Irving H. Picard v. Saul B. Katz et al
Filing
28
NOTICE of RECENT AUTHORITY re: 20 MOTION to Dismiss THE AMENDED COMPLAINT OR, IN THE ALTERNATIVE, FOR SUMMARY JUDGMENT.. Document filed by Charles 15 Associates, Charles 15 LLC, Charles Sterling LLC, Charles Sterling Sub LLC, College Place Enterprises LLC, Coney Island Baseball Holding Company LLC, Estate of Leonard Schreier, FFB Aviation LLC, FS Company LLC, Fred Wilpon Family Trust, Arthur Friedman, Ruth Friedman, Iris J. Katz and Saul B. Katz Family Foundation, Inc., Judy and Fred Wilpon Family Foundation, Inc., Amy Beth Katz, David Katz, Dayle Katz, Gregory Katz, Howard Katz, Iris Katz, 157 J.E.S. LLC, Air Sterling LLC, BAS Aircraft LLC, Jason Bacher, Bon Mick Family Partners LP, Bon-Mick, Inc., Brooklyn Baseball Company LLC, C.D.S. Corp., Michael Katz, Saul B. Katz, Todd Katz, Katz 2002 Descendants' Trust, Heather Katz Knopf, Natalie Katz O'Brien, Mets II LLC, Mets Limited Partnership, Mets One LLC, Mets Partners, Inc., Minor 1 (REDACTED), Minor 2 (REDACTED), L. Thomas Osterman, Phyllis Rebell Osterman, Realty Associates Madoff II, Red Valley Partners, Robbinsville Park LLC, Ruskin Garden Apartments LLC, Saul B. Katz Family Trust, Michael Schreier, Deyva Schreier Arthur, See Holdco LLC, See Holdings I, See Holdings II, Sterling 10 LLC, Sterling 15C LLC, Sterling 20 LLC, Sterling Acquisitions LLC, Sterling American Advisors II LP, Sterling American Property III LP, Sterling American Property IV LP, Sterling American Property V LP, Sterling Brunswick Corporation, Sterling Brunswick Seven LLC, Sterling Dist Properties LLC, Sterling Equities, Sterling Equities Associates, Sterling Equities Investors, Sterling Heritage LLC, Sterling Internal V LLC, Sterling Jet II Ltd., Sterling Jet Ltd., Sterling Mets Associates, Sterling Mets Associates II, Sterling Mets LP, Sterling Pathogenesis Company, Sterling Third Associates, Sterling Thirty Venture LLC, Sterling Tracing LLC, Sterling Twenty Five LLC, Sterling VC IV LLC, Sterling VC V LLC, Edward M. Tepper, Elise C. Tepper, Jacqueline G. Tepper, Marvin B. Tepper, Valley Harbor Associates, Kimberly Wachtler, Philip Wachtler, Bruce N. Wilpon, Daniel Wilpon, Debra Wilpon, Fred Wilpon, Jeffrey Wilpon, Jessica Wilpon, Judith Wilpon, Richard Wilpon, Scott Wilpon, Valerie Wilpon, Wilpon 2002 Descendants' Trust, Robin Wilpon Wachtler. (Attachments: # 1 Exhibit A, # 2 Exhibit B)(Wagner, Karen)
EXHIBIT A
Page 1
In re: Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V. 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.
Docket No. 09-5122-bk(L)09-5142-bk (Con)
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
2011 U.S. App. LEXIS 13177
November 3, 2010, Argued
June 28, 2011, Decided
PRIOR HISTORY: [*1]
Appeal from a judgment of the United States District
Court for the Southern District of New York (Colleen
McMahon, Judge) reversing an order of the United States
Bankruptcy Court for the Southern District of New York
(Arthur J. Gonzalez, Bankruptcy Judge) and remanding
with instructions to enter summary judgment in favor of
Appellees Alfa, S.A.B. de C.V., ING VP Balanced
Portfolio, Inc., and ING VP Bond Portfolio, Inc.
Appellant Enron Creditors Recovery Corp. challenges the
district court's conclusion that 11 U.S.C. § 546(e) protects
from avoidance pre-petition payments Enron Corp. made
to redeem, prior to maturity, commercial paper it had
issued. It argues that Enron Corp.'s payments did not
constitute "settlement payments" within the meaning of §
546(e)'s safe harbor both because they were repayments
of debt and because they were not common in the
securities industry. We hold that Enron Corp.'s payments
were" settlement payments" and thus were protected from
avoidance under § 546(e). We therefore AFFIRM the
judgment of the district court.
COUNSEL: MICHAEL SCHATZOW (Robert L.
