ENRON CREDITORS RECOVERY CORP. v. ALFA, S.A.B. DE C.V. Docket Nos. 09-5122-bk (L), 09-5142-bk (Con).
651 F.3d 329 (2011)
In re ENRON CREDITORS RECOVERY CORP., Appellant, v. ALFA, S.A.B. DE C.V., ING VP Balanced Portfolio, Inc., ING VP Bond Portfolio, Inc., Appellees.
United States Court of Appeals, Second Circuit.
Decided: June 28, 2011.
Michael Schatzow ( Robert L. Wilkins, Mitchell Y. Mirviss, Colleen M. Mallon, Richard L. Wasserman, on the brief), Venable LLP, Baltimore, MD, for Appellant Enron Creditors Recovery Corp.
Michael L. Cook ( Brian C. Tong, on the brief), Schulte Roth & Zabel LLP, New York, NY, for Appellee Alfa, S.A.B. de C.V.
Sabin Willett ( Mark M. Elliott, Eric Heining, on the brief), Bingham McCutchen LLP, Boston, MA, for Appellees ING VP Balanced Portfolio, Inc., and ING VP Bond Portfolio, Inc.
Mark D. Cahn, Deputy General Counsel ( Morgan Bradylyons, Attorney, Jacob H. Stillman, Solicitor, Katharine B. Gresham, Assistant General Counsel), on the brief, Securities and Exchange Commission, Washington DC, for amicus curiae Securities and Exchange Commission.
Joshua D. Cohn ( Christopher J. Houpt), on the brief, Mayer Brown LLP, New York, NY, for amicus curiae Securities Industry and Financial Markets Association.
Judge KOELTL dissents in a separate opinion.
JOHN M. WALKER, JR., Circuit Judge:
This appeal raises an issue of first impression in the courts of appeals: whether 11 U.S.C. § 546(e), which shields "settlement payments" from avoidance actions in bankruptcy, extends to an issuer's payments to redeem its commercial paper prior to maturity. Enron Creditors Recovery Corp. ("Enron")
The Bankruptcy Court for the Southern District of New York (Arthur J. Gonzalez, Bankruptcy Judge) concluded that § 546(e)'s safe harbor does not protect Enron's payments from avoidance because they were made to retire debt, not to purchase securities, and because they were extraordinary. The District Court for the Southern District of New York (Colleen McMahon, Judge) held that Enron's payments do fall within the safe harbor, reversed the Bankruptcy Court's decision, and remanded with instructions to enter summary judgment in favor of Alfa and ING.
On appeal, Enron challenges the district court's conclusion that the safe harbor protects Enron's redemption payments whether or not they were made to retire debt or were unusual. Because we agree with the district court that Enron's proposed exclusions from the reach of § 546(e) have no basis in the Bankruptcy Code, we AFFIRM its decision and order.
After a series of events in the latter half of 2001, including the resignation of its CEO, Jeffery Skilling, its announcement of $600 million in third-quarter losses, the commencement of an SEC investigation into its practices, and the correction of four years' worth of financial statements, Enron, a Houston-based energy company, collapsed. See, e.g., David S. Hilzenrath, Early Warnings of Trouble at Enron, Wash. Post, Dec. 30, 2001, at A10.
On December 2, 2001, Enron petitioned for Chapter 11 bankruptcy. This appeal arises out of Enron's attempt to avoid and recover pre-petition payments it made to redeem, prior to maturity, commercial paper it had issued.
Between October 25, 2001 and November 6, 2001, Enron drew down on its $3 billion revolving lines of credit and paid out more than $1.1 billion to retire certain of its unsecured and uncertificated commercial paper prior to the paper's maturity. Enron redeemed the commercial paper at the accrued par value, calculated as the price originally paid plus accrued interest. This price was considerably higher than the paper's market value.
The offering memoranda that accompanied the issuance of the commercial paper provided that the "Notes are not redeemable or subject to voluntary prepayment by the Company prior to maturity." This provision prohibited calls and puts: Enron could not force investors to surrender the notes and the investors could not require Enron to prepay them.
