Official Committee of Unsecured Creditors of Quebecor World (USA) Inc. v. American United Life Insurance Co. (In re Quebecor World (USA) Inc.)

Summarized by Robert Yan , Otterbourg P.C.
12 years 8 months ago

Citation:

Docket No. 12-4270-bk (2d Cir. June 10, 2013)

Tag(s):

Ruling:

AFFIRMING the District Court, the Second Circuit Court of Appeals held that certain payments made by a debtor subsidiary to noteholders in exchange for private placement notes issued by a debtor affiliate were exempt from avoidance because those payments qualified as a transfer made in connection with a securities contract, and were therefore entitled to the safe harbor protection of 11 U.S.C. § 546(e).

Procedural context:

Appeal from a judgment of the United States District Court for the Southern District of New York (Furman, J.) which affirmed an order of the United States Bankruptcy Court for the Southern District of New York (Peck, J.) granting appellees’ motion for summary judgment and dismissing appellant’s adversary complaint.

Facts:

Debtor Quebecor World (USA) Inc. (“QWUSA”) and debtor Quebecor World Capital Corp. (“QWCC”) are subsidiaries of debtor Quebecor World, Inc. (“QWI”). In 2000, QWCC raised $371 million for Quebecor-related entities by issuing private placement notes (“Notes”) to the appellees pursuant to note purchase agreements. On October 29, 2007, QWUSA transferred about $376 million to the appellees’ trustee, who, in turn, distributed the funds to the appellees and the Notes were surrendered to QWI. On January 21, 2008, QWUSA filed for relief under chapter 11 of the Bankruptcy Code. The filing date was less than ninety days after QWUSA’s transfer of the $376 million payment. In the bankruptcy case, the Official Committee of Unsecured Creditors (“Committee”) commenced an adversary proceeding against the noteholders in order to avoid and recover the October 29 transfer under 11 U.S.C. § 547. The noteholders moved for summary judgment, asserting the alleged transfer was exempt from avoidance under 11 U.S.C. § 546(e). The Bankruptcy Court granted the noteholders’ motion, holding that the October 29 transfer: (1) fell within the definition of “settlement payment,” as set forth in the Court’s decision in Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V. (In re Enron Creditors Recovery Corp.), 651 F.3d 329 (2d Cir. 2011), and (2) qualified as a “transfer made . . . in connection with a securities contract” regardless of whether QWUSA redeemed or purchased the Notes. Although the District Court disagreed with the Bankruptcy Court’s conclusion that a transfer to redeem securities could qualify as a “transfer made . . . in connection with a securities contract,” the District Court affirmed the Bankruptcy Court’s order because it agreed that the October 29 transfer was a “settlement payment” under Enron. The Committee appealed. The Court held that the October 29 transfer “fit[] squarely within the plain wording of the securities contract exemption, as it was a ‘transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract.’” (quoting 11 U.S.C. § 546(e)). The Court declined to address whether the October 29 transfer would still be exempt as a settlement payment if QWUSA had redeemed its own securities because the Court agreed with the District Court that QWUSA made the transfer to purchase the Notes. The Court rejected the Committee’s argument that QWUSA could not have purchased the Notes because evidence suggested that some of the appellees believed the transaction was a redemption. The Court concluded that the appellees’ subjective understanding of the transaction at the time it was made was not dispositive of whether QWUSA was redeeming or purchasing the Notes. The Court also rejected the Committee’s argument that QWUSA could not have purchased the Notes because an agreement prohibited the appellees from selling the Notes in the first instance. The Court concluded that the language of the agreement did not prohibit the appellees’ sale of the Notes to specific entities such as QWUSA. Lastly, the Court rejected the Committee’s argument that even if QWUSA purchased the Notes, the safe harbor did not apply to all of the transfers because the appellee’s trustee was merely a conduit and some of the appellees are not financial institutions. Reiterating its holding in Enron, the Court held that the financial intermediary is not required to have a beneficial interest in the transfer and that “a transfer may qualify for the section 546(e) safe harbor even if the financial intermediary is merely a conduit.” The Court added that “[a] clear safe harbor for transactions made through these financial intermediaries promotes stability in their respective markets and ensures that otherwise avoidable transfers are made out in the open, reducing the risk that they were made to defraud creditors.”

Judge(s):

Circuit Judges Chin and Lohier; District Judge Swain (sitting by designation)

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