Wilkins, Mitchell Y. Mirviss, Colleen M. Mallon,
Richard L. Wasserman, on the brief), Venable LLP,
Baltimore, MD, for [*2] Appellant Enron Creditors
Recover 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.
JUDGES: Before: WALKER, CABRANES, Circuit
Judges, and KOELTL, District Judge.* Judge KOELTL
dissents in a separate opinion.
* The Honorable John G. Koeltl, of the United
States District Court for the Southern District of
New York, sitting by designation.
OPINION BY: JOHN M. WALKER, JR.
OPINION
Page 2
2011 U.S. App. LEXIS 13177, *2
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 [*3]
actions in bankruptcy, extends to an issuer's payments to
redeem its commercial paper prior to maturity. Enron
Creditors Recovery Corp. ("Enron")1 seeks to avoid and
recover payments Enron made to redeem its commercial
paper prior to maturity from Appellees Alfa, S.A.B. de
C.V. ("Alfa"), ING VP Balanced Portfolio, Inc., and ING
VP Bond Portfolio, Inc. (collectively, "ING"), whose
notes were redeemed by Enron. Alfa and ING argue that
§ 546(e) protects these payments from avoidance.
1 This opinion will refer to Enron Corp. and the
reorganized entity, Enron Creditors Recovery
Corp., collectively as "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 [*4] 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.
BACKGROUND
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.
I. Facts
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 [*5]
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 [*6] 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
Page 3
2011 U.S. App. LEXIS 13177, *6
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 [*7]
impression that would allow it to reenter the commercial
paper market once "bad publicity" about the company's
stability "had blown over." They argue that the
redemption was an economically rational move that
allowed Enron to refinance its existing commercial paper
debt with debt at a lower interest rate.
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) [*8] provides, in relevant part, that
[n]otwithstanding sections . . . 547 [and]
548(a)(1)(B) . . . of this title, [which
empower the trustee to avoid preferential
and constructively fraudulent transfers,]
the trustee may not avoid a transfer that is
a . . . settlement payment, as defined in
section . . . 741 of this title, made by or to
(or for the benefit of) a . . . stockbroker,
financial institution, financial participant,
or securities clearing agency . . . that is
made before the commencement of the
case, except under section 548(a)(1)(A) of
this title[, which empowers the trustee to
avoid transfers made with actual intent to
hinder, delay, or defraud creditors].
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 [*9] that are common in the industry.
In re Enron Corp., 325 B.R. 671, 685-86 & n.7 (Bankr.
S.D.N.Y. 2005)("Enron I"). The bankruptcy court held
that evidence was necessary to determine whether the
redemption payments were commonly used, rather than,
as Enron alleged, extraordinary because they resulted
from coercion by holders of the commercial paper. Id. at
686. It also held that a factual issue existed over whether
Enron's redemption payments were made to retire debt or
to purchase the commercial paper, and that this
distinction could affect whether the payments constituted
settlement payments. Id. Most of the defendants settled
with Enron after Judge Gonzalez denied their motions to
dismiss.
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., 407 B.R. 17, 45 (Bankr.
S.D.N.Y. 2009)("Enron II"). Concluding that "the transfer
of 'ownership' of a security is an integral element in the
securities settlement process," it held that "settlement
payments" include only payments made to buy or sell
securities and not payments made to retire debt. Id.
37-41. The bankruptcy [*10] court relied on our decision
in SEC v. Sterling Precision Corp., 393 F.2d 214 (2d Cir.
1968), in which we held that "a maker's paying a note
prior to maturity in accordance with its terms would not
be regarded as a 'purchase'" under the Investment
Company Act of 1940. Enron II, 407 B.R. at 38 (quoting
Sterling Precision, 393 F.2d at 217). The bankruptcy
Page 4
2011 U.S. App. LEXIS 13177, *10
court concluded that Alfa and ING had not demonstrated
that Enron's payments were settlement payments as
defined in § 741(8), because they had failed to establish
that the payments were made to acquire title to the
commercial paper rather than to retire debt. Id. at 37-41.
At several points in its opinion, the bankruptcy court, to
buttress its denial of summary judgment, emphasized
facts (most of which are disputed) regarding the allegedly
unusual nature of Enron's redemption. These include the
above-market price Enron paid, the alleged insistence of
the broker-dealers to act as intermediaries instead of
principals, and the supposed rarity of commercial paper
prepayments in general. See, e.g., id. at 37-38.
Alfa and ING sought, and were granted by the
district court, interlocutory review of the bankruptcy
court's decision denying summary [*11] judgment. See
In re Enron Creditors Recovery Corp., No. 01-16034,
2009 U.S. Dist. LEXIS 98611, 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., 422 B.R. 423, 424 (S.D.N.Y. 2009) ("Enron IV").
