfer constituted an unavoidable “settlement payment” under § 546(e), the bankruptcy court granted the Motion.
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