The Depository Trust Company (the "DTC"), a clearing agency, maintained bookkeeping entries that tracked ownership of Enron's commercial paper. This is the customary tracking method in the industry. Every issuer of commercial paper has an issuing and paying agent ("IPA") within the DTC to issue commercial paper and to pay at maturity or at an early redemption.
Three broker-dealers, J.P. Morgan, Goldman, Sachs & Co., and Lehman Brothers Commercial Paper, Inc., participated in Enron's redemption. They received the commercial paper from the individual noteholders and paid them the redemption price. The mechanics of these transfers were as follows. The DTC debited the redemption price from each broker-dealer's account and credited it to the noteholder's DTC account. The broker-dealers then transferred the notes to the DTC account of Enron's issuing and paying agent, Chase IPA, and received payment from Enron through the DTC. Immediately after the broker-dealer received payment, the commercial paper Enron redeemed was extinguished in the DTC system. Confirmations of these transactions referred to them as securities trades, termed them "purchases" from the holders, and referenced a "trade date" and "settlement date."
Prior to these transactions, ING and Alfa owned Enron commercial paper in the amount, respectively, of $48,200,000 and $5,667,255. They both agreed to transfer their commercial paper to broker-dealer J.P. Morgan in exchange for the redemption price.
The parties dispute the circumstances and motives surrounding Enron's redemption. Enron argues that it made the redemption payments under pressure from noteholders seeking to recover on their investments amidst rumors of Enron's imminent implosion. Alfa and ING argue that Enron redeemed its commercial paper to "calm the irrational markets" and leave a favorable impression that would allow it to reenter the commercial paper market
II. Procedural History
In November 2003, two years after Enron filed for bankruptcy, the reorganized entity brought adversary proceedings against approximately two hundred financial institutions, including appellees Alfa and ING, seeking to avoid and recover the redemption payments. It alleged that the payments were recoverable as (1) preferential transfers under 11 U.S.C. § 547(b), because they were made on account of an antecedent debt within ninety days prior to bankruptcy, and (2) constructively fraudulent transfers under 11 U.S.C. § 548(a)(1)(B), because the redemption price exceeded the commercial paper's fair market value.
In 2004, the defendants in the adversary proceedings moved to dismiss Enron's complaint for failure to state a claim. They argued that the redemption payments were "settlement payments" protected from avoidance under 11 U.S.C. § 546(e)'s safe harbor.
Section 546(e) provides, in relevant part, that
Section 741(8) of Title 11, in turn, defines a "settlement payment" as "a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade."
The bankruptcy court denied the motion to dismiss. It held that the phrase "commonly used in the securities trade" in § 741(8) modifies all the terms in the section's definition and thereby limits protected "settlement payments" to those that are common in the industry. In re Enron Corp.,
Following discovery, Alfa and ING, relying on § 546(e)'s safe harbor, moved for summary judgment. The bankruptcy court denied the motions. In re Enron Creditors Recovery Corp.,
Alfa and ING sought, and were granted by the district court, interlocutory review of the bankruptcy court's decision denying summary judgment. See In re Enron Creditors Recovery Corp., No. 01-16034, 2009 WL 3349471 (S.D.N.Y. Oct.16, 2009) ("Enron III"). The district court limited the scope of review to the question whether the § 546(e) safe harbor applies to an issuer's redemption of commercial paper prior to maturity, effected through the customary mechanism of transacting in commercial paper through the Depository Trust Company, without regard to extrinsic facts, such as the motives and circumstances of the redemption. See In re Enron Creditors Recovery Corp.,
The district court reversed the bankruptcy court. It concluded that § 546(e)'s safe harbor protects Enron's redemption payments, and directed entry of summary judgment in favor of Alfa and ING. Id. at 442. The district court held (1) that § 741(8)'s definition of "settlement payment" is not limited to payments that are "commonly used," and, therefore, that the circumstances of a particular payment do not bear on whether that payment fits within the definition, id. at 429-34; (2) that a "settlement payment is any transfer that concludes or consummates a securities transaction," id. at 436; and (3) that Enron's redemption constitutes a securities transaction regardless of whether Enron acquired title to the commercial paper, because the redemption involved "the delivery and receipt of funds and securities," id. at 435-42.