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 [*12] 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.
DISCUSSION
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., 212 F.3d 144, 151 (2d Cir. 2000).
Here, we review only the issue the district court agreed to
hear on appeal:
whether the § 546(e) 'safe harbor' . . .
extends to transactions in which
commercial paper is redeemed by the
issuer prior to maturity, using the
customary mechanism of the Depository
Trust Company . . . for trading in
commercial paper . . . , without regard to
extrinsic facts about the nature of the
[transactions], the motive [*13] behind
the [transactions], or the circumstances
under which the payments were made.
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, 971 F.2d 322, 324-25 (9th Cir. 1992)(citing In
re Kaiser Steel Corp., 952 F.2d 1230 (10th Cir. 1991);
Kaiser Steel Corp. v. Charles Schwab & Co., 913 F.2d
846 (10th Cir. 1990); Bevill, Bresler, & Schulman Asset
Mgmt. Corp. v. Spencer Sav. & Loan Ass'n, 878 F.2d
742, 745 (3d Cir. 1989)).
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., 913 F.2d 846, 849
(10th Cir. 1990) (quoting H.R. Rep. 97-420, at 2 (1982),
reprinted in 1982 U.S.C.C.A.N. 583, 583). If a firm is
required to repay amounts received in settled securities
transactions, it could have insufficient capital or liquidity
to meet its current securities trading obligations, [*14]
placing other market participants and the securities
markets themselves at risk.
Page 5
2011 U.S. App. LEXIS 13177, *14
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., 181 F.3d 505,
515 (3rd Cir. 1999) (internal quotation marks omitted).
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, 564 F.3d 981, 985
(8th Cir. 2009) [*15] (quoting In re Resorts Int'l, Inc.,
181 F.3d at 515).
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., 571 F.3d
545, 549 (6th Cir. 2009) (quoting Contemporary Indus.
Corp., 564 F.3d at 985). Several circuits, for example,
have rejected limitations on the definition that would
exclude transactions in privately held securities or
transactions that do not involve financial intermediaries
that take title to the securities during the course of the
transaction. See, e.g., In re Plassein Int'l Corp., 590 F.3d
252, 258-59 (3rd Cir. 2009); In re QSI Holdings, Inc.,
571 F.3d at 549-50; Contemporary Indus. Corp., 564
F.3d at 986. No circuit has yet addressed the safe harbor's
application to an issuer's early redemption of commercial
paper.
Alfa and ING argue that Enron's redemption
payments are settlement payments within the meaning of
§ 741(8) because they completed a transaction involving
the exchange of money for securities. The SEC and the
Securities Industry and Financial Markets Association, a
trade group representing the interests of securities firms,
banks, and asset managers, have [*16] filed amicus
briefs in support of Alfa and ING's interpretation of the
statute.
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 [*17] 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, 540 U.S. 20, 26, 124 S. Ct.
376, 157 L. Ed. 2d 333 (2003); see also Stepnowski v.
Comm'r, 456 F.3d 320, 324 n.7 (3d Cir. 2006) ("Under
the last-antecedent rule of construction, . . . the series
[*18] 'A or B with respect to C' contains two items: (1)
'A' and (2) 'B with respect to C.'"). Enron seizes on a
Page 6
2011 U.S. App. LEXIS 13177, *18
corollary rule of construction under which "a modifier . . .
set off from a series of antecedents by a comma . . .
should be read to apply to each of those antecedents."
Kahn Lucas Lancaster, Inc. v. Lark Int'l Ltd., 186 F.3d
210, 215 (2d Cir. 1999), abrogated on other grounds as
recognized by Sarhank Grp. v. Oracle Corp., 404 F.3d
657, 660 n.2 (2d Cir. 2005). For example, in the phrase
"no person shall be deprived of life, liberty, or the pursuit
of happiness, without due process of law," the phrase
"without due process of law" modifies all three terms.
This rule, however, does not apply to the series in §
741(8) because the modifier is not set off from its
antecedents by a comma. Because both the modifier and
its immediate antecedent are set off from the preceding
terms in the series, the last-antecedent rule applies. The
phrase "commonly used in the securities industry" thus is
properly read as modifying only the term "any other
similar payment." The phrase is not a limitation on the
definition of settlement payment, but rather, as our sister
circuits have held, it is "a catchall [*19] phrase intended
to underscore the breadth of the § 546(e) exemption." In
re QSI Holdings, Inc., 571 F.3d at 550 (quoting
Contemporary Indus. Corp., 564 F.3d at 986 (emphasis
in original)).
