Circuit Court Affirms Broad Reading of Safe Harbor

In a decision issued on June 10, 2013, In re Quebecor World (USA) Inc., No. 12-4270-bk, 2013 WL 2460726 (2d Cir. June 10, 2013), the Second Circuit affirmed decisions of the district and bankruptcy courts holding that section 546(e) of the Bankruptcy Code precluded a creditors committee from avoiding a debtor’s purchase of private placement notes issued by one of the debtor’s affiliates as a preferential transfer. The Second Circuit held that the payment was shielded from preference avoidance because it was a “transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract.” In addition, the Second Circuit – following the United States Courts of Appeals for the Third, Sixth and Eighth Circuits – expressly held that a transfer may qualify for the section 546(e) safe harbor even if the financial intermediary is merely a conduit without a beneficial interest in the transfer.

In its decision, the Second Circuit affirmed the broad reading and literal application of the section 546(e) safe harbors that it had applied in In re Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011) (“Enron”), which held that early redemption payments made to holders of commercial paper qualified as “settlement payments” under section 546(e). This decision is likely to have significant impact on avoidance litigation because it provides transferees of constructive fraudulent and preferential transfers with another safe harbor defense that is arguably broader than the “settlement payment” defense outlined under Enron and its progeny.