Enron appealed to this court.
On appeal, Enron argues that the bankruptcy court's decision was correct and that the district court erred by holding that settlement payments under § 741(8) are not limited to those that are commonly used in the securities trade and that involve the transfer of title to a security.
"A district court's order in a bankruptcy case is subject to plenary review, meaning that this Court undertakes an independent examination of the factual findings and legal conclusions of the bankruptcy court." In re Duplan Corp.,
Enron IV, 422 B.R. at 424. As several of our sister circuits have held, the meaning of "settlement payment" under § 741(8) is a matter of statutory construction and thus a question of law we review de novo. See, e.g., In re Comark,
I. Judicial Interpretation of the Safe Harbor
Congress enacted § 546(e)'s safe harbor in 1982 as a means of "minimiz[ing] the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries." Kaiser Steel Corp. v. Charles Schwab & Co., Inc.,
The safe harbor limits this risk by prohibiting the avoidance of "settlement payments" made by, to, or on behalf of a number of participants in the financial markets. By restricting a bankruptcy trustee's power to recover payments that are otherwise avoidable under the Bankruptcy Code, the safe harbor stands "at the intersection of two important national legislative policies on a collision course-the policies of bankruptcy and securities law." In re Resorts Int'l, Inc.,
Section 741(8), which § 546(e) incorporates, defines "settlement payment" rather circularly as "a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade." The parties, following our sister circuits, agree that courts should interpret the definition, "in the context of the securities industry," as "the transfer of cash or securities made to complete [a] securities transaction." Contemporary Indus. Corp. v. Frost,
Although our circuit has not yet addressed the scope of § 741(8)'s definition, other circuits have held it to be "extremely broad." In re QSI Holdings, Inc.,
Alfa and ING argue that Enron's redemption payments are settlement payments within the meaning of § 741(8)
Enron proposes three limitations on the definition of settlement payment in § 741(8), each of which, it argues, would exclude the redemption payments. First, it contends that the final phrase of § 741(8) — "commonly used in the securities trade" — excludes all payments that are not common in the securities industry, including, Enron argues, Enron's redemption. Second, Enron argues that the definition includes only transactions in which title to the securities changes hands. Because, Enron argues, the redemption payments here were made to retire debt and not to acquire title to the commercial paper, they are not settlement payments within the meaning of § 741(8). Finally, Enron argues that the redemption payments are not settlement payments because they did not involve a financial intermediary that took title to the transacted securities and thus did not implicate the risks that prompted Congress to enact the safe harbor.
Because we find nothing in the Bankruptcy Code or the relevant caselaw that supports Enron's proposed limitations on the definition of settlement payment in § 741(8), we reject them. We hold that Enron's redemption payments fall within the plain language of § 741(8) and are thus protected from avoidance under § 546(e).
II. "Commonly Used in the Securities Trade"
Section 741(8) defines "settlement payment" as "a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade." Enron argues that the phrase "commonly used in the securities trade" modifies all the preceding terms and thereby excludes from the definition all uncommon payments. We disagree.
First, as the district court held, the grammatical structure of the statute strongly suggests that the phrase "commonly used in the securities trade" modifies only the term immediately preceding it: "any other similar payment." Under the "rule of the last antecedent, ... a limiting clause or phrase ... should ordinarily be read as modifying only the noun or phrase that it immediately follows." Barnhart v. Thomas,
Moreover, Enron's proposed reading would make application of the safe harbor in every case depend on a factual determination regarding the commonness of a given transaction. It is not clear whether that determination would depend on the economic rationality of the transaction, its frequency in the marketplace, signs of an intent to favor certain creditors — as suggested by the facts on which the bankruptcy court relied, such as the alleged coercion by Enron's commercial paper noteholders, Enron II, 407 B.R. at 31 — or some other factor. This reading of the statute would result in commercial uncertainty and unpredictability at odds with the safe harbor's purpose and in an area of law where certainty and predictability are at a premium.