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 [*20] 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., 393 F.2d 214 (2d Cir. 1968). See Enron
II, 407 B.R. at 37-40. In Sterling Precision Corp., we held
that an issuer's redemption of bonds and preferred stock
was not a "purchase" within the meaning of the
Investment Company Act of 1940. 393 F.2d at 217. We
based this conclusion, in part, on the fact that the issuer
"did not acquire title to its Debentures or Preferred Stock;
it discharged them." 393 F.2d at 216-18. Drawing on this
conclusion, the bankruptcy court held that Enron's
redemption payments do not constitute settlement
payments under § 741(8) because Enron did not acquire
title to the commercial paper it redeemed. Enron II, 407
B.R. at 38-40.
Alfa [*21] 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 Indus. Corp.,
564 F.3d at 985 (quoting Kaiser Steel Corp. v. Charles
Schwab & Co., 913 F.2d 846, 849 (10th Cir. 1990)), we
find little support for the contention that a securities
transaction necessarily involves a purchase or sale.
Several of the industry definitions of "settlement
payment" on which other courts of appeals have relied
define the term as an exchange of money or securities
[*22] that completes a securities transaction; these
definitions make no mention of a requirement that title to
the securities changes hands. See, e.g., Kaiser Steel
Corp., 913 F.2d at 849 (citing, inter alia, D. Brownstone
& I. Franck, The VNR Investor's Dictionary 279 (1981)
Page 7
2011 U.S. App. LEXIS 13177, *22
(defining "settlement" as "finishing up of a transaction or
group of transactions"); Group of Thirty, Clearance and
Settlement Systems in the World's Securities Markets 86
(1989) (defining "settlement" as "[t]he completion of a
transaction, wherein securities and corresponding funds
are delivered and credited to the appropriate accounts");
A. Pessin & J. Ross, Words of Wall Street: 2000
Investment Terms Defined 227 (1983) (defining
"settlement" as "the completion of a securities
transaction")). While, as the dissent notes, see Dissent at
8-9, Kaiser Steel Corp. also cites industry definitions that
reference a purchase or sale of securities, 913 F. 2d at
849, the range of definitions that the decision cites
suggests that the securities industry does not universally
consider a purchase or sale of securities to be a necessary
element of a settlement payment.
Enron argues, and the dissent agrees, see Dissent at
11, 19-20, [*23] 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, 502 U.S. 151, 152-53, 112 S. Ct. 527, 116 L. Ed.
2d 514 (1991); Ray v. City Bank & Trust Co., 899 F.2d
1490, 1491-93 (6th Cir. 1990); Breeden v. L.I. Bridge
Fund, LLC, 220 B.R. 739, 740 (B.A.P. 2d Cir. 1998);
CEPA Consulting, Ltd. v. N.Y. Nat'l Bank, 187 B.R. 105,
106-07 (S.D.N.Y. 1995). Concluding that the safe harbor
protects payments made to redeem tradeable debt
securities does not contradict caselaw permitting
avoidance of payments made on ordinary loans.
Interpreting the term "settlement payment" in the context
of the securities industry will exclude from the safe
harbor payments made on ordinary loans.
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 [*24] 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,2 cf. Sterling
Precision Corp., 393 F.2d at 217 ("[A] maker's paying a
note prior to maturity in accordance with its terms would
not be regarded as a 'purchase.'" (emphasis added)), and
would thus trigger safe-harbor protection under the rule
Enron and the dissent espouse. It is difficult to see,
however, why this transaction should warrant safe harbor
protection while a transaction identical in every respect,
except that the commercial paper's terms did not prohibit
early redemption, should not. Avoidance [*25] of the
transactions in either scenario would present the same
threat of systemic risk in the marketplace, and limiting
safe-harbor protection to transactions in the first scenario
would not prevent an issuer from making payments to
reacquire commercial paper during the preference period.
Contrary to the dissent's contention, see Dissent at 18-19,
a purchase or sale requirement would thus not prevent
Enron from favoring commercial-paper holders over
other creditors.
2 Whether the reacquisition of commercial paper
at issue in this appeal is properly characterized as
a redemption or a repurchase remains an open
issue. See Enron II, 407 B.R. at 45. Because the
district court addressed on appeal only whether
the safe harbor protects an issuer's premature
redemption of commercial paper, we do not have
occasion to address the distinction between a
premature redemption and an issuer's repurchase
of commercial paper.
