Following the Second Circuit’s recent precedent in an Enron appeal (also the subject of a Basis Points blog post), Judge Peck of the United States Bankruptcy Court for the Southern District of New York concluded that the redemption of notes prior to maturity was exempt from preference actions under the safe harbor provision of Bankruptcy Code § 546(e). Official Comm. of Unsecured Creditors of Quebecor World (USA) Inc. v. Am. United Life Ins. Co., No. 08-10152 (Bankr. S.D.N.Y. July 27, 2011). The circumstances surrounding the Quebecor early redemption were different from those in Enron. Unlike Enron’s redemption of public notes through the DTC, Quebecor effected a redemption of private placement notes without the assistance of a clearing agency. Nevertheless, Judge Peck concluded that such factual distinctions have become “indistinguishable” as a result of the Second Circuit’s holding in Enron. Accordingly, he granted summary judgment to the defendant noteholders. A copy of the decision can be found HERE.
“It’s still the same old story, a fight for love and glory…” or, in this case, a fight for $376 million used to redeem private notes in full, including make-whole premiums, within the 90-day preference period. Unlike the early redemption in Enron effected through the DTC, the Quebecor noteholders mailed their private notes directly to the company for cancellation over the weeks and months following their agreement with the company to accept early redemption, including make-whole. Nevertheless, “the fundamental things still apply”: Judge Peck, compelled by Enron’s “easy-to-apply” formulation, held that a repurchase of notes qualifies for the § 546(e) exemption “without having to show anything more than the transfer in question was made to a financial institution to complete a securities transaction.” Noting that Enron’s precedent allows “behavior that the law generally would seek to discourage,” Judge Peck observed that, after Enron, the § 546(e) safe harbor provision is far-reaching and no longer conducive to identifying exceptions in a case-by-case analysis. In dicta, Judge Peck suggested the plausibility of excepting from the safe harbor a small, private transaction having no foreseeable impact on the securities market. Nevertheless, under Enron—and now Quebecor, the early redemption of notes, whether public or private, is exempt from preference actions as a “settlement payment” under § 546(e). “On that you can rely, as time goes by…” or at least until the Supreme Court intervenes or Congress amends the Bankruptcy Code.