Accordingly, we hold that the phrase "commonly used in the securities industry" limits only the phrase immediately preceding it; it does not limit the other transactions that § 741(8) defines as settlement payments.
III. Redemption of Debt Securities
Enron next argues that the redemption payments are not settlement payments because they involved the retirement of debt, not the acquisition of title to the commercial paper. We find no basis in the Bankruptcy Code or the relevant caselaw to interpret § 741(8) as excluding the redemption of debt securities. Because Enron's redemption payments completed a transaction in securities, we hold that they are settlement payments within the meaning of § 741(8).
The bankruptcy court agreed with Enron's position, relying in large part on our decision in SEC v. Sterling Precision Corp.,
Alfa and ING argue that Sterling Precision Corp. is not relevant to this case because it interpreted the Investment Company Act, not the Bankruptcy Code. Setting aside this argument, reliance on Sterling Precision Corp.'s interpretation of the term "purchase" still makes sense only if we read a purchase or sale requirement into § 741(8). For the following reasons, we decline to do so.
Nothing in the text of § 741(8) or in any other provision of the Bankruptcy Code supports a purchase or sale requirement. Enron argues that a "settlement payment" must involve a transaction in securities, which, in turn, must involve a purchase or sale. While we, like our sister circuits, agree that in the context of the securities industry a "`settlement' refers to `the completion of a securities transaction,'" Contemporary
Enron argues, and the dissent agrees, see Dissent at 347, that applying the safe harbor to Enron's commercial paper redemption would contradict "uniform case law spanning two decades" that allows "avoidance of debt-related payments." The cases on which Enron relies, however, involve non-tradeable bank loans, not widely issued debt securities. See, e.g., Union Bank v. Wolas,
Indeed, it is not clear that a purchase or sale requirement would necessarily exclude all payments made on ordinary loans. For example, what if parties structured the early repayment of a loan evidenced by a promissory note as a repurchase of that promissory note? The note's terms could prohibit voluntary early redemption. If the borrower were to buy back the promissory note at a negotiated price, it would be difficult to characterize this transaction as a redemption rather than a repurchase in order to exclude it from the safe harbor.
The payments at issue in this case demonstrate the difficulty with and the absence of a statutory foundation for a purchase or sale requirement. Assume, for example, that the terms of Enron's commercial paper-like the terms of the hypothetical promissory note discussed above-prohibited early redemption. Enron could reacquire the paper only by agreeing with the paper holders on a particular reacquisition price. This transaction would appear to be a repurchase,
Because we find no basis in the Bankruptcy Code or the caselaw for a purchase or sale requirement, and because we do not think such a requirement is necessary to exclude from the safe harbor repayment of ordinary loans, we decline to impose a purchase or sale requirement on § 741(8).
IV. Involvement of a Financial Intermediary
Enron also argues that the redemption of debt does not constitute a protected settlement payment because it did not involve a financial intermediary that took a beneficial interest in the securities during the course of the transaction. Enron argues that the redemption thus did not implicate the systemic risks that motivated Congress's enactment of the safe harbor. Although the role of the broker-dealers that participated in Enron's redemption is a disputed issue of fact, see Enron IV, 422 B.R. at 426, Enron is correct that the DTC acted as a conduit and recordkeeper rather than a clearing agency that takes title to the securities during the course of the transaction.
Nevertheless, we do not think the absence of a financial intermediary that takes title to the transacted securities during the course of the transaction is a proper basis on which to deny safe-harbor protection. The Third, Sixth, and Eighth Circuits rejected similar arguments in affirming application of the safe harbor to leveraged buyouts of private companies that involved financial intermediaries who served only as conduits. See In re Plassein Int'l Corp., 590 F.3d at 257-59; In re QSI Holdings, Inc., 571 F.3d at 549-50; Contemporary Indus. Corp., 564 F.3d at 986. In reasoning that provides an analog for us, these courts explained that undoing long-settled leveraged buyouts would have a substantial impact on the stability of the financial markets, even though only private securities were involved and no financial intermediary took a beneficial interest in the exchanged securities during the course of the transaction.