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. [*26] 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
Page 8
2011 U.S. App. LEXIS 13177, *26
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; [*27] 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.3 See In re Plassein Int'l Corp., 590 F.3d at
258; In re QSI Holdings, Inc., 571 F.3d at 550;
Contemporary Indus. Corp., 564 F.3d at 987. We see no
reason to think that undoing Enron's redemption
payments, which involved over a billion dollars and
approximately two hundred noteholders, would not also
have a substantial and similarly negative effect on the
financial markets.
3 The dissent characterizes these decisions as
"stand[ing] for the proposition that, if Section
546(e) applies to a particular type of
transaction-namely,
purchases
of
equity
securities-an individual transaction does not lose
safe-harbor protection simply because it does not
involve a central counterparty." Dissent at 15. We
have difficulty understanding the import of this
characterization. We rely on these decisions as
[*28] support for rejecting Enron's argument that
a transaction must involve a central counterparty
to receive safe-harbor protection. The dissent
argues that Congress enacted the safe harbor out
of "concern for the stability of central
counterparties that guarantee both sides of a
securities transaction." But the dissent does not
appear to dispute our, or the Third, Sixth, and
Eighth Circuits', rejection of a restriction on the
safe harbor that would limit it to transactions
involving central counterparties.
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).4 They
thus [*29] constitute the "transfer of cash . . . made to
complete [a] securities transaction" and are settlement
payments within the meaning of § 741(8). See
Contemporary Indus. Corp., 564 F.3d at 985 (quoting In
re Resorts Int'l, Inc., 181 F.3d at 515 (3rd Cir. 1999)).
Because we reach this conclusion by looking to the
statute's plain language, we decline to address Enron's
arguments regarding legislative history, which, in any
event, would not lead to a different result. See Lamie v.
U.S. Trustee, 540 U.S. 526, 534, 124 S. Ct. 1023, 157 L.
Ed. 2d 1024 (2004) ("It is well established that when the
statute's language is plain, the sole function of the
courts-at least where the disposition required by the text
is not absurd-is to enforce it according to its terms."
(internal quotation marks omitted)).
4 We reject, as the district court did, Enron's
attempt to supplant the Bankruptcy Code's
definition of "security" with the definition in the
Securities Exchange Act of 1934, which excludes
short-term commercial paper. 15 U.S.C. §
78c(a)(10). This case calls on us to interpret a
provision of the Bankruptcy Code. It makes little
sense to look to a definition from a different
statutory scheme, particularly when that definition
contradicts [*30] the Bankruptcy Code's.
CONCLUSION
For the foregoing reasons, we AFFIRM the district
court's decision reversing the decision of the Bankruptcy
Page 9
2011 U.S. App. LEXIS 13177, *30
Court and directing entry of summary judgment in favor
of Alfa and ING.
DISSENT BY: John G. Koeltl
DISSENT
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 26-27.
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 of "settlement payment" in the Bankruptcy
Code, the Court broadly defines "settlement payment" to
include a payment that "complete[s] a transaction in
securities." Op. at 19. A "security" is, in turn, broadly
defined under the Bankruptcy Code to include various
types of debt such as a note, bond, or debenture. 11
U.S.C. § 101(49)(A). The Court's holding is not required
by the opaque definition of "settlement payment" [*31]
in the Bankruptcy Code, and is inconsistent with the
legislative history of that provision. Moreover, the
breadth of the Court's definition threatens routine
avoidance proceedings in bankruptcy courts. The
Bankruptcy Court correctly concluded in this case that
the definition of "settlement payment" should include a
requirement that there be a purchase or sale of a security
to trigger a "settlement payment." See In re Enron
Creditors Recovery Corp., 407 B.R. 17, 38-40 (Bankr.
S.D.N.Y. 2009). The redemption of commercial paper
indisputably is not the purchase or sale of that
commercial paper. Because I disagree with the Court's
conclusion eliminating this requirement, I respectfully
dissent.
I.
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, [*32] 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:
Notwithstanding sections 544, 545, 547,
548(a)(1)(B), and 548(b) of this title, the
trustee may not avoid a transfer that is a . .
. settlement payment, as defined in section
. . . 741 of this title, made by or to (or for
the benefit of) a commodity broker,
forward contract merchant, stockbroker,
financial institution, financial participant,
or securities clearing agency . . . .
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 12.1 It answers this question in
the affirmative, based on what it terms "the plain
language [*33] of § 741(8)." Op. at 16; see also Op. at
26-27. The text of Section 741(8), however, provides
virtually no guidance as to the types of transfers that
might qualify as settlement payments. The Court
understates the severity of this problem by describing the
definition as "rather circular[]." Op. at 14. It is in fact
difficult to imagine a more circular, less clear statute than
one that defines "settlement payment" by exclusive
reference to a variety of types of "settlement payment,"
and then concludes with a catch-all that refers back to the
undefined "settlement payment," namely "any other
similar payment commonly used in the securities trade."
