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Joseph Hill v. Raquel King

Summarizing by J Newman

Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., et al. (In re Enron Creditors Recovery Corp.)

Docket No. 09-5122-bk (L) (2d Cir. June 28, 2011); 2011 U.S. App. LEXIS 13177; 2011 WL 2536101
A debtor-issuer’s premature payments to redeem its commercial paper constitute “settlement payments” and are, thus, shielded from the exercise of a bankruptcy trustee’s avoidance powers under the safe harbor provision of 11 U.S.C. §546(e). The safe harbor set forth in 11 U.S.C. §546(e) shields, inter alia, settlement payments relating to securities from the reach of a trustee’s avoidance powers. The Second Circuit determined that the redemption of commercial paper is a security, as defined by 11 U.S.C. §101(49)(A)(i). Settlement payments in the securities context are defined by the Bankruptcy Code as “… a partial settlement payment, … a final settlement payment, or any other similar payment commonly used in the securities trade.” 11 U.S.C. §741(8). As a case of first impression in the courts of appeals, the Second Circuit determined that no authority existed to support the proposed limitations of applicability of the safe harbor protections for early redemption payments. In determining the subject payments were “settlement payments,” the Second Circuit resolved (1) that the definition of a “settlement payment” in this context is a “transfer of cash or securities made to complete a securities transaction,” (2) that the restrictive language in 11 U.S.C. §741(8) – ie. that the payment method be “commonly used” – limits only the last catch-all term meant to include “any other similar payment” and does not restrict the term “settlement payment,” (3) there is no basis in statute or caselaw to support the interpretation that 11 U.S.C. §741(8) requires the transaction to be a purchase or sale of securities, and (4) the absence of a financial intermediary to take title during the redemption of commercial paper is not a proper basis to deny the safe-harbor protection. Dissent (Judge Koeltl): To the extent that the Second Circuit rejected the requirement that a “settlement payment” in the securities context must include a purchase or sale or securities, the ambiguous and circular definition of “settlement payment” in the Bankruptcy Code provides virtually no guidance as to the type of transfers that might, or might not, qualify as “settlement payments.” The question of whether the redemption of commercial paper is a “securities transaction” is one of first impression for the courts of appeals. The industry understanding of a securities transaction requires a purchase or sale of investment securities, and no case law supports an opposite proposition. Redemption of commercial paper is not akin to either a purchase or a sale. The legislative history supports the holding opposite to the Second Circuit in that (A) as the intended result of the safe harbor was to stabilize the commodities and securities markets, financial intermediaries, who incur little risk in a commercial paper transaction, were not likely the intended beneficiaries, and (B) had 11 U.S.C. §546(e) been intended to apply to premature redemption of commercial paper, regardless of extrinsic facts as to the “ordinary” nature of the transaction, the extension of the “ordinary course” defense to cover longer term commercial paper redemptions set forth in 11 U.S.C. §547(c)(2) was unnecessary. Finally, from a policy perspective, the holding of the Second Circuit undermines the intent of avoidance actions to chill the race for prepetition payment and the broad application could likely subject any payment involving a debt instrument to the safe harbor.
Procedural context:
Appeal by the reorganized debtor from a judgment of the United States District Court for the Southern District of New York (McMahon, J.), reversing an order of the United States Bankruptcy Court for the Southern District of New York (Gonzalez, J.), and remanding with instruction to enter summary judgment in favor of the commercial paper owners.
Just over one month prior to Enron petitioning for bankruptcy relief under Chapter 11, Enron made payments to redeem certain of its commercial paper, including to holders Alfa and ING, prior to the paper’s maturity at a price considerably higher than the paper’s market value. Through adversary proceedings against approximately two hundred financial institutions (including Alfa and ING), Enron (through the reorganized entity) sought to avoid and recover the redemption payments citing 11 U.S.C. §§547(b) and 548(a)(1)(B). The defendants sought to dismiss Enron’s complaint for failure to state a claim, arguing that the redemption payments were “settlement payments” shielded from avoidance under Section 546(e). Upon the Bankruptcy Court’s denial of the motion to dismiss, most of the defendants settled with Enron. Alfa and ING ultimately moved for summary judgment. In denying further motions by Alfa and ING for summary judgment, the Bankruptcy Court determined that “settlement payments” include only payments to buy or sell securities, not payments to retire debt, and further focused on the extraordinary terms of the redemption to support denial. Upon approved interlocutory appeal, limited to review of the question as to whether Section 546(e) applies to an issuer’s pre-maturity redemption, effectuated through a customary channel and without regard any other the extrinsic facts, the District Court reversed the Bankruptcy Court’s decision, held that Enron’s payments to Alfa and ING did fall within the safe harbor, and remanded with instructions to enter summary judgment in favor of Alfa and ING. The District Court held that (1) the term “settlement payment” is not limited to payments that are commonly used and, thus, the circumstances surrounding the transfer do not bear on the applicability of Section 546(e) in this instance; (2) a “settlement payment is any transfer that concludes or consummates a securities transaction;” and (3) Enron’s redemption constitutes a securities transaction. Enron appealed.
Circuit Judges John M. Walker, José A. Cabranes, and District Judge John G. Koeltl (sitting by designation) presiding. Judge Koeltl dissenting.

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