Moreover, § 546(e) applies to settlement payments made "by or to (or for the benefit of)" a number of participants in the financial markets. It would appear inconsistent with this language for courts to limit the safe harbor circuitously by interpreting the definition of "settlement payment" to exclude payments that do not involve a financial intermediary that takes title to the securities during the course of the transaction.
In sum, we decline to adopt Enron's proposed exclusions from the definition of settlement payment and the safe harbor. The payments at issue were made to redeem commercial paper, which the Bankruptcy Code defines as a security. 11 U.S.C. § 101(49)(A)(i).
For the foregoing reasons, we AFFIRM the district court's decision reversing the decision of the Bankruptcy Court and directing entry of summary judgment in favor of Alfa and ING.
JOHN G. KOELTL, District Judge, dissenting:
The Court today concludes that Section 546(e) of the Bankruptcy Code, 11 U.S.C. § 546(e), which exempts a "settlement payment" from a bankruptcy trustee's avoidance powers, extends to every transaction in which commercial paper is redeemed by an issuer prior to maturity using the customary mechanism of the Depository Trust Company. Op. at 339.
The issue resolved in this case has never been decided previously by any court of appeals. To capture a premature commercial paper redemption within the definition
Section 547(b) of the Bankruptcy Code, 11 U.S.C. § 547(b), provides that the trustee of a bankruptcy estate may recover, among other things, money or property transferred by an insolvent debtor in the 90 days preceding bankruptcy, where the transfer (1) was made to or for the benefit of a creditor; (2) was made for or on account of an antecedent debt owed by the debtor; and (3) enabled the creditor to receive more than it otherwise would have under the provisions of the Bankruptcy Code. 11 U.S.C. § 547(b).
Section 546(e) of the Bankruptcy Code, 11 U.S.C. § 546(e), carves out a limited exception to the trustee's avoidance powers, including its power to avoid preferential transfers under Section 547(b). It provides, in relevant part, that:
11 U.S.C. § 546(e). Section 741 in turn defines "settlement payment" in an ambiguous fashion as "a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade." 11 U.S.C. § 741(8).
The question the Court confronts today is whether an issuer's redemption of commercial paper prior to maturity is a "settlement payment" within the meaning of Sections 546(e) and 741(8). Op. at 333.
In light of this statutory ambiguity, other courts of appeals have construed "settlement payment" as a "term ... of art in the securities trade," which "should be given its established meaning in that industry." Contemporary Indus. Corp. v. Frost,
Enron argues persuasively that a "securities transaction" is a term of art in the securities industry that requires a purchase or sale of securities. This industry understanding is reflected in numerous business dictionaries. See, e.g., Barron's Financial Guides, Barron's Dictionary of Finance and Investment Terms 641, 745 (7th ed.2006) (defining "settlement" as the "conclusion of a securities transaction in which a broker/dealer pays for securities bought ... or delivers securities sold and receives payment from the buyer's broker"); Thomas P. Fitch, Barron's Dictionary of Banking Terms 423-24 (5th ed.2006) ("[t]he delivery of securities by a selling broker, and payment by a buying broker"); Group of Thirty, Global Clearing and Settlement: A Plan of Action 13 (2003) ("the process by which the ownership interest in securities is transferred from one investor to another, generally in exchange for a corresponding transfer of funds"); New York Stock Exchange, Language of Investing Glossary 30 (1981) ("[c]onclusion of a securities transaction when a customer pays a broker/dealer for securities purchased or delivers securities sold and receives from the broker the proceeds of a sale"); Bank for International Settlements, Committee on Payment and Settlement Systems & Technical Committee of the International Organization of Securities Commissions, Recommendations for Securities Settlement Systems 48 (2001) ("[t]he completion of a transaction through final transfer of securities and funds between the buyer and the seller").