Thus, while it may be true, as the Court notes, that no
provision of the Bankruptcy Code clearly indicates that
the redemption of commercial paper is beyond the scope
of Section 741(8), see, e.g., Op. at 16, 19, neither does
Page 10
2011 U.S. App. LEXIS 13177, *33
any provision of the Bankruptcy Code clearly indicate
that such transactions are within its scope. In other words,
the statute is ambiguous.
1 As the Bankruptcy Court noted, commercial
paper is a note evidencing a debt, "with a
corporation borrowing the money in the
marketplace instead of from a bank." Enron, 407
B.R. at 37, 38. [*34] Commercial paper with a
maturity at the time of issuance of nine months or
less is excluded from the definition of a "security"
under the Securities Exchange Act of 1934. See
15 U.S.C. § 78c(a)(10).
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, 564 F.3d 981, 985 (8th Cir. 2009)
(citing McDermott Int'l, Inc. v. Wilander, 498 U.S. 337,
342-46, 111 S. Ct. 807, 112 L. Ed. 2d 866 (1991)).
"Specifically, 'settlement' refers to 'the completion of a
securities transaction,' and a 'settlement payment is
generally the transfer of cash or securities made to
complete [the] securities transaction.'" Id. (quoting Kaiser
Steel Corp. v. Charles Schwab & Co., 913 F.2d 846, 849
(10th Cir. 1990); In re Resorts, Int'l, Inc., 181 F.3d 505,
515 (3d Cir. 1999) (alteration in original)); see also In re
Comark, 971 F.2d 322, 325 (9th Cir. 1992). The parties
agree that this is the approach the Court should follow in
interpreting "settlement payment," see Op. at 14, but
disagree as to whether an issuer's redemption of its
commercial paper is a [*35] "securities transaction."
This question is one of first impression in the courts of
appeals.
II.
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 [*36] 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., 878 F.2d 742, 751 (3d
Cir. 1989) ("[T]he transfer of record ownership of
securities is an integral element in the securities
settlement process."). Among the definitions of
"settlement payment" that the Kaiser Steel Court relied
on was the definition from the New York Stock
Exchange's Language of Investing Glossary: The
"[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." Kaiser Steel, 913 F.2d at 849 (quoting New
York Stock Exchange, Language of Investing Glossary
30 (1981)). See also [*37] 17 C.F.R. 240.17f-1(a)(5)
("The term securities-related transaction shall mean a
purpose [sic], sale or pledge of investment securities, or a
custodial arrangement for investment securities.").
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., 393 F.2d 214, 217 (2d Cir.
1968) (Friendly, J.). While the Court reached that
conclusion in the context of the Investment Company
Act, the Court's reasoning was based on, among other
factors, the common understanding of an issuer's
repayment of its debt. As Judge Friendly explained, "in
common speech a maker's paying a note prior to maturity
Page 11
2011 U.S. App. LEXIS 13177, *37
in accordance with its terms would not be regarded as a
'purchase.'" Id. at 217. Judge Friendly continued: "[T]he
normal discourse of lawyers sets redemptions apart from
purchases. The distinction is recognized in corporation
statutes, . . . ; by judicial [*38] decision, . . . ; and by
writers on corporation law." Id. The Court today does not
dispute this conclusion, but argues that it is irrelevant
because the Court declines to "read a purchase or sale
requirement into § 741(8)." Op. at 20.
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 21. 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 [*39] (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.2
2 The Court downplays Enron's argument that
applying the safe harbor to the redemption of
commercial paper would undermine uniform case
law that allows the avoidance of debt-related
payments. Op. at 21-22. But this is not an
argument that a purchase or sale requirement is
not part of a "securities transaction." Rather, it is
an effort to downplay the significance of the
Court's holding. As explained in Part IV, the
Court's distinction is unpersuasive, and the
decision will in fact undo decades of
well-established law. It is sufficient [*40] at this
point to note that the Court's attempt to
distinguish prior case law is not an argument why
the Court's definition of a securities transaction is
in fact correct.
III.
A.
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, 590 F.2d 1085,
1091-92, 191 U.S. App. D.C. 383 (D.C. Cir. 1978). The
predecessor of Section 546(e) was first enacted in 1978,
and applied only to commodities markets. See Kaiser
Steel, 913 F.2d at 848-49; H.R. Rep. No. 97-420, at 1-3
(1982). This left open the possibility that the avoidance
provisions of Section 547(b) could be applied to the
settlement of securities transactions, and the failure to
include securities transactions in the settlement safe
harbor lent force to the argument that the clearing
agencies were not entitled to protection from preference
avoidance when they cleared securities transactions. This
anomaly [*41] inadvertently jeopardized the national
settlement system. See Bankruptcy of Commodity and
Securities Brokers: Hearings Before the Subcomm. on
Monopolies and Commercial Law of the H. Comm. on
the Judiciary, 97th Cong. 238-67 (1981) (statement of
Bevis Longstreth, Comm'r, SEC). Clearing agencies were
exposed to risk because they were "the critical link
between the buyer's broker and the seller's broker"; they
"simultaneously guarantee[d]" the delivery of securities
to the buyer and the delivery of the purchase price to the
seller. Id. at 245.3 In response to this concern, in 1982,
Congress adopted substantially the current version of
Section 546(e), which more broadly covered settlement
payments. H.R. Rep. No. 97-420, at 2 (1982).4
3 The Court's reading of the legislative purpose
behind Section 546(e) at times appears
substantially broader. It writes: "If a firm is
Page 12
2011 U.S. App. LEXIS 13177, *41
required to repay amounts received in settled
securities transactions, it could have insufficient
capital or liquidity to meet its current securities
trading obligations, placing other market
participants and the securities markets themselves
at risk." Op. at 13 (emphasis added). However,
this concern could likewise be invoked [*42] for
refusing to apply the Bankruptcy Code's
preference provisions in any context; there is
always a risk that the transferee of an avoided
transfer will be negatively affected and
destabilized by the trustee's exercise of its
avoidance powers. The legislative history
indicates that Congress intended to eliminate only
a particular subset of claims: those that might
jeopardize the stability of clearing agencies.
4 In 2006, Congress adopted amendments to
Section 546(e) that were "technical changes"
designed to "update the language to reflect current
market and regulatory practices" and to "clarify []
the treatment of certain financial products." H.R.
Rep. 109-648, at 2 (2006). The amendments do
not shed any light on whether the premature
redemption of commercial paper is covered by the
exclusion for a "settlement payment."
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
harbor to redemptions of commercial paper today. As an
initial matter, the 1934 Act did not, and does not, apply to
commercial paper, which is not a "security" for purposes
of the Act. See 15 U.S.C. § 78c(a)(10).5
5
The [*43] 1934 Act exempts from the
definition of security "any note, draft, bill of
exchange, or banker's acceptance which has a
maturity at the time of issuance of not exceeding
nine months, exclusive of days of grace, or any
renewal thereof the maturity of which is likewise
limited." 15 U.S.C. § 78c(a)(10).
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 24. 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.,
559 F.3d 772, 776-77 (8th Cir. 2009). Rather than act as
such [*44] a central counterparty, the DTC serves as an
electronic bookkeeper that processes payments; it does
not guarantee the performance (and assume the risk of
non-performance) of any other party. See id. (explaining
that the DTC "tracks transfers of indirect security
entitlement positions among its members, eliminating the
need to transfer the physical stock certificates," while
"NSCC acts as the intermediary between buyer and seller
. . . and assumes the rights and obligations of buyers and
sellers to receive, pay for, and deliver securities").
Because the DTC does not guarantee the obligations of
its members, and does not take title to the securities or
funds it clears, it is not exposed to any risk on account of
a transaction that is challenged by a bankruptcy trustee.
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 24-25. In support of this
conclusion, it relies on cases from other courts of appeals
that have applied Section 546(e)'s [*45] safe harbor to
leveraged buyouts of companies that "involved financial
intermediaries who served only as conduits." Op. at 25
(citing In re Plassein Int'l Corp., 590 F.3d 252, 257-59
(3d Cir. 2009); In re QSI Holdings, Inc., 571 F.3d 545,
549-50 (6th Cir. 2009); Frost, 564 F.3d at 986).
Accepting the reasoning of the courts of appeals in those
cases, however, does not militate in favor of extending
Section 546(e)'s safe harbor to transactions in commercial
paper. Those cases stand for the proposition that, if
Section 546(e) applies to a particular type of transaction namely, purchases of equity securities - an individual
transaction does not lose safe-harbor protection simply
because it does not involve a central counterparty, and
thus does not directly implicate the concerns that led
Congress to enact the section.6 The leveraged buyout
cases do not resolve the question the Court must answer
in the first instance: whether a different type of
transaction - a redemption of commercial paper - is
covered by Section 546(e).7
Page 13
2011 U.S. App. LEXIS 13177, *45
6 As the Court points out, the issue on this
appeal concerns only an issuer's premature
redemption of commercial paper. Opinion at 23
n.2.