The existence of a purchase or sale requirement also finds support in case law. See, e.g., In re Bevill, Bresler & Schulman Asset Mgmt. Corp. v. Spencer Savings & Loan Association,
There appears to be no dispute that an issuer's redemption of its commercial paper does not involve the purchase or sale of a security. Commercial paper is a note evidencing the issuer's debt. As the Court recognizes, this Court has found that an issuer's redemption of its bonds and preferred stock is not a "purchase" within the meaning of the Investment Company Act of 1940. SEC v. Sterling Precision Corp.,
The Court states that it finds little support for a purchase or sale requirement and explains that cases "make no mention of a requirement that title to the securities changes hands." Op. at 337. The Court cites Kaiser Steel and its citation to definitions of "settlement" that make no reference to a change in title to securities. However, Kaiser Steel concerned whether a leveraged buyout transaction was included in the definition of a "settlement payment" in § 741(8). There was no question that the transaction involved the purchase of securities. Moreover, as the Court notes, Kaiser Steel specifically cited other source materials that make clear that a change of title is an integral element of the settlement of a securities transaction. See Kaiser Steel, 913 F.2d at 849 (citing New York Stock Exchange, Language of Investing Glossary 30 (1981)(quoted above); D. Scott, Wall Street Words 320 (1988) (defining "settlement" as the "[t]ransfer of the security (for the seller) or cash (for the buyer) in order to complete a security transaction")). Kaiser Steel cannot stand for the proposition that no purchase or sale is required for a securities transaction when the transaction at issue did include a purchase and when the Court cited to source materials that identified a purchase as an essential element of a settlement payment.
The Court today points to no case that holds that there is no purchase or sale requirement for a securities transaction, and provides no source that indicates that there is a common industry understanding that the redemption of commercial paper is the completion of a securities transaction.
The relevant legislative history supports the conclusion that redemptions of commercial paper are not protected by Section 546(e)'s safe harbor. In 1975, Congress amended the Securities Exchange Act of 1934 ("the 1934 Act" or "the Act"), 48 Stat. 881, codified at 15 U.S.C. § 78a et seq., to create a national system for the clearance and settlement of securities transactions. Bradford Nat'l Clearing Corp. v. SEC,
These concerns were not implicated by the market for commercial paper at the time of Section 546(e)'s enactment, and cannot justify the application of the safe
Moreover, Congress's concern for the stability of central counterparties that guarantee both sides of a securities transaction would not justify sweeping redemptions of commercial paper within Section 546(e)'s safe harbor, because transactions in commercial paper are not cleared through such a central counterparty. As the Court notes, "the DTC acted as a conduit rather than a clearing agency that takes title to the securities during the course of the transaction." Op. at 334. Unlike the National Securities Clearing Corporation ("NSCC"), which clears transactions in equity and debt securities covered by the 1934 Act, the DTC does not act as an intermediary for trades by undertaking independent obligations to deliver securities to the buyer and payment to the seller. See Pet Quarters, Inc. v. Depository Trust and Clearing Corp.,
The Court acknowledges this distinction between the DTC and the NSCC, but rejects it as immaterial on the theory that "the absence of a financial intermediary that takes title to the transacted securities during the course of the transaction is [not] a proper basis on which to deny safe-harbor protection." Op. at 338. In support of this conclusion, it relies on cases from other courts of appeals that have applied Section 546(e)'s safe harbor to leveraged buyouts of companies that "involved financial intermediaries who served only as conduits." Op. at 338 (citing In re Plassein Int'l Corp.,
The conclusion that redemptions of commercial paper are not covered by Section 546(e) is further supported by subsequent legislative history.