7 The Court questions any reliance [*46] on the
fact that Congress enacted the safe harbor out of
concern for the stability of central counterparties
when various courts of appeals have rejected a
restriction on the safe harbor in leveraged buyout
transactions that do not involve such
counterparties. Op. at 25 n.3. That is not a basis to
ignore the legislative history, which reveals that
Congress was primarily concerned with upsetting
the securities settlement process. That settlement
process involves the purchase and sale of
securities that are ordinarily cleared through a
clearing agency. The fact that some transactions
that do not involve a clearing agency - leveraged
buyouts - are protected by the safe harbor because
they were not carved out by Congress is not a
basis for disregarding the legislative history and
its focus on transactions involving the purchase
and sale of securities. The Court points to nothing
in the legislative history of the ambiguous
"settlement payment" provision that indicates that
it was intended to cover the redemption of
commercial paper.
B.
The conclusion that redemptions of commercial
paper are not covered by Section 546(e) is further
supported by subsequent legislative history.8 Section
547(c)(2) of the Bankruptcy Code [*47] provides that a
trustee may not avoid under Section 547 a transfer
to the extent that such transfer was in
payment of a debt incurred by the debtor
in the ordinary course of business or
financial affairs of the debtor and the
transferee, and such transfer was (A) made
in the ordinary course of business or
financial affairs of the debtor and the
transferee; or (B) made according to
ordinary business terms.
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, 880 F.2d 1172, 1175-76 (10th Cir. 1989). In
1984, two years after the passage of Section 546(e), the
"ordinary course" defense was amended to eliminate this
restriction. A discussion between Senators Dole and
DeConcini, as part of the debate surrounding passage of
the amendment, makes clear that Congress was primarily
concerned with ensuring that "ordinary course"
redemptions of commercial paper with longer maturities
would come within Section 547(c)(2)'s safe harbor. Id. If,
as the Court concludes, Section 546(e) protects every
redemption of commercial paper, [*48] "without regard
to . . . the motives and circumstances of the redemption,"
Op. at 11, then this amendment was unnecessary because
any redemption of commercial paper - whether made in
the ordinary course of business or not - would be
protected by the "settlement payment" exclusion that
Congress had adopted two years before.
8 Subsequent legislative history is not entitled to
the same weight as contemporaneous legislative
history, but it may provide "some guidance" as to
the legislative intent for a prior congressional act.
See Davis v. United Air Lines, Inc., 662 F.2d 120,
123-24 (2d Cir. 1981).
IV.
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. 151, 112 S. Ct. 527,
116 L. Ed. 2d 514 (1991), the Supreme Court discussed
the congressional priorities that motivated enactment of
Section 547, and concluded that preference actions under
that section are "intended to serve two basic policies":
A preference is a transfer that enables a
creditor to receive payment of a greater
percentage of his claim against the debtor
than he would have received if the transfer
had not been made and he had participated
in the distribution of the assets of [*49]
the bankruptcy estate. The purpose of the
preference section is two-fold. First, by
permitting
the
trustee
to
avoid
prebankruptcy transfers that occur within a
short period before bankruptcy, creditors
are discouraged from racing to the
courthouse to dismember the debtor
during his slide into bankruptcy. The
protection thus afforded the debtor often
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2011 U.S. App. LEXIS 13177, *49
enables him to work his way out of a
difficult financial situation through
cooperation with all of his creditors.
Second, and more important, the
preference provisions facilitate the prime
bankruptcy policy of equality of
distribution among creditors of the debtor.
Any creditor that received a greater
payment than others of his class is
required to disgorge so that all may share
equally. The operation of the preference
section to deter "the race of diligence" of
creditors to dismember the debtor before
bankruptcy furthers the second goal of the
preference section -- that of equality of
distribution.
502 U.S. at 160-161 (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 [*50] 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 7. 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 7.
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 [*51] 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 22. 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 Code
irrespective of whether they are widely issued or
tradeable. The Court's reasoning thus applies equally to
any payment on account of a debt evidenced by [*52] a
writing, and does indeed imperil decades of cases that
allow the avoidance of debt-related payments. See, e.g.,
Wolas, 502 U.S. at 162 (remanding to determine whether
payments of long-term debt were within the ordinary
course of business exception to avoidance under Section
547(c)(2)).
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 22. 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 [*53] 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
Page 15
2011 U.S. App. LEXIS 13177, *53
loans." Opinion at 22. 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 22-24. But, under the Court's
approach, such repurchases would still be covered by the
"settlement payment" safe harbor, and, in addition, [*54]
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.
CONCLUSION
For the reasons explained above, I respectfully
dissent.