11 U.S.C. § 547(c)(2). As originally enacted in 1978, the "ordinary course" defense was restricted to preference actions involving short-term debts of a duration of 45 days or less. See Fidelity Sav. & Inv. Co. v. New Hope Baptist,
Enron's reading of Section 546(e) finds further support in the policies reflected in the Bankruptcy Code. In Union Bank v. Wolas,
502 U.S. at 160-161, 112 S.Ct. 527 (citing H.R.Rep. No. 95-595 177-178 (1977)).
These goals — preventing a "race to the courthouse" and ensuring equality of distribution among creditors — are severely undermined by the interpretation of Section 546(e) adopted by the Court. What Enron alleges happened in this case, according to the Court's interpretation of its papers, is instructive: "it made the redemption payment under pressure from noteholders seeking to recover on their investments amidst rumors of Enron's imminent implosion." Op. at 331. That is, under intense pressure from certain creditors, Enron extinguished its debt by paying to them funds in excess of what they would have received on the open market and, more importantly, far in excess of what they would have received pursuant to the provisions of the Bankruptcy Code. See 11 U.S.C. § 547(b). The scenario depicted by the appellees is no less troubling. They assert, according to the Court, that "Enron redeemed its commercial paper to `calm the irrational markets' and leave a favorable impression that would allow it to reenter the commercial paper market once `bad publicity' about the company's stability `had blown over.'" Op. at 331-32. Those voluntary debt payments are no different from other efforts of a debtor shortly before bankruptcy to prefer some creditors over others. Such transfers, which result in creditors of equal priority being treated unequally, and which decrease the liquidity of a corporation attempting to avoid a slide into bankruptcy, are at the very core of the trustee's avoidance powers under Section 547.
The Court's holding that a settlement payment requires only the transfer of cash to complete a securities transaction, without any purchase or sale of a security, is indeed extraordinarily broad. In fact, the Court's definition of a settlement payment would seem to bring virtually every transaction involving a debt instrument within the safe harbor of Section 546(e), thus allowing the settlement payment exception to swallow up the Section 547(b) avoidance provision.
The Court concludes that its holding poses no threat to the viability of the Bankruptcy Code's preference provisions on the ground that this case involves "widely issued debt securities," and not "non-tradeable bank loans." Op. at 337. The Court, however, offers no basis for distinguishing between the two types of debts, and under 11 U.S.C. § 101(49)(A), there is none; notes, bonds, and debentures are "securities" under the Bankruptcy
The Court does not dispute that the payment of any ordinary loan evidenced by a note would fall within its definition of a settlement payment, but the Court finds that "the context of the securities industry will exclude from the safe harbor payments made on ordinary loans." Opinion at 337. The Court cites no authority for this proposition, and the terms of its definition would cover such payments.
The Court's holding is wholly unnecessary. The issue presented in this case is a narrow one — whether the premature redemption of commercial paper by the issuer falls within the safe harbor of a "settlement payment" under section 546(e). The issue is an unusual one, as reflected by the fact that it has never arisen in any prior decision of any court of appeals. However, by eliminating the "purchase or sale" requirement that would exclude such payments, the Court undermines the ability of bankruptcy trustees to avoid preferential payments on account of ordinary debts. The Court argues that including a "purchase or sale" requirement would not "necessarily exclude all payments made on ordinary loans." Opinion at 337. It is not clear why this is an argument against a "purchase or sale requirement," which should be required by the common industry understanding and legislative history of section 546(e). The Court does not dispute that recognizing such a requirement in fact excludes the premature redemption of commercial paper from the scope of the "settlement payment" safe harbor of section 546(e), and does so without imperiling the regular avoidance powers of bankruptcy trustees for ordinary loans. The Court appears to object that the "purchase or sale" requirement would not exclude various ways in which an issuer might deal with its commercial paper. The Court hypothesizes that companies could protect their premature redemptions of commercial paper by turning them into repurchases rather than redemptions, if there is a "purchase or sale" requirement. Opinion at 337. But, under the Court's approach, such repurchases would still be covered by the "settlement payment" safe harbor, and, in addition, the Court's approach imperils the ordinary repayment of loans. The fact that the "purchase or sale" requirement would not address all of the ways in which a company might deal with its commercial paper is not a reason to find that premature redemptions of commercial paper do not fall within the "settlement payment" safe harbor.
For the reasons explained above, I respectfully